Consumers increasingly paying through cards; merchants get burdened with hefty fees

  • Jun 23, 2020 AEST
  • Team Kalkine
Consumers increasingly paying through cards; merchants get burdened with hefty fees


  • The COVID-19 pandemic has encouraged the cashless payment system all around the world. 
  • When consumers pay through credit card, the merchants pay some percentage to the bank, but for smaller merchants, it reduces their revenue.
  • Bump ’n Grind coffee shop is not happy with increasing card payment as they are paying more to the bank than in buying the green beans.
  • For smaller merchants, the card system is not too beneficial as the payment services come at a fixed cost, but due to fewer transactions, it is difficult to spread the charges.
  • The pandemic panic is the ultimate disrupter to the already reducing cash payments as merchants and consumers prefer cashless transactions.
  • RBA opines the cost incurred by merchants for the electronic transaction must be minimum.

During the pandemic, cashless payment system, which was already growing, is now being encouraged even more. People all around the world are moving towards cashless transactions and opting for credit cards, BNPL, and cryptocurrency options to purchase goods and services.

How does the card system work?

When the consumer pays through a credit card, the bank gets between two to three per cent of the price from the merchant. The merchant doesn't like paying this swipe fees, but banks love to receive this payment. 

The bank often returns some part of this fees to the consumer as rewards of using the bank's card. These rewards could be cashback points or airline miles. Also, separate small fees are paid to the payment networks like Mastercard Inc. and Visa Inc., and to the financial institutions that support the transactions.

The transaction fees increase everyone's price, from the merchant to the consumers, as they fund a growing collection of cardholder rewards, which mostly benefits affluent buyers.

Bump ’n Grind Coffee Shop not pleased with credit card payments

Bump ’n Grind, an independent coffee and vinyl record shop, is not happy about the increasing use of cashless payments through credit cards, online purchases, and app during the pandemic. The cashless payment is burdening Bump ’n Grind financially as it is not suitable for the shop which roasts its own coffee beans. Last year, the shop's expenditure on cards' processing fees was higher than what it spent on purchasing of green beans.

As per the owner David Fogel, that's quite overburdening for the small business as it is affecting their revenue. The shop was shut down for nearly two months during the COVID-19 pandemic, but the roasting and delivering of beans continued. The owner said that it is renegotiating the shop's rent, and if negotiation will not succeed, he is ready to close the shop and focus on the wholesale coffee beans business.

The customer discounts are a giant reverse Robin Hood which transfers billions of dollars a year. However, the card industry would like to disagree on this. As per them, people from all level of income get the high value from their credit cards reward programs, and they responsibly use it. The person who spends more gets more reward points, the card industry says, there can't be a better way for it.

Why smaller businesses incur higher average payment costs?

  • The merchants get payment services at some fixed cost, and due to fewer transactions in small businesses, they lose more on the revenue part.
  • Also, larger merchants get more benefit from advantageous interchange rates from card schemes such as strategic or specific industry rates.
  • For small businesses, there are barriers like they can't take benefit by switching, as searching, and switching to another scheme may cost them more to recover from the low transactions.
  • Small merchants are less likely to be offered plans from their acquirers to minimise their payment costs.
  • Large merchants benefit more in the interchange economy.
  • Rarely small firms have the negotiating power in the interchange economy. 

Mastercard and Visa have planned to increase interchange fees for many merchants from July, and it could be hardest on the small businesses. 

Due to the high transaction fees, many small businesses completely bypass cards entirely; however, due to pandemic, it is not possible for them. Some are allowing card payments even though it is incurring them a lot of expenses.

One such example is Mississippi Records in Portland, Ore. It accepted only cash before the pandemic. When its physical store got closed due to pandemic and the company witnessed an eighty per cent drop in revenue. For the first time in the 17 years existence of the business, the owner, Mr Isaacson, has set a digital store and got a contactless card payment reader. The store got reopened in mid-June, but with new guidelines of social distancing and mask-wearing. All over the world, the retail industry is re-shaped, and they are offering more and more cashless options to customers.

Mr Isaacson's store now accepts both cash and cards, but he is not pleased and wants to go back to the cash payment. However, to survive in this virus-driven world, small businesses don't have many options but to offer cashless card payments.

Pandemic panic became the ultimate disrupter to the Australia cash payments

Over the past decades, Aussies have witnessed a rise in the electronic payment and decline in the paper payment. Cheque payments use declined, and bill payments increasingly moved to electronic cash. The payments are frequently made through credit cards and debit cards. Card usage also supported by the current online boom in the wake of the ongoing crisis as it allows remote payments.

Despite the growth in electronic payment and growing alternative payment system like BNPL, app, cryptocurrency and others, cash still holds its importance and the minority of the Australian population still prefers cash payment for face to face purchasing. 

The COVID-19 crisis came as the ultimate disrupter to the cash payment system. The ongoing turmoil witnessed changes in consumers and merchant payment preferences as both now prefer cashless transactions. Consumer behaviour is changing, and this behaviour is shaping the retail payment system. As a result, ATM withdrawals have come down significantly.

Costs incurred by merchants of electronic payments must be low: RBA

RBA takes the issue of electronic payment costs for merchants very seriously. The merchants like to allow as many payment systems as their competitors allow so that they do not lose any sales to the rival company. Consequently, they take up as many as a payment mechanism as possible.

As they incur more cost due to multiple payment mechanisms, ultimately, they find themselves into the prices charged to buyers. As the contactless payment increases, now it is more important to ensure that competitive pressure remains on electronic payment costs to merchants. Until now, the bank has not made it mandatory for merchants to acquire least-cost routing, but it will be considered in the review.


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