Payments reform should be about supporting small business, not protecting incumbents from competition
Marco Lamantia, Executive Director - Australia
After the Reserve Bank of Australia published public submissions last week as part of its review into card payments, we had the opportunity to hear from industry participants big and small. Their submissions help paint a valuable and timely picture of how the payments industry operates and how it thinks of itself, giving Australians an insight into the competing priorities and competitive tensions driving a pivotal, rapidly evolving sector.
As parliamentarians interrogate bank CEOs about surcharges on flat whites, and the decline of cash reshapes consumer habits, the RBA’s review has become an unmissable moment for understanding this often overlooked part of our economy.
Payments are generally overlooked for a reason. Whether you are a business or a consumer, payments should work seamlessly, so that business-owners can focus on running the show and customers can get on with their day.
While small businesses have particular payments needs, they haven’t historically been well served by the major banks. Often they were offered rigid products designed for big businesses complete with hidden fees, long-term contracts, monthly terminal charges, and complex terms. Very small businesses like market stalls and the local footy sausage sizzle often weren’t able to accept card payment at all.
Square was started to solve this problem. We and other fintechs have focused largely on long-neglected and under-served small businesses, offering owners a simple, transparent price regardless of how their customer chooses to pay with no hidden fees. This allows small businesses to make sales in minutes, not days or weeks, allowing businesses to get started quickly and flexibly, with no lock-in contracts or startup costs.
The reason hundreds of thousands of businesses are turning to Square is because we are delivering what they want. We know because they have told us. In a survey of our customers, 84% said they prefer the transparency and predictability of simple rate pricing. The top four reasons why small businesses switch to Square is to avoid four main bug-bears: monthly terminal charges, high costs, lock-in contracts, and complicated pricing for different cards.
Since Square launched in Australia in 2016, the Big Four Banks’ market share in payment processing has dropped from 73% to 63%. More competition has paid dividends for Australian small businesses which have benefited from double digit declines in average payment costs and dramatic improvements in product offerings. Progress towards the RBA’s broader objectives for the payments system is being made, as evidenced through the growing proportion of debit card transactions and increasingly prevalent least cost routing.
Greater competition has delivered greater choice. If a small business just needs a bare-bones payment acceptance, there’s an option for them. If they need industry-specific software or hardware, that’s available too. If they want unbundled pricing or seek to surcharge transparently, those options are on offer as well. If they want simple, easy-to-set-up payments and software, there are plenty of options. Choice is now abundant.
Instead of focusing on better serving small businesses in response to greater competition and choice, some of the major banks and other payments industry players want the RBA to dictate how small businesses operate and ban them from being able to choose the types of products that suit their needs, like simple pricing.
So there is absolutely no need to restrict choice and dictate what products can or cannot be used. Business owners are well informed and have a keen sense of what they need from their payments provider, so this lobbying by banks should be seen simply as an attempt to limit freedom of choice for small businesses and prevent them from voting with their feet for what matters to them most: simplicity and value.
Fewer options in the market will reduce competitive pressures on incumbents so they can continue to cross-subsidise their loss-making payments businesses with high margin business and consumer lending. With reduced competition, payment costs will eventually rise.
Australia has a highly concentrated financial services sector which too often lacks meaningful competition, something that we all ultimately pay for. This is why Square and the fintech sector more broadly are urging the Government to use the RBA’s review on payments to enhance, not take away, hard-fought gains to make our payments industry more competitive, innovative and diverse. This means allowing hundreds of thousands of small businesses to continue to use the products they prefer, and encouraging more smaller fintechs to enter the market.
Failing to embrace innovation and progress will push Australia back towards a world where payment costs are around $400 million higher than they are today, small business needs are neglected, and the local sausage sizzle is cash only. You can bank on it.