As a part of an ongoing effort to improve cash flow conditions for Australian SMEs, the House of Representatives Standing Committee on Economics has called for a reduction in transaction fees for tap-and-go payment services. The Australian Small Business and Family Enterprise Ombudsman (ASBFEO), Kate Carnell, has also vocally thrown her support behind this initiative. With the rise of contactless payment, poorly regulated payment management has led to a wide disparity in specific transaction costs from different providers, and for different kinds of businesses.
SMEs are taking the brunt of the cost
According to the Ombudsman, businesses pay an average fee of 0.26 percent using eftpos, and more than double that for Visa and Mastercard at 0.58 percent. However, these numbers don’t match up for businesses of different sizes. Large enterprises can negotiate for better terms from banks and international credit providers, while smaller businesses pay significantly more than average.
Worse, businesses generally have no way to control whether their payments are processed using eftpos or one of the major credit card company services. PayWave does not give customers a choice regarding how individual payments are processed, meaning that fees can vary unpredictably between individual purchases. Processing payments through these major credit providers instead of eftpos alone costs businesses $290 million per year. While that may not sound massive on a national scale, these costs aren’t carried by massive businesses, but most often rather by micro-enterprises who need to make every dollar count to stay afloat.
The government wants to reduce the burden on SMEs
As we move toward a cashless economy, using contactless payment options is becoming increasingly necessary for both businesses and consumers. Already, 4 in 5 Australians use contactless payment at least once per week. Ms Carnell states that it’s critical to shift the primary burden of financing this transition away from small businesses, who are currently being forced to bear it simply because they don’t have the negotiating power to secure a better deal.
The parliamentary committee’s recommendation at this time is to demand that banks allow debit payments to be routed consistently through eftpos rather than credit card systems. If they fail to do so by April 1 of next year, this may be followed up with regulatory action.
Private enterprise is stepping up
As with the late payment inquiry earlier this year, parliament and the ASBFEO are reacting to this situation in concert with private actors. Even before this initiative was announced, a number of smaller payment providers began stepping up to begin to provide a more competitive merchant payment market to bring down costs.
Contactless payment provider Tyro recently announced improvements to its cost-routing system to reduce transaction fees. Moreover, according to the company’s executive director, this move is meant explicitly to help lead the charge on providing more efficient and lower-cost services to consumers. This comes as another payments provider, Invoice2Go, has announced that they will roll out their own tap-and-go service to compete with existing major players.
What this means for Australian SMEs
As with the payment times inquiry and the business community’s response to it, this new initiative doesn’t appear to face any active opposition beyond the inherent hurdles in implementation. For small business, this will ultimately translate to better cash flow, and better access to contactless payment options.
Cheaper and more predictable merchant fees
The most immediate result of always running debit transactions through eftpos will be that merchant fees will drop, as well as becoming far more predictable. This then also makes marginal costs more predictable, and allows businesses to budget more precisely and with greater confidence.
More working capital
A savings of 0.25% sounds tiny, but it adds up quickly. Transaction fees are based on the final sales price of a product, not just profit margins. Any money a business saves, it can keep. For example, a clothing retailer currently operating with an 8 percent profit margin could raise that to 8.25, for a 3% increase in potential profit, or disposable income to invest back into their business. Even for relatively modest-sized SMEs, that translates to thousands of dollars in savings that can make all the difference at a critical time.
In the past, Australian SMEs have faced significant cash flow challenges that made it difficult for them to compete locally against larger businesses, and internationally against their peers. SMEs produce a third of the country’s GDP, and employ 69 percent of the workforce, making this a serious issue for the Australia’s overall economic health. In 2017, the government has worked with businesses to improve conditions, and to strengthen this sector of the economy to ensure that entrepreneurship and small enterprise continues to thrive. By tackling inefficiencies and inequality in merchant fee processing, the playing field once again becomes a little bit more even, providing small businesses with that little extra boost they need to grow and compete.