Why debit card payments matter to both shops and shoppers

Many of us are over physical money – some never even carry it. Check your wallet right now, it’s likely padded with debit cards but light on notes.

The pandemic helped exacerbate this of course, where the idea of tapping and never touching anything seemed like the best idea going forward. Convenience like this is a good thing but it also has consequences. 

For example, what are the added costs of taking up payments technology, generally? It’s not something we often think about especially as using smartphones and digital wallets has been so normalised. It’s too easy.

But even in 2023 there are costs, whether we choose to pay attention or not. In his keynote speech to the Reserve Bank late last year, Governor Philip Lowe said that Australians expect payments to be fast, low cost, reliable and easy to use. The RBA shares these expectations , which is why it’s been so focused on the topic and asking banks to help reduce costs, even introducing a flat rate charge of 1.4% on merchants using their mobile phone (or tablet) as a payment terminal, just as one measure.

However, charges can vary between shops and payment technologies, and this in itself is worth understanding a bit more.

When you pay for something, your payment choice matters

We should take a quick step back here to describe how your debit card works in the shop. Your card might be issued by a bank or credit union or similar, though the actual payments you make are run through one of three main networks each time - Eftpos, Debit Mastercard or Visa Debit. The fee the shop pays on this can vary based on the bank or provider, with eftpos usually being less expensive. 

So when you make your choice at the payment terminal - be it ‘CHQ’, ‘SAV’ or ‘CR’ - you are drawing on your account but also selecting the payment network (or route). Simple enough, yet some banks are making decisions that complicate matters a little, such as partnering with tech companies like Apple to facilitate contactless debit and credit card payments made over iPhones. Westpac has done such a deal recently, as reported by Banking Day this week.

The RBA governor is acutely aware of these sorts of wrinkles in the payments process. In his December address, Lowe said that while it is pleasing to see merchant payment costs trend lower, there are developments working against making more affordable payments such as: higher cost international scheme debit cards; higher payment costs that come with the shift to online commerce; and the greater use of mobile wallets offered by Apple Pay, Google Pay and Samsung Pay.  

The bottom line is that the use of these digital services or wallets is growing very quickly and can be hard to keep up with. Importantly, they are often more expensive for merchants to accept and this can impact us consumers too.

Bringing payment costs down

This all leads us back to least cost routing (LCR), a service that allows retailers to direct contactless debit card transactions to the cheapest payment processor. In short, if the merchant chooses not to ‘route’ the payment via the cheapest option, the transaction will be sent via the default network which is programmed on the card, typically the Debit Mastercard or Visa Debit network.

This was once only adopted for in-person tap-and-go payments but is now becoming more available for online transactions as well as mobile-wallet payments, according to the RBA. Though mobile wallet transactions have been slower to get over the line and the obvious reason for that is that many of our mobile wallets are created by international companies.

The overarching point is that least cost routing has been designed to bring down payment costs. It’s a strategy that’s important for all of us because if shops are forced to charge more for payments made by customers, this usually feeds through to the price of the very goods and services we’re paying for! Convenience often comes at a price, doesn’t it?

While 'LCR' might largely solve this whole problem, it perhaps hasn’t been completely embraced. Late last year the RBA noted that the take up of least cost routing has been low. And now, amid a slow take-up, some banks also seem focused on the tech company offerings, including Westpac using Apple’s Tap to Pay. 

Other tech comes into play

Tap to Pay makes things easier for millions of Aussie iPhone users for sure. It accepts all forms of contactless payments – including Apple Pay, contactless credit and debit cards and other digital wallets. For shops affiliated with Westpac, for example, Tap to Pay can be simply done with an iPhone and Westpac’s Eftpos Air app, removing the need for additional hardware or payment terminals.

Great, but what fees does it incur? 

The Eftpos Air app charges a 1.4% transaction fee to merchants which meets the RBA’s benchmark but is higher than when you just tap your debit card on an Eftpos terminal. Each Eftpos transaction costs 0.5% or less, says the RBA. (Most merchants pay just 0.7% on Mastercard and Visa transactions).

So while progress is being made in payments technology and more options are available to shoppers, pricing differences at the point of sale remain a challenge. And the difference in costs to the merchant largely depends on the bank, which is why the goal continues be introducing more competition into the mix.