Overcharging customers for using EFTPOS is soon going to be a thing of the past, but will the local corner store survive without passing the buck? C&I editor Ben Hagemann reports.
Whether it’s by this or any other name, we all know the so-called ‘Chewing Gum tax’. EFTPOS surcharges and minimum spend rules are a pervasive part of the point of sale experience when shopping with small retailers, especially when it comes to the route channel. Consumers love to hate these seemingly tiny fees for using their own bank card when making simple purchases from a corner store.
Minimum spend rules on purchases made using EFTPOS are common in restaurants and independent convenience stores, often ranging between $10-$20, and customers who fall short of that minimum may have to (begrudgingly) purchase an additional item to be allowed to use EFTPOS, such as a chocolate bar, a fizzy drink, or even a packet of chewing gum; hence the name. Retailers pass on those costs to the consumer at point of sale to keep marked prices down without affecting profit margins. Retailers can also impose a small fixed charge or percentage for purchases that fall below their minimum spend rule, commonly around 30-60c, or 1-2 per cent of the total purchase. Retailers often impose these charges on cigarette sales as well, or on public transport credit top-ups. But is that what using EFTPOS really costs the retailer, and is it fair to pass on a charge larger than the cost of acceptance, even one so minimally increased due to the difficulty of precise calculation of those costs?
Minimum spend and surcharging are widely regarded by retail groups as unprofessional, and larger convenience franchises eschew the practice of passing on banking costs separately, in order to maintain customer loyalty. However for smaller operators the banking charges incurred by offering customers the option of EFTPOS payments can build up to a significant impost on the bottom line, in some cases costing thousands of dollars of each month.
As long as EFTPOS terminals have been in common use, there have been small retailers who saw fit to apply the minimum spend rule to purchases. Customers have learned to accept this convention. Surcharges on card use, on the other hand, tend to annoy customers, especially those who rarely carry cash.
In September 2017 new rules imposed by the Reserve Bank of Australia (RBA) will come into force to prevent small business operators from passing on “excessive” surcharges, that is, charging a greater amount than the ‘cost of acceptance’ on each transaction. The question is, will the new legislation have a significant impact, if at all, on small retailers already struggling to pay the bills?
It is not uncommon for a route store to charge 50c extra for a packet of cigarettes, for the privilege of the customer using their card, but this is all about to change. Consumers have won the battle against large businesses and their fondness for excessive credit/debit surcharges. In September 2016 the Australian Competition and Consumer Commission (ACCC) outlawed the imposition of excessive credit and debit surcharges on purchases, of the kind that were frequently used by airlines (sometimes around $10 per transaction).
Under the new law, a large business is defined as having at least two of the following features; a gross revenue of $25 million or more, gross assets of $12.5 million or more, or 50 or more employees. Businesses that escaped being defined as ‘large’ also escaped the ban, albeit temporarily with a 12-month reprieve.
From September 2017, no business will be allowed to charge a customer more than the acceptance cost of the transaction in question.
Excessive surcharging by airlines and other large business operators was, until September 2016, completely out of control. Mark ups on credit card transactions often ran to more than 1000 per cent, with charges of around $10 not uncommon when booking airline tickets. Investigation by the ACCC led the RBA to undertake a review of card payments, and in May last year the regulator announced amendments to the Competition and Consumer Act (2010) to prevent excessive surcharging, effective from September 2016 for large businesses.
Speaking with C&I, eftpos executive manager for corporate affairs Warwick Ponder said that surcharging was very common, and that the legislative changes of September had already taken effect.
“Some merchants do surcharging for two different reasons, in terms of what we have surveyed them about. One is to cover the cost of merchant service fees from acquirers,” he said.
“If you are a very small merchant with a small number of transactions, say a few hundred dollars per month, that being the terminal and admin costs, transaction fees, you may feel that you need to surcharge people to recoup your costs, depending on what sort of card is used. And there’s nothing wrong with that.
“If you are a bigger merchant making many more transactions, with a much bigger cashflow, you probably wouldn’t feel the need so much. So you tend to see surcharging at smaller shops, like newsagents, as well as at the bigger end of town. Airlines like Qantas and Virgin, and utilities, surcharge the most, and the merchants at the really small end of town do the second most.
“The ones in the middle don’t do much, and the supermarkets don’t do any at all. But it is very common to surcharge. We have seen surcharging amounts come down in recent months as a direct result of the new legislation, so that the big end of town are now only surcharging for the cost of acceptance.”
