Will the surcharge ban actually make things cheaper?

A lot of people ask me this, and it’s a fair question. Will the surcharge ban actually make things cheaper?

My honest answer is no. Not in any way that lasts. I think costs come down for a year or two and then go back up higher than they started, because of what this does to competition rather than what it does to prices.

That’s my personal opinion, which is what I always give you. Here’s the reasoning.

Someone has to pay it

This is the whole thing in one line. The money doesn’t disappear on 1 October — it moves.

Right now the consumer pays it, at the terminal, in plain sight. From October the business pays it. And a business that’s now carrying a cost it wasn’t carrying before has three choices: wear it, put its prices up, or go looking for a better deal. Most will do some of the second.

So the cost lands in the menu price instead of the receipt. The customer still pays it. They just can’t see it any more.

And it may well be more than they were paying. The retail association has told me a lot of their retailers are planning to push their prices up by more than the surcharge was worth — because if you’re making a price move anyway, you make one worth making. So this may end up costing everyone more, not less.

I think it was a bit of a knee-jerk reaction, and I don’t think small business was properly heard — they were against it and lobbying against it the whole way through.

What it does get right

I’ll give it this, and it’s genuine.

It’s probably going to wipe out the really high-margin surcharging deals. The ones where a payment company was making bank off a merchant who didn’t know any better — who wasn’t educated in payments, didn’t know what things should cost, and signed up to a rate that was frankly a gouge because the surcharge meant they never felt it.

Those deals deserve to die, and they will. That’s a good outcome.

So will total costs come down? Yes — for a while

If you ask me whether the whole pool of merchant acquiring costs in Australia gets smaller, the answer is yes. Initially.

Because all those surcharging clients are going to go shopping for the first time in years. Some of them, maybe a lot of them, will get a better deal — especially the ones who were being charged the most. That’s a real reduction, and it’s the part the reform will get credit for.

I just want to emphasise the word: short term.

Where I think the RBA has got it wrong

There seems to be a thought behind all this that payments is commoditised. It isn’t.

One bank is not the same as another bank. One point of sale is not the same as another point of sale. One terminal is not the same as another terminal. They’re not like for like, and anyone who’s actually placed a merchant knows it.

But the thinking seems to be: we’re selling rice. It’s the same rice everywhere. There’s no real difference, so let’s wash out all these price differences. That’s not quite true, and the gap between that assumption and reality is where the damage happens.

Why people left the banks in the first place

Here’s the bit that gets missed. Why did surcharging take off at all?

A bunch of resellers for one of the banks started doing it, and merchants moved to them. But hang on — you could always surcharge. You could do it before any of them came along. You just plugged it into the terminal.

So why did people actually move?

They moved for service and for solutions. Because when they ring, someone answers the phone. Because they get a human being. Because when they turn up to the local business meeting, the broker is there — and the bank is not going to do that.

And here’s the thing that surprises people: those third parties weren’t always cheaper. Most of the time the bank was cheaper than one of these payment companies you’d never heard of. So why were merchants paying more? Because they were getting something the bank wasn’t giving them.

What gets wiped out

In my opinion this ban is going to take out a whole layer of the industry.

A lot of resellers only ever made their margin on surcharging. That’s gone. They’re gone with it.

It’s going to hurt some of the acquirers built on that model too — the ones offering Qantas Points on your card turnover, where the merchant thought beauty, I get points and the customer covers the surcharge, and my family trip doesn’t cost me anything. (I’d bet a fair few of them weren’t mentioning the fringe benefits to their accountant either.) That model only works when someone else is paying, and from October nobody is.

Some of the majors work with resellers. We work with a couple. NAB, CBA and Westpac don’t have a card-present reseller program at all.

So the net effect is fewer players. And you don’t need to be an economist to work out what less competition does to prices over time. That’s just how it always goes.

What you lose that never shows up in a price comparison

When the reseller layer goes, this is what goes with it.

The phone getting picked up by someone who knows your business. The broker at your Christmas party. The card that turns up for your daughter’s sixteenth. Someone wishing your son luck in his basketball grand final. Those things sound soft, and they were worth 1.75 per cent to a lot of merchants — that’s a revealed preference, not sentiment.

