Recently, we were invited as a significant POS Software supplier to a meeting to discuss the new payment method, PayTo, which is slowly being released.

The argument was that it would help with merchants' payment processing fees and reduce the frustrations of delayed settlements, customer arguments and chargebacks. It may help with the payment fee but certainly will help with the significant pain points of delayed settlements, customer arguments and chargebacks.

Think of it as an improved debt card system that can replace much of your credit card fees.

It gives you direct access to your customers' bank accounts and a faster, more secure, cost-effective payment method.

Let me start by saying that several larger retailers are using it, and soon, customers will expect it in your shop. I doubt you can avoid its usage. The big plus for the customer is that there is little to no cost for them.

It's excellent for larger items and items that need payment terms. They are looking at mid-this year for PayTo to go critical.

What is PayTo?

PayTo is a digital payment system that allows you to receive payments directly from customers' bank accounts. It's a modernised version of direct debit designed to be faster, more secure, and more flexible. As it operates in real-time, you get speedier cash flow.

How Does PayTo Work?

To use PayTo, your business must be sponsored by a bank, financial institution, or payment service provider. It is unclear if this sponsorship will involve you with a setup fee from your bank, but the process is straightforward once you're set up. Here's how it works:

Create a PayTo Agreement

You must define payment terms, including the amount, frequency, and duration. This agreement can be used for one-off, recurring, or ad-hoc payments.

Customer Authorisation

Your customer provides their PayID. The PayTo agreement is sent to their bank for authorisation, and they must approve it through their banking app. It ensures transparency and Security.

Payment Execution

Once authorised, PayTo debits the customer's account according to the agreed terms and instantly transfers funds to your business account.

Key Benefits of PayTo for the Merchant

Real-Time Payments

This is a big plus, as with PayTo, you instantly get the funds into your account. This will eliminate many of the delays associated with traditional payment methods. It means you can access your money immediately, improving your cash flow.

Lower Transaction Fees

Unlike credit card payments, PayTo does not go through a credit card supplier, so there are none of their fees.

Reduced Risk of Chargebacks

Since the customer has authorised it, the risk of chargebacks is reduced. In practice, this has been shown to reduce disputes.

Enhanced Security

Your customer agreements are now authorised through your customers' banking apps. It would reduce the risk of fraud.

5. Streamlined Reconciliation

The banks have reports that provide detailed transaction data, making matching payments and managing your accounts easier. Once this gets going, we will look into automating this in your POS System.

How to Get Started with PayTo

Check it out online

Click here

Contact Your Bank

You should contact your bank to learn about their PayTo options; there are some issues to resolve, particularly the potential costs.

Setup Fees

To use PayTo, your business must be sponsored by a bank or financial institution. Depending on your commercial arrangement, this may involve setup or access fees.

Transaction Fees

While PayTo generally has lower transaction fees than credit cards, I am unsure about debt cards.

The cost I was quoted was $0.30 fixed. Now, if I am doing a $500 transaction, that is quite reasonable, but if I am doing a $5.00 transaction, $0.30 is not so good.

Conclusion

PayTo is a modern payment solution that addresses many of the challenges retailers face with traditional payment methods. As I stated, it's coming; we can do nothing about that. Customers will want it.

Key Takeaways

• PayTo enables real-time payments directly from customers' bank accounts.
• We are on to it.
• It offers lower transaction fees and reduced chargeback risks compared to traditional methods.
• Retailers can benefit from improved cash flow, enhanced security, and streamlined reconciliation.
• To get started, contact your bank or financial institution and explore PayTo's resources.

I was watching Anthony Albanese's video here on excessive card surcharges. He argues that it is unfair that because one pays in cash, the coffee is $5; with a debit card, it is $5.10. He thinks this is unfair. His solution is to ban debit card surcharges.

To understand the full implications of this policy, we need to examine its effects on consumers and businesses on this clearly well-intentioned policy.

The Consumer Perspective

Let us start with a positive: removing debt surcharges will improve the shopping experience by eliminating unexpected costs at checkout, potentially increasing consumer satisfaction.

However, as card payments have become increasingly popular if the cost of both cash and card transactions must be the same, it would be $5.10. This means that cash users now pay more.

Cash transactions are cheaper because they are more profitable for the merchant. After all, they do not have bank fees. Why shouldn't a consumer benefit from that? As cash is now a good solution, it has nothing wrong; even with our advanced banking system, it's still the most cost-effective way of conducting business.

Banking System Effects

Banning consumer surcharges doesn't eliminate these debt costs. Someone will pay them, as they are not magically going to disappear.

With retail surcharges banned, they become hidden fees. Banks will see an opportunity to increase them. After all, if the public does not know of these fees, there's less pressure on banks to keep fees competitive. It would lead to even higher debt costs.

Business Implications

Due to their limited bargaining power, we see small businesses are charged higher merchant fees than larger companies. Banning surcharges would worsen this disparity, giving larger firms a competitive advantage and making it even harder for small businesses to compete.

A debit card fee isn't just a transaction between a business and a bank. It results from a complex network of banks, payment processors, and other financial institutions, and there is no simple solution.

Conclusion

If I have a crack in the wall, painting over it does not address the problem of what is causing it. Similarly, these debit card fees are not the cause of the problem but the result of their existence.

