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Calls for ‘least cost routing’ heat up to protect small business

Maja Garaca Djurdjevic
Maja Garaca Djurdjevic
21 May 2020 2 minute readShare
tap and go payment

The small business ombudsman has joined retailers in pressuring the banks to adopt “least cost routing” and send tap-and-go payments via the cheapest payment pathway to limit the costs incurred by small merchants.

With tap-and-go payments surging during the coronavirus pandemic, calls are increasing for banks to stop sending contactless payments down costly credit networks over the cheaper EFTPOS alternative.

It’s estimated about $30 million in extra fees were paid by merchants during March, due to banks directing debit card contactless payments to global companies such as Visa and Mastercard.

Australian Small Business and Family Enterprise Ombudsman Kate Carnell is calling on banks to make “least cost routing” available to small businesses as a matter of urgency.

Ms Carnell said that for far too long, small businesses have been slugged with unnecessarily high fees from credit card networks, when there is a cheaper option.

“Australian banks have been doing some good work to support small businesses throughout the COVID-19 crisis,” Ms Carnell said.

“Banks have an opportunity to build on this now, by making least cost routing readily available to small businesses for tap-and-go payments.”

She argued that the unnecessarily high fees are particularly unfair when many small businesses are trying to get back on their feet, with coronavirus restrictions lifting.

“Small businesses are being disproportionally hit by fees, with larger retailers able to bypass full fees by using payment systems directly or by having the market power to negotiate least cost routing with their banks,” Ms Carnell said.

In fact, the likes of Woolworths and Coles are able to bypass the fees because they are able to tap into the payments system directly.

“There has been plenty of time for the banks to implement these changes. It has been two years since the major banks were directed by federal parliamentary committees to embed least cost routing in the merchant services plans they advertise to retailers,” Ms Carnell said.

Prior to the coronavirus pandemic, the Reserve Bank hinted it could consider mandating least cost routing as part of its announced review of payment regulations. However, the review has now been put on hold amid the crisis.

At the time of the RBA’s announcement, Visa warned that a mandate could mean “we were divorcing consumers from their set of choices”.

Responding to Visa’s views, Council of Small Business of Australia chief executive Peter Strong said: “The consumer has no idea how the process works either, so it’s just self-interest.”

Ms Carnell, too, is adamant that the banks should see to it that small businesses are protected.

“The banks need to do the right thing by Australian small businesses in this economic crisis and deliver least cost routing as a universal service,” Ms Carnell said.

As of July, eftpos Australia has announced it will cut the standard wholesale interchange fee paid by small businesses in half to 2 cents for tap-and-go transactions that are routed to EFTPOS.

“Roll-out of least cost routing should be a priority for the banks,” Ms Carnell concluded.

Calls for ‘least cost routing’ heat up to protect small business
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Maja Garaca Djurdjevic
Maja Garaca Djurdjevic

Maja Garaca Djurdjevic is the editor of My Business. 

Maja has a decade-long career in journalism across finance, business and politics. Now a well-versed reporter in the SME and accounting arena, prior to joining Momentum Media, Maja reported for several established news outlets in Southeast Europe, scrutinising key processes in post-conflict societies and enabling citizens to influence decision-making.

You can email Maja on [email protected] 

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