Australian supermarket chain Woolworths has