Interchange fees: The rate that stops a nation
While the recent RBA decision to cut interest rates got all the headlines showcasing Australians’ obsession with property, it’s another more insidious rate which is hurting the bottom line of small-to-medium business that we should be taking a closer look at.
Our fixation is clear. It doesn’t matter whether you’re at a dinner party, day care, or walking the dog, the conversation seems to be always only two sentences away from the P word … property.
Dare let it slip you are in the hunt for a home, then the questions come thick and fast, “what school catchment area are you in, fixed or variable loan, why not put in a granny flat, are you close to light rail, who won last night’s bathroom reveal on The Block?”
This love of all things property explains why Reserve Bank head Glenn Stevens gets rock star status on the first Tuesday of each month[i] when he announces which way the rate is heading. (For the record, the cash rate was cut to two percent.) The only time rate noise gets drowned out is in November because of a clash with the “race that stops a nation” Melbourne Cup.
The attention is understandable. If the cash rate rises by 25 basis points, that will likely be passed on with lightning speed by the hungry big banks and we get hit in the pocket. And vice versa. But what if there was another rate that the RBA had a say in and it was hitting your bottom line as a small-to-medium business (SME)? Shouldn’t we kick up a fuss?
We’re talking about the dreaded interchange fee. For those unfamiliar, it’s the amount banks charge each other for the use of credit and debit cards. And it’s not small. It’s estimated there was $225 billion in credit card purchases last year which adds up to hundreds of millions of dollars in fees, and much of it is falling in the lap of SMEs.
Every café owner, hairdresser, pharmacist or newsagent is affected. They are faced daily with a dizzying number of cards with varying rates in a system too complex to unravel. Because they don’t have the clout of a Woolworths or Coles to negotiate a better deal from the credit-card companies, the SMEs are left to shoulder the burden. They can either pass the cost (as much as 10 times[ii] that of the big supermarkets) on as a surcharge to their customers or absorb it and reduce their margins. Either way they lose.
At present, interchange rates are set by the RBA at 0.5% on credit cards but that’s on average so the number can vary widely so SMEs don’t really know what they are being charged. The fees can move from as little as zero for charities to as much as 2.2% for the top-of-the range premium cards.
Governor Stevens said that range only widens depending on the merchant’s bargaining power[iii]. The RBA’s own review[iv] also admitted the cost of seductive reward schemes, which offer cheap travel or free wine, lands not with the big “strategic” players like Woolworths and Coles but with the SME.
“The cost of high interchange rates for consumer premium and commercial cards falls entirely on small merchants,” RBA stated. “The average credit card interchange rate for non-preferred merchants was more than 50 basis points higher than for preferred merchants.”
So where to from here? There are those like SME advocate Tyro who recently put in submission to the RBA calling for the fee to be dropped altogether. “The unfair result is that these discounts and rewards in the hundreds of millions of dollars per year are funded by Australia’s SMEs and the least affluent consumers,” CEO Jost Stollmann said. “This is a huge transfer of wealth.”
But what can SMEs do? Alone, maybe not much. But at last count, there were about 390,000 SMEs employing more than seven million Aussies. Together, they could create some noise for the RBA who are considering lowering the rate to a hard cap of 0.3%.
That’s a voice that could be heard over any horse race, even the Melbourne Cup.
[i] Except in January.
[ii] Visa: Strategic Merchant Program rate 0.22% versus High Net Worth Qualified rate 2.20% and Standard rate 0.33%.
[iii] “There can be a difference of up to 180 basis points in the cost of the same card presented at different merchants,” he said. “This problem is aggravated as merchants often have no way of determining which are the high-cost cards.” Governor Stevens’ address to the Australian Financial Review Banking and Wealth Summit, March 2015
[iv] RBA Review of Card Payments Regulation, March 2015.