Payment problems: Blanket surcharging bans are not the answer

At Zeller we want to see immediate action against excessive surcharging on payments. But blanket bans risk doing more harm than good.

We must avoid reactive policy changes to ensure Australia continues to foster an innovative, economically viable, reliable and competitive payments industry.

At Zeller we are strongly against excessive surcharging and believe it needs to be acted upon immediately, yet as we partner with thousands of Aussie businesses we believe that the right to surcharge should remain the choice of the merchant.

Some of the proposed constructs that orientate around blanket bans on surcharges risk doing more harm than good, so instead regulators should increase enforcement of the current framework to stop excessive fees as the first step.

We need to manage the overall framework carefully and avoid reactive policy changes to ensure Australia continues to foster an innovative, economically viable, reliable and competitive payments industry.

As consumers we face surcharges every day, and opinions are seemingly polarised, with merchants wanting them to remain, while consumers broadly dislike them.

Trust me when I say I have a healthy aversion to the big banks, and I co-founded Zeller in order to offer an alternative to their outdated business banking services, yet electronic payments are not just another way the big four banks take our money.

Electronic payments are a global phenomenon, rapidly evolving in almost every country.

We’re just lucky enough to live in an advanced country driven by our population’s insatiable appetite for innovation and technology. Cash is rapidly disappearing because the vast majority of merchants and consumers love simple, convenient, fast electronic payments.

Far from being the final act in the bank’s master plan, the pace at which consumers are adopting electronic payments is the single biggest reason for the rapid decline in cash usage.

Anyone who thinks cash is free or without direct costs to businesses is misinformed.

The cost associated with the use of cash is on par with or exceeds the cost of running a business with electronic payments.

If you ever hear someone saying that the difference between interchange fees and the rate charged to merchants is proof that there is gouging, it’s a guaranteed signal that this person doesn’t understand how payment processing works.

Interchange is a pass-through fee that is paid to the bank that issues that card, and far from the only cost that payment providers incur on behalf of a merchant.

In fact, interchange is often a minority line item among various other costs required to process transactions.

There’s a huge amount of work that goes into enabling merchants to accept electronic payments safely, securely and as quickly as possible.

Additional costs include onboarding, fraud detection, risk management, AML/KYC management, terminal supply and management, 24/7 customer support, fast settlement, scheme fees, chargeback management and the supply of innovative apps and dashboards for merchants to manage payments effectively.

In an era of high inflation, all the costs that go into processing payments have increased, yet fees for merchants to accept payments have been steadily declining, which is a clear indication that healthy competition is finally having a positive impact.

With payment processing now an integral national infrastructure, we need to be careful to not drive costs to an unviable level or we risk driving out competition and investment in further ­innovation.

In the past, the single biggest frustration merchants faced was understanding payment acceptance costs. Some banks started providing lengthy statements outlining all the different costs, which exacerbated the problem.

With all the different operating costs, terminal rental fees, chargeback fees and the multitude of interchange fees, this convoluted practice was known as ‘‘unblended’’ pricing and was completely incomprehensible.

To combat such confusion, a new model emerged where some payment companies started to assess all the different card types a particular business might present, spread out all the operating costs and then calculate and offer what is known as a “blended rate”.

This single rate vastly simplified the acceptance costs for merchants so they no longer had to be concerned with the type of card their customers presented and had more predictability with their costs.

Despite popular opinion, this blended pricing model wasn’t forced upon merchants – it was offered as a new alternative to the confusing, unblended pricing models and grew rapidly as it was instantly appealing to businesses.

The RBA’s ban on surcharges exceeding the “reasonable cost of payment acceptance” is clearly not working. 

Unfortunately evidence of excessive surcharging is commonplace. 

There are common examples of excessive fees from companies who simply layer an additional service charge on another provider’s payment services, merchants who surcharge more than their payment costs, to payment providers who bundle frequent flyer points into an inflated rate.

Many big four banks still enable merchants to add a surcharge that exceeds the costs they are being charged.

Some bank’s Eftpos terminal instruction manuals explicitly outline how to apply a surcharge of up to 15 per cent. I am at a loss as to why this is allowed to continue.

The responsibility to investigate and act on reports of excessive surcharging sits with ACCC.

Given the recent injection of an additional $2.1m of federal funding, I am encouraged to see the ACCC preparing to step up its review of excessive surcharging, yet I’d like to see some immediate additional steps taken.

The ACCC should mandate that all payment providers eliminate the ability for terminals to apply a surcharge above the cost that the merchant is being charged to process payments.

Payments providers should be required to display the full cost of the transaction (inclusive of surcharge) on the terminal prior to the payment being processed.

The ban on additional products, services or benefits being bundled into a surcharge should be enforced.

At Zeller we’ve had these steps in place since we first launched.

The RBA’s original mandate to allow surcharging has been incredibly effective in increasing the transparency of card processing costs. But a ban would see payment costs immediately absorbed into higher overall costs.

Ben Pfisterer is co-founder and chief executive of Zeller.

Originally published as Payment problems: Blanket surcharging bans are not the answer