Cash now is a good solution.

Although the ideas behind banning debit card surcharges are commendable, the broader implications must be considered. Instead of a quick solution that may negatively impact small businesses and potentially raise prices for all consumers, we should pursue a comprehensive approach that addresses the underlying issues within our payment system.

Cost Shifting is not Cost Elimination!

Here are two reasons why the present card payment system is wrong.

The current card payment system in Australia is fundamentally flawed. It unfairly burdens merchants, particularly on small businesses. While convenient for consumers, this system has created a cost crisis that threatens the viability of many Australian retailers.

The Card Payment Boom

The increase in card payments has been remarkable, but it has also placed significant financial burdens on merchants as I will show.

The Cost of Convenience

Merchants bear a significant portion of the costs associated with card transactions:

• 50% of fees on debit card transactions
• 80% of fees on credit card transactions

These costs are mainly in the interchange fees, which make up about 80% of merchants' total fees for card transactions.

Understanding Interchange Fees

Interchange fees serve several purposes:

1. Transaction processing: Covering the costs of handling electronic payments
2. Risk management: Mitigating fraud and credit risks
3. Network maintenance: Supporting the infrastructure that enables card payments

Although the fees have dropped over time, as card usage has increased, total card costs have skyrocketed.

My first thought is why the fees here are so much higher than in many European countries. Indeed, Australia, with its lower cost structure, should be cheaper.

 I don't accept the bank's argument that our costs must be higher because of our low population. Australia's population is higher than most European countries.

In 2021, the average merchant service fee in Australia was 0.9%. In the EU, the average fee is 0.3% for credit cards and 0.2% for debit cards.

The Effect on Retailers and Consumers

The current fee structure creates a complex dynamic, as retailers pay most fees.

Now, card issuers offer more attractive terms to cardholders to attract more business, such as rewards points, which the card issuer charges the retailer. Is it correct that retailers should be charged these reward costs? I do not think so. Plus, under the current system imposed by the ACCC, retailers cannot surcharge many of these reward systems. For example, a premium VISA card must be charged the same surcharge as a standard VISA card.

Cost of card payments

Although the costs are dropping, as card usage has exploded, the total cost has skyrocketed. The immediate problem with these fees, which are dropping, is that they are still high in Australia compared to other countries like Europe. If in Europe, with its higher cost structures, it can be cheaper, why not here?

Over the same period, we have seen that card suppliers have moved the cost they levy from the customer to the merchants. Today, merchants pay almost all these costs.

The Reserve Bank of Australia has written a good article on the cost of Card Payments. You can read it here.

It is unfair that Small Businesses Pay More

A study by the RBA found that, on average, small merchants pay transaction fees that are about three times higher than those paid by large merchants. This significant gap raises questions about fairness and produces major competitiveness problems.

Factors Behind Higher Fees for Small Businesses

Several factors contribute to the higher costs faced by smaller merchants:

1. Limited Bargaining Power: Large businesses can better negotiate favourable wholesale fees for processing card transactions.

2. Fixed Costs: Accepting card payments involves fixed costs like purchasing or renting payment terminals. For smaller merchants, these costs are spread over a lower volume of transactions, leading to higher average costs.

3. Pricing Plans: I often see smaller merchants opting for short-term plans, which are generally more expensive in the long run.

4. Lack of Volume Discounts: Larger merchants benefit from volume discounts due to their higher transaction volumes, a benefit that's out of reach for most small businesses.

The Numbers Tell the Story

The disparity in costs is significant:

• The smaller merchants on the chart have an average cost of acceptance across all card types of 1.15% of transaction values.
• In contrast, the largest has an average cost of acceptance of just 0.47%.

The Broader Impact

This cost disparity has several implications:

1. Reduced Competitiveness: Higher transaction costs make it harder for smaller retailers to compete with larger retailers.

2. Cash Preference: Some small merchants discourage card use or implement minimum purchase amounts for card transactions, inconveniencing customers.

Here is a good article on the problems of small vs large retailers here.

Looking Ahead: Technology potential solutions.

Digital Wallet Integration:

Improvements to digital wallets like Apple Pay, Samsung Pay and Google Pay in the Australian card payment ecosystem could bypass some traditional card network fees, providing a direct, less costly payment route. These could bypass the card entirely.

Bitcoin as a Potential Solution

Items like Bitcoin present an intriguing alternative to Australia's current card payment systems, particularly for small businesses facing high transaction fees. Bitcoin has much lower transaction costs as it has no interchange or bank fees, plus it offers a level of anonymity and security that cash provides.

What the government should do?

-We should introduce a low-cost card payment system with the same fee, regardless of the business's size. We have one now, called cash, but we need something to replace it. Merchant surcharging should not be allowed in that payment system.

-Transparency in fee structures. We cannot act until we know exactly what is happening.

-A review of the current costs of interchange fees. Why do the card providers need so much in fees?

-A review of the card costs: Why should merchants have to pay for the reward system for many cards? If card suppliers want to market their cards more, they should pay for it. The current surcharge rules by the ACCC are wrong, as they do not allow a merchant to charge a surcharge on many premium cards. 

Conclusion

The Australian payment system needs urgent reform to protect small businesses and ensure fair competition. The convenience of card payments shouldn't come at the expense of our vibrant small business sector.