Why are merchant service deals so expensive?

Are you a small business or a busines accepting card and/or online payments from customers? Have you tried to understand the merchant service deals and offers from banks and their competitors?

Cash is surcharge-free and easy for everyone to understand but that is not the case with card payments. Merchant deals offered by banks in Australia are notoriously complex and many merchants find the costs significant.

New merchant deals and new Mastercard and Visa card fee schedules are out now and might be surprised how expensive accepting card payments can be.

What do Visa and Mastercard charge for credit and debit card transactions?

Whether you are a cardholder, a consumer making a purchase or a shop keeper, a merchant accepting a card as a form of payment, you need to understand the basic fees of the banks and card schemes – Visa, Mastercard, UnionPay, American Express and Diners Club.

But they don’t make it easy to understand some of their fees. And the card schemes have new fee schedules in 2020.

One of the hardest thing to understand is how Mastercard and Visa make money. They don’t charge the retailer or the cardholder anything. Mastercard and Visa charge interchange fees for directing payments from one bank (the cardholder’s bank) to the another- the merchant’s bank.

For a simple debit card transaction at a Point of Sale in Australia, here is the full Mastercard interchange fee schedule: (This Mastercard interchange fee schedule is current from April 2020):

Mastercard is charging up to 0.165 per cent in interchange fees for a contactless debit card payment. That is $8.25 per $500 transacted. What is Visa charging in interchange fees for debit card transactions? Visa also has new fee schedules for 2020; (This Visa debit card fee schedule is current from February 2020):

Visa is charging up to 2.2 per cent in interchange fees. For contactless debit card transactions, Visa is charging up to 16.5 cents.

But what about credit cards? Visa and Mastercard have different – higher – fees for credit cards. The interchange fees the international card schemes charge to accept credit card transactions can range up to 0.88 per cent. The schedules for credit card transaction fees are much longer and more complex than debit card transactions.

Mastercard’s interchange fees for credit card transactions are up to 0.88%. Many Mastercard and Visa credit card transactions will be charged at around the 0.50% to 0.80% range.

Visa’s 2020 credit card interchange fee schedule for Australia was updated February 2020). Visa is charging up to 0.88 per cent in interchange fees for premium credit card transactions. Believe it or not that is $44 for $500 of transactions.

Who pays for card transactions?

Retailers do not pay interchange fees to Visa and Mastercard and other card schemes. Retailers pay their bank a package of fees and their bank pays the card schemes.

Customers, shoppers, can be charged a fee by the retailer to cover their costs in accepting card transactions. That customer surcharge is up to the merchant. Merchants are not supposed to profit from surcharging customers on card transactions.

Comparing and understanding merchant service deals from banks

Here are some actual merchant deals that we have heard about at CashWelcome.org.

  • Victorian IGA local independent retailer 6 terminals = $2,000/month.
  • Victorian Mini-Mart, 1 terminal – $500/month.
  • Queensland Club, multiple terminals = $5000/month.
  • Queensland Club, 16 terminals = $546 + 1.3% on all transactions.

The truth is that banks don’t make it easy to compare and work out the total cost of their merchant service deals. By charging rental for devices, transaction fees, monthly fees and a variety of other fees the real cost of their service can be difficult to work out.

ANZ Bank merchant deals

ANZ has some of the most popular credit cards in Australia and was the first bank to offer Apple Pay for its card customers.

For merchants, ANZ has a number of plans with different pricing structures and offers interchange-based pricing for large businesses. Finding the actual prices that ANZ charges merchants can be tricky. There’s no actual prices on ANZ Bank’s pricing page for merchants.

Instead the bank says:

“To discuss merchant pricing fees and structure … contact us on 1300 366 988.”

NAB merchant deals

National Australia Bank is a traditionally popular bank with Australian business. NAB’s merchant plans for retailers requiring a terminal charge around 1.0% to 1.5% of transactions or turnover. There is a monthly minimum cost plus a percentage of transactions over the monthly minimum turnover.

CBA merchant deals

Commonwealth Bank is Australia’s biggest bank by customer numbers and market capitilisation. Commbank’s Simple Merchant Plan charges a flat monthly fee plus 1.5% on turnover over the minimum amount.

Westpac merchant deals

Westpac is currently waiving set-up fees ($82.50) and monthly merchant fees for the first 12 months of new contracts. Monthly fees on Westpac merchant deals start at $55 per month with $3,500 of Visa, Mastercard and eftpos transactions included. Westpac has a PDF Guide to Merchant Service Fees & Charges.

Tyro merchant deals

Tyro is a new bank that specialises in merchant services. Tyro does not issue card itself, unlike the other banks. Tyro’s merchant service deals are typically cheaper than many banks. However transaction fees still range up to 2.2 per cent per transaction even with Tyro.

What is Least Cost Routing and how can I get Least Cost Routing for my business?

Least Cost Routing is the ability of merchants, (specifically their POS terminal) to send each card transaction to the network that charges the least fees.

Mastercard and Visa may charge around 1.5% of  the value of a transaction but eftpos charges a flat rate around 25 cents.

So a small transaction might be cheaper going through Mastercard or Visa and bigger transactions might be cheaper going through eftpos.

Consider this:

Mark owns a coffee shop with an average transaction size of $5. His card transactions, if handled by eftpos, cost about 25 cents each. But if Mark has the ability to direct his transactions to the least cost network, his $5 sales could be handled by Mastercard for 1.5%, or around 6 cents, a saving of 19 cents per sale.

Heather runs a fitness and pilates studio. Her average card transaction is $50. The average card fee, if handled by Mastercard or Visa is about 75 cents. But if Heather gets Least Cost Routing, she can switch most payments to eftpos, saving about 50 cents each time. You can find more information about LCR and LCR deals now offered by banks in Australia here.

THIS INFORMATION IS GENERAL IN NATURE AND DOES NOT TAKE INTO ACCOUNT YOUR PERSONAL SITUATION.  YOU SHOULD CONSIDER WHETHER THE INFORMATION IS APPROPRIATE TO YOUR NEEDS, AND WHERE APPROPRIATE, SEEK PROFESSIONAL ADVICE FROM A FINANCIAL ADVISER IF YOU OR SOMEONE YOU KNOW IS IN FINANCIAL STRESS, CONTACT THE NATIONAL DEBT HELPLINE ON 1800 007 007.