Some people will still pay for that and still get it. A lot won’t, because the people who provided it won’t be there.

The guy who left the banking world to start his own little brokerage goes back to the real world — back to the bank, $150k, sitting pretty, working from home most of the week and having a whinge when they ask him to come in. Less competition, less service, less product diversity.

We have done exactly this before, in financial planning

This is the part I’d really want the RBA to sit with, because we have run this experiment already in another industry and we know how it ends.

Everyone used to have a financial planner. Why? Because it was free at the point of use — commission-based, like a mortgage broker. You got advice, and often you got a better deal than the bank would have given you directly.

Then the government, in its wisdom, banned commissions in financial advice.

What happened? Nobody pays five grand out of pocket for advice. So they don’t get advice. The industry was gutted — adviser numbers dropped below 15,000 this year, from somewhere around 28,000 before the reforms. And now, thirteen years on, the government and the industry are both scrambling to work out how to get ordinary people back in front of an adviser.

They destroyed it, and they did it by deciding the cost couldn’t be passed on or paid by a third party.

What they should have done instead

And this is the bit that annoys me, because there was an obvious answer.

Don’t ban the commission — standardise it. Set your asset classes: low risk, high risk, whatever the categories need to be. Then every single fund in a given class pays every single adviser in Australia exactly the same commission, regardless of what volume that adviser writes.

Do that and the conflict evaporates. The adviser has no reason to push a client into a bad position for an extra buck. You don’t get this fund’s probably better for John but it only pays me 0.1 per cent trail, whereas this high-risk one pays 0.5 — and sure, John’s nearly at retirement, but look at that commission. Nobody’s incentive is pointing the wrong way, and the client still gets to see someone without writing a cheque.

They had the option and they took the blunt instrument instead. I think the same thing is happening here.

The bit nobody will measure

So what do you actually get at the end of it? Worse support, and a lot of businesses sitting on substandard solutions.

That has a real cost, it’s just an intangible one, which means it never makes it into anybody’s impact statement. It’s a productivity cost, and it’s borne by every business running the wrong setup because nobody was there to tell them otherwise.

And be clear about where the innovation in this industry has actually come from, because it isn’t the majors. I was at a bank being told a proper unified portal was coming — you’d log in and see your card-present and card-not-present transactions in one place. That was ten years ago. It still isn’t there.

The good stuff has come from the smaller players. Tyro has done a lot of genuinely good work. And the resellers have built their own software, their own integrations, their own plugins — WooCommerce, Xero, the pieces that actually connect payments to how a business runs. We build that sort of thing ourselves.

That all dies, because the banks don’t build it. They never have.

Ten years out

Strip out the third parties, and in ten years we’re back to an oligopoly. A handful of majors, no real pressure on price, and nothing forcing anyone to answer the phone.

Along the way I’d expect prices to come down first — knock the competition out with cheap pricing, which is old economics, the same play as dumping cheap aluminium into a market — and then drift back up once there’s nobody left to undercut.

Nobody can surcharge. Nobody’s shopping around, because there’s nothing much to shop between. Nobody’s paying 1.75 per cent any more. And nobody’s getting what the 1.75 per cent used to buy either.

The rule already existed. Nobody enforced it.

This is the part that really gets me, and it’s the reason I don’t accept that a ban was the only option on the table.

Excessive surcharging has been illegal in this country since 2016. Large merchants from 1 September 2016, everybody else from 1 September 2017. You cannot surcharge more than it actually costs you to accept the card, and the ACCC enforces it.

So the problem was never that there was no rule. The problem was that the rule sat there and nothing happened.

I’ve reported excessive surcharging. What do you reckon came of it? Nothing.

There’s a hotel group near me — about ten pubs — on a very low rate from one of the majors, and surcharging about 0.8 per cent more than it actually cost them to accept the card. That’s not recovering a cost. That’s a revenue line, and it’s exactly what the 2016 rule was written to stop.

