Plastic’s fantastic – for a bank

Tired of queuing at the petrol station while the customer in front of you is tinkering with the eftpos terminal, keying in a PIN just to buy a Cornetto, some barbecue chips and a packet of chewy?

You’d better get used to it. We are moving, inexorably, to a cashless society. Cashless sales have been rising, as a proportion of all sales, since eftpos was introduced almost 30 years ago.

The next step is the contactless debit card with a microchip which processes each transaction. It will speed things up and, alongside the slow but sure revolution in online shopping, further eliminate the use of cash in every day living.

The way things are evolving in the little-publicised battle to control the payments system, it will also cost more.

Retailers have for years picked up a rebate of 4¢ to 5¢ from their bank for use of the eftpos network. Under recent changes, however, the retailer’s bank will now be charged 5¢ by the cardholder’s bank for every transaction.

As the retailer’s bank will pass on the fee – and, of course, because the banks are on either side of the deal – these changes constitute a swing of 10¢ a transaction in favour of the banks and against small business. We are talking a transfer of value in the order of $220 million to $300 million.

Our pesky customer buying his chewing gum would be unlikely to incur this fee since purchases under $15 trigger only a 1¢ network processing fee. Still, the average size of an eftpos transaction is more than $50.

Should our pesky customer add a packet of Winnie Reds and a big bottle of Coke to his order, then ask for “cash out” to boot, the 5¢ fee would come into play plus 20¢ for the “cash out”. Of the annual 2 billion in eftpos transactions, 250 million involve a cash withdrawal.

Because Woolworths and Coles have struck their own eftpos deals with the banks – and they account for about 70 per cent of the grocery market – there is about $175 million in extra fees for the taking. The rest of the merchants – 300,000 small retailers – will cop it, albeit in small increments.

One can’t begrudge the banks – despite their statutorily mollycoddled status – from looking to raise fees to bring higher profits. Nor can one begrudge the press from keeping an eagle eye on them to stymie market abuses.

The Commonwealth Bank chief, Ralph Norris, was out this week bemoaning as usual the myriad cost pressures facing the banks. During the boom, credit growth in the mortgage market was running at 15 per cent a year. Now it is growing at 7 to 8 per cent – half the pace. Fees and charges are on the up, as evinced by a Reserve Bank report on Thursday of ATM fees rising, particularly in rural areas.

For bank investors the slower credit growth is not good news, but pause to consider this: bank shares have normally traded at a discount to the market – that is, a PE ratio of 11 or 12 times compared with

13 or 14 times for the broader industrial index. Their future earnings, given the high leverage of the banks, have been discounted. Only at the height of the boom, when their stocks reached earnings multiples of 16 times, were the banks valued equally with other industrial companies. Now, and this is merely our opinion, that gap is likely to close, slowly. Why should the banks – given they are underpinned by the state and can’t go bust – be valued by the market at a discount to other large industrial companies who don’t enjoy the same immunity from risk?

Coupled with that is pricing power which the bank sector has maintained even as interest rates have escalated.

So, it is hardly a big stretch to contemplate that a rerating of bank valuations can, to some extent, countervail the pressure arising from the contraction in credit.

Back to the little guys then. Of the 1.2 million small businesses in Australia, about 300,000 have an eftpos terminal. When the eftpos system was developed, the banks said to the retailers: ”Put in an eftpos terminal, accept these cards and we will give you 20¢ per transaction.”

Then along came Reserve Bank governor Ian Macfarlane who noticed that the more expensive the card, the more market share it was getting. The market was not working. Why so? The banks were pushing reward schemes with fatter and fatter fees. So the more expensive cards were getting the most use. It suited Visa and MasterCard who wanted the banks to raise interchange fees to fund the reward programs. That is, raise the fee that is paid by the merchant’s banks to the card issuer’s banks.

Macfarlane decided to regulate interchange fees, capping them at 50 basis points per transaction, the lowest in the developed world and well below the likes of the US at 180 points.

This year, however, the big banks moved to make eftpos pay. Woolies and Coles, seeing they were going to be slugged with higher fees, invoked the hallowed principle of “if you can’t beat ’em join ’em”. With the banks, they set up a company called EPAL (Eftpos Payments Australia Ltd) and became counterparties to the issuing banks.

Small merchants can be justifiably miffed, having to shoulder the investment in eftpos while their nemeses Woolies and Coles are getting a free ride.

True, some ten issuers (as with the mortgage market, the Big Four banks have 90 per cent of the payments market) have to upgrade their systems for new cards but so do the 300,000 small businesses – and pay a fee.