THE VALUE OF PAYMENT CARDS, UNBUNDLED RATES AND SURCHARGING
Payments by cards are good for retailers
Whatever kind of payment you accept, there is a cost associated with it. There are costs associated with EFTPOS terminals and line charges - and there is even a hidden cost to accepting cash payments. The additional time it takes to accept cash at the point of sale and to balance the till does add up. If you include the additional security required and shrinkage due to errors when processing cash you might be surprised at the amount it costs your business: it's just these costs don’t show up as a total on your bank statement.
While there is a cost for accepting credit and contactless debit transactions, it has to be said that being able to accept cards make it easier for people to buy goods and services. Credit and debit cards broaden a retailer's potential customer base - and the more potential customers you can attract, the more likely you are to make additional sales. They are especially good at helping you sell to international visitors - who typically make substantial use of their credit cards and make purchases that may not otherwise not occur.
We know consumers are more likely to make a spontaneous or higher-value purchase when they can put it on their credit card and pay it off later. Retailers no longer have to manage credit arrangements in-store as they did many years ago. This is taken care of by credit card companies and banks - and retailers bear no responsibility for these debts.
Customers are increasingly wanting to pay using contactless cards - and in the future via contactless technology using a phone or wearable item. The move to contactless payments can help your business, especially if you are in a high-volume environment.
Plus, of course, and most significantly, scheme credit and debit cards make the world your market. In the age of the Internet, your customers can be based anywhere, not just in your own suburb. It's easier for you to sell to customers from Kaitaia to Bluff, as well as in London, New York, or Jakarta.
What about unbundled rates?
Despite the benefits of accepting credit and debit cards, their costs are a big issue for retailers. We think rates charged in New Zealand are too high - but even so, there are things merchants can do to increase transparency and, potentially, help cut their costs.
The majority of retailers are on 'bundled' or 'blended' rates. This means that the bank charges a flat fee across all transaction types (excluding EFTPOS) and applies this to all payments the business accepts in future. The rate that Retail NZ members can access with Westpac is a blended rate, although we are in discussions about a special unbundled rate for Retail NZ members.
Some banks offer unbundled rates, sometimes called 'Interchange Plus'. This means that retailers are charged the published Visa or MasterCard interchange rate for each card type (these can be found online) plus a bank fee to cover processing and service.
If you are interested in an unbundled rate, you can have a discussion with your bank about the unbundled rates it can offer you, and look at how these compare to the average bundled rate for your business. You do need have a good understanding of the different payment types coming in through your business and how much customers are spending with each. If you don't already have this, your Bank should be able to give you the information you need.
If you are going unbundled, it is best also to consider accepting contactless payments because it can help lower the overall cost.
Some retailers prefer the certainty of knowing exactly how much they will be charged for each payment, and this certainly is a benefit of a bundled rate.
If you would like more information about any of this work please contact firstname.lastname@example.org.
What does Interchange plus mean in practice?
An unbundled rate for payments means that the amount you will pay your bank varies depending on the card customers choose to use and provides more transparency around what you are paying to whom and why. This can lead to some pretty complex calculations, but let's look at a hypothetical book store, that sells 500 books a day at $20 each, and that customers pay with either contactless scheme debit or credit cards (note that for the purposes of making this example simple, we are excluding normal EFTPOS and cash transactions).
The bookshop is on the Retail NZ bundled rate with Westpac - so pays 1.64 per cent for all credit and contactless debit transactions. That's a total of $164 a day. That's a pretty good deal compared to what other banks will charge - but is it the best solution?
The answer depends on how customers choose to pay. Let's assume that 80 per cent of customers pay using a premium credit card, and the remaining 20 per cent use a contactless debit card (we're assuming in this example that customers are split equally between Visa and MasterCard). Moving to an unbundled rate could cost a total of 2.15 per cent in merchant service fees - meaning that the business would be $51 a day worse off on an unbundled rate.
But, if 80 per cent of customers paid with contactless debit cards, and the remaining 20 per cent paid with premium credit cards, the result could be quite different. In this case, the business could pay a total of 1.03 per cent in merchant service fees - making it $61 a day better off on the unbundled rate.
The examples above are, by necessity, simple ones. In the real world, the calculations would be more complex, and the outcomes different; but they show how material the differences can be - and how much you could win or lose depending on the specifics of your business. It's therefore really important to understand the details of your transactions, including the kinds of cards customers use, the size of transactions, the interchange rates and bank fees that apply, and the payment channels (over the counter or online) before you can complete this calculation for your business.
If you don't already have the information, we recommend that you ask your Bank to provide a breakdown. We also have a handy spreadsheet available that's available to help with the calculations - please email email@example.com if you would like a copy.
Retail NZ is not recommending either an unbundled rate or a bundled rate. The situation will depend on completely on your individual business, and how much you value the certainty of a flat rate compared to the risk of a variable rate.
If you are thinking about switching on contactless for the first time, it's important to remember that standard EFTPOS transactions are free, while there is a cost for contactless debit. MasterCard has a micro-transaction rate available for low-value contactless debit transactions - but it is critical that you are informed and model the numbers for your business before making any final decisions.
Can't I just surcharge?
You are allowed to apply a surcharge to cover the costs of merchant service fees. This is common in the ticketing and travel business, but almost no retailers apply a surcharge to customer purchases because it would put them at a competitive disadvantage and deter many customers from purchasing. If you do surcharge, you need to advise the customer before the purchase, and it needs to be set at a level to cover the costs you incur: there may be questions under the Fair Trading Act if you set, say, a 5% fee to cover a 1.69 per cent charge!
Where can I get further information?
Email us at firstname.lastname@example.org.