I reported it. Zip. Zero. Nothing happened.

Don’t bring in new legislation if you’re not going to enforce the old legislation — because then you never even find out whether the old rules worked. That’s the bit that frustrates me about this country. We pass the law, we write the rules, and then we don’t enforce them. So what was the point of any of it?

Three things they could have done instead

Enforce what was already there. And make it easy to enforce. You could put one person in the whole of Australia on this. Subpoena the merchant’s statements, compare the surcharge to the cost of acceptance, and issue the fine. You’re over. Here’s your penalty. It’s not complicated work and the rule was already written.

Or cap it at a flat number. Say 1.4 per cent, or wherever you think the line sits. A hard ceiling is harder to argue with than “cost of acceptance”, which is where every dispute ends up, and a merchant can work out in one minute whether they’re compliant.

Or make the acquirer control it. This is the one I’d have pushed for, because it needs no enforcement at all — it just works.

Plenty of providers already do this. ANZ Worldline controls the surcharge. Live Payments controls the surcharge. The merchant can’t go and set some rogue rate well above what they’re paying, because the provider won’t let the terminal do it. CBA didn’t do it and Westpac didn’t do it, and that’s where the gouging lived.

If you want excessive surcharging gone, make it impossible at the terminal rather than illegal on paper. You’d have fixed the actual problem — merchants profiting off a surcharge — without taking out the surcharge itself, and without taking out a layer of the industry along with it.

So what was this for?

I think this was short-term thinking from a government under pressure, at a moment when cost of living was the only thing anyone wanted to talk about. It’s a decision made with the consumer in mind and not much thought for the business end of it — and I’d say that about either side of politics, because both of them do it.

Cheaper this year, dearer in five, and an industry thinned out in between. And for a short-term win in a market sense, I think it ends up costing Australians in productivity, in specialisation, in product advancement and in investment.

That’s my read. I think it’s a bad move.

None of which changes what you should do about it, by the way. The ban is happening on 1 October whatever I think of it. Use the window — get your rates repriced while there’s still competition to use, because the leverage you have right now is the most you’re going to have for a while.

FAQ

Will the surcharge ban make things cheaper for consumers?

Not in my view. The cost doesn’t vanish, it moves from the receipt into the price. Most businesses will recover it in what they charge, and some will recover more than they were surcharging because a price rise is easier to do once than repeatedly.

Will it at least make things cheaper for merchants?

For a year or two, yes, and genuinely so for anyone who was on a gouging rate. Longer term I think it goes the other way, because the reform removes a layer of competition rather than adding one.

Is there anything good in it?

Yes. It’ll clean out the worst surcharging deals — the ones sold to merchants who had no idea what payments should cost. Those deserved to go.

Wasn’t excessive surcharging already banned?

It was, and that’s my whole objection. Since 1 September 2016 for large merchants and 1 September 2017 for everyone else, you have not been allowed to surcharge more than the payment actually costs you, and the ACCC enforces it. The rule existed. It just wasn’t enforced, so we never found out whether it worked before replacing it.

What should they have done instead?

Any of three things. Enforce the existing rule and make it easy to enforce — one investigator, subpoena the statements, issue the fines. Or set a hard flat cap instead of arguing about cost of acceptance. Or, best of all, require the acquirer to control the surcharge at the terminal so a merchant physically can’t set a rogue rate. Some providers already do exactly that.

Why would less competition follow from a surcharge ban?

A lot of resellers and smaller acquirers made their margin on surcharging. Take that away and their model doesn’t work. Several of the majors don’t run reseller channels at all, so the merchants those resellers served end up back with the banks — fewer providers, less pressure on price.

What’s the financial advice comparison?

Commissions were banned in financial advice thirteen years ago to remove a conflict. It worked, and it also emptied the industry — adviser numbers are now under 15,000, down from roughly 28,000. Standardising commissions across asset classes would have killed the conflict without killing access. I think payments is about to learn the same lesson.

Does this mean I shouldn’t bother shopping around?

The opposite. Shop around now, while the competition still exists and every provider is expecting the call. The window is open in a way it won’t be later.