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The CEO of Australia’s largest bank has come under fire after suggesting that merchants are gouging consumers by surcharging for card payments.

Matt Comyn, CEO of Commonwealth Bank, made the remarks last week while appearing before the House of Representatives Standing Committee on Economics.

In an  with Labor MP Jerome Laxale, Comyn was asked to explain why a typical cup of coffee in Australia costs A$5 when paying by cash, but could be surcharged up to A$5.08 when paying by card.

Comyn initially said that Laxale’s example was “not a like-for-like comparison”, because the cost of accepting cash payments has always been “embedded” into the price of goods and services.

Asked why this is so for cash but not for cards, Comyn responded that payment acceptance costs in Australia are already among the lowest in the world — implying that merchants may be abusing their ability to recoup costs through surcharging.

“I think there's a reasonable hypothesis that at least some businesses are surcharging more than the cost of acceptance, but there is no data on that,” he said.

“We are one of the lowest, if not the lowest cost-of-acceptance markets in the world. We're a fraction of the US or Canada, for example, so the domestic payment system is extremely efficient.”

Elsewhere in his exchange with Laxale, Comyn said the cost of accepting electronic payments in Australia has fallen by more than 30 percent.

This claim is  by Reserve Bank of Australia (RBA) data from 2010 to 2020; however, as the graph below shows, the decline is mainly due to the reduction in credit card transactions.

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During the same period, debit card transactions became more expensive for merchants to accept.

Nonetheless, Comyn said the overall decline in payment acceptance costs has led to “substantial” savings for consumers.

“That’s not a saving,” said Laxale, holding up two cards showing the cash price and card price of the same coffee.

Comyn accused the MP of peddling “fact-free rhetoric” based on a “false comparison”.

“I am presenting facts here,” said Laxale. “To a consumer, it’s money that they have earned, and yet they buy the same thing and it costs them different.

“That’s what I’m trying to get to the bottom of.”

Who is to blame for widespread surcharging?

At other times during the hearing, Comyn indicated that other entities in the payments ecosystem may be at fault for not passing on certain savings to merchants, which in turn drives surcharging.

“I think it's critically important that some of these payment providers, which are imposing a more significant impact on the payments industry, are urgently reviewed,” he said.

Without mentioning these entities by name, it was clear that Comyn was referring to firms such as Square, which charge merchants a high flat fee per transaction to accept any payment type.

In Australia, Square  1.6 percent for in-person payments, 2.2 percent for online payments and 2.2 percent for remote payments (such as card-on-file and invoice payments).

Although this simplifies pricing structures, it cancels out the cost savings that merchants could enjoy when accepting cheaper payments.

The clearest example of this is in the market for debit card payments.

As Comyn noted, Australia’s interchange fees for debit card transactions are among the lowest in the world, and have been driven down by competition with eftpos, the low-cost domestic scheme.

According to the RBA, this has led to total merchant fees being as low as 0.22 percent for eftpos debit card transactions, 0.45 percent for Visa Debit and 0.47 percent for Debit Mastercard.

However, these savings are often not passed on to the merchant when all transaction types are bundled under a single fee structure — a model that Commonwealth Bank .

Unintended consequences of least-cost routing

The cancellation effect described above is most pronounced when a payment provider uses least-cost routing by default.

If the consumer pays using a dual-network debit card, this means that the transaction is routed via the cheapest network (i.e., eftpos).

If this cost saving was passed on to merchants, it would act as a strong incentive not to surcharge consumers.

However, flat fee pricing structures mean the saving does not reach its intended beneficiary.

Brad Kelly, managing director of Australia’s Payment Services consultancy, said that least-cost routing currently benefits the payment provider, not the merchant.

“Small businesses are being gouged because eftpos is so cheap,” he told 91����ԭ��. “Outside of strategic merchants, eftpos is just a few cents per transaction.

“When you load up a 2 percent fee on a A$100 transaction, that’s A$2 that costs Square just a few cents.”

He added that POS software and hardware pricing also drives surcharging, both of which are provided by banks, such as Commonwealth, and fintechs, such as Square.

On Comyn’s suggestion that some merchants are surcharging more than the cost of acceptance, Kelly described this claim as “rubbish”, noting that Australia’s banking industry all “parrots the same line”.

Comyn’s remarks also do not account for the vast difference between what smaller merchants are charged for accepting electronic payments and what larger merchants are charged.

As the RBA has , a merchant that turns over less than A$10,000 per year could pay up to four times more per transaction than a merchant that turns over A$1bn per year.

The largest merchants in Australia, such as Coles and Woolworths, can access preferential pricing for both interchange fees and other costs.

“Preferential pricing is so low that it’s embarrassing, and it’s one of the reasons why the largest merchants don’t surcharge,” said Kelly.