Friday, July 26, 2024

How retailers can save money on debit card payments

There are new ways for retailers to save money on card fees, and help is available to understand how banks charge small businesses for accepting payments.

By Payments Consulting Network MD Mangala Martinus.

Payments Consulting Network MD Mangala Martinus.

Running a retail business isn’t easy at the best of times, and we all know that it takes hard work, imagination and a bit of luck to build something sustainable.

While there’s no need to go over the recent challenges of the pandemic for the retail sector, it is time to take stock and look at ways to continue driving revenue and profitability.

As a payment’s expert, I work closely with a lot of small businesses looking to save money on the credit and debit fees they are charged. It’s a complex area, and many people don’t have the time to delve into the intricacies.

In fact, most retailers get set up on a monthly package with a bank and pay what they are charged. The trouble is that the monthly package combines aspects like scheme fees (the ‘membership’ payment for accepting cards like Visa, Mastercard and Eftpos), interchange fees (the transaction fees for each payment processed), terminal fees and the bank’s margin. It’s hard to work out how much you are paying for each – and whether that’s too much.

Least cost routing

There is hope, though, especially with debit card fees. Given these cards are the most popular way that consumers pay for goods, even a small per transaction saving can mount up across all the products retailers sell to a substantial saving. And if you are a retailer with several stores, the savings can be sizeable.

One area for savings is through using a system called least cost routing (LCR), or as it’s sometimes known, merchant choice routing. LCR has been on the agenda for years but is only now gaining more attention following support from groups such as COSBOA and a range of industry associations.

Put simply, LCR is when a customer makes a ‘tap-and-go’ payment with their dual-network debit card (one that has both Visa/Mastercard and Eftpos functionality), and the retailer has the choice between sending the transaction over whichever debit network costs them the least amount to accept. 

Getting a better deal

Most retailers are paying more than they should because most businesses have been set up to automatically process multi-network contactless debit card payments across the Visa and Mastercard networks.

These are in many cases more expensive than the cheaper Australian Eftpos network. The discrepancy comes because the global players charge a percentage of the transaction, whereas Eftpos charges a flat fee, so the higher the transaction, the more potential savings are available via Eftpos processing.

The fact that small businesses traditionally don’t have a choice has been a hot topic recently, with even Federal Treasurer Josh Frydenberg weighing in. The RBA is ‘encouraging’ the big four banks to implement LCR, but it’s hit and miss. In my view, the RBA should actually mandate LCR across point of sale, online and mobile transactions. As more payments are accepted in the digital realm, retailers should not be at the mercy of higher fees when they are trying to compete.

Substantial savings

The potential savings are very large in some cases. For example, I’ve recently worked with Tasmania’s Hill Street Grocer, which has 10 stores in the state. Setting them up with LCR has saved around $190,000 in the first year and reduced their fees by around a third. This means they have extra money to invest, hire new staff or reduce prices, depending on their strategy.

To take the first step, our advice to retailers is to call your existing bank and ask them about implementing LCR. Sometimes they will come back with a better deal, but we’ve also heard stories where, presumably to protect their margins, they say they can put you on LCR, but then increase their other fees so that you get no overall benefit.

There’s no real reason for this, and while each business’s circumstances vary, if you don’t like the sounds of what’s being proposed, check out the other banks’ LCR offerings, or talk to someone who can guide you through the process. As a starting point, check out our Merchant Pricing Hub and learn more about what LCR can offer your business – it’s highly likely there are savings to be made for thousands of retailers across the country.

About Mangala Martinus and Payments Consulting Network

Mangala Martinus is MD of Payments Consulting Network, a boutique management consulting firm focused on the payments industry in Asia-Pacific, and Merchant Pricing Hub, which supports Australian businesses lower the cost of payments. He has over 28 years’ experience in financial services and payments, specialising in developing innovative business strategies based on detailed market and financial analysis.

About the Merchant Pricing Hub

The Merchant Pricing Hub’s innovative Pricing Comparison service helps small businesses reduce the cost of payments (in-store and online) by presenting competitive pricing from a range of payment service providers (leveraging least-cost routing) –  a unique feature of this free service is that all referral fees are donated to charity.

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