Dr Michael Schaper, deputy chairman of the ACCC, advised small businesses (that do pass on transaction surcharges) to review and amend their business practices well before the September 2017 deadline.
“They should plan in advance, make the change as early as you can,” he said.
“You don’t want to wait until the last minute, your business should be ready to carry on uninterrupted, with minimal impact on your bottom line.
“Remember that there’s the turn of financial year to consider, so it’s important not to be caught out.”
Dr Schaper said small businesses need to consider strategies to ensure that they do not charge beyond the acceptance cost or credit and debit card transactions.
“The first point they have to consider is how they are going to deal with it; how are they going to ensure they don’t overcharge past the acceptance cost for each customer?”
“The second point is costing structure; they need to consider how they can build those banking costs into overall fees.
“For those making a small windfall by passing on those surcharges, cents on the actual acceptance cost, those businesses have to ask themselves, how am I going to recover that income?”
In terms of enforcement, Dr Schaper said the ACCC was unlikely to engage in a targeted crackdown on small business surcharging, but this would be no reason for complacency as the national watchdog would investigate consumer complaints about any surcharging that exceeded the new standard.
“If we were talking about a cost of eight cents and [the retailer] was charging ten, it’s unlikely anyone is going to go after them,” he said.
“But if there was a doubling of an acceptance cost, that would be a problem. The law is pretty clear.
“We do tend to exercise discretion when it comes to investigating complaints. Ignorance is not an excuse of course, but if we were looking at a corner shop with a small income…we tend not to go out of our way to pick on small businesses, but we would likely look at a warning if necessary.
“The other options are fines, but also there is the option of a court-enforced undertaking by the business that they won’t breach the law again. Really, it’s about horses for courses.”
But how does it all work?
Even those who work in the electronic payments field agree that it is a very complex area. There are four major players in the Australian point of sale market, being eftpos Australia, Amex, Visa and Mastercard.
Eftpos Australia is a not-for-profit organization owned by 18 major financial institutions and retailers, including Coles Group, Woolworths, NAB and Commonwealth Bank to name a few. The name is not to be confused with the name of the actual point of sale systems, which are also called EFTPOS (Electronic Funds Transfer at Point Of Sale).
According to eftpos Australia, the key to the cost of a card transaction, whether it is a credit or a debit transaction, is summed up in what is called the ‘cost of acceptance’, which is the total cost of the transaction, as comprised of A number of payment elements.
One of these elements is called the scheme fee, which goes to the payments company (that is Visa, Mastercard, etc.), and an interchange fee, which goes to the banks.
To begin with, eftpos Australia charges a Scheme Fee of 1.5c to both the acquiring and issuing bank, where the ‘issuing’ bank is the one that issues the cards, while the ‘acquiring’ bank supplies the merchant with the terminal.
Interchange fees were originally brought in to provide banks with an incentive to roll out infrastructure. In the early days of electronic card transactions, all transaction charges flowed to the acquiring banks, but this situation has changed. For a process transaction on an EFTPOS card, the money flows from the acquiring bank to the issuing bank. Around 5c to 15c goes (depending on the product, debit or credit) from the acquiring to the issuing bank.
In the case of ‘Cash Out’ the acquiring bank or merchant (seen to be “loaning” the money) sees the interchange fee paid from the issuer to the acquirer; 10-25c depending on the institution. The interchange fee on two-thirds of transactions is 5c, and it goes up to 15c for other products.
Although Visa and Mastercard don’t publish their scheme fees, the RBA says it’s around 12c. For credit cards, there’s a percentage charged on the transaction, and at the extreme end of the spectrum is Amex, which charges 2.5% ad valorem. While that might not seem like much, on a $100 purchase that’s a very expensive transaction cost at $2.50.
But in general, the merchant service fee is made up of hiring terminal, admin costs, profit margin for the bank, and transaction fees. This is what comprises the cost of acceptance, so on average a merchant is looking at anywhere from 20-38c for a debit transaction.
It’s worth remembering that the infrastructure put in place by the banks, that is, the EFTPOS terminals themselves (mobile devices) together with service and maintenance, is not free. Many people forget that the cost of doing business, whether through an EFTPOS terminal or even in cash (which requires armoured trucks and security personal) is not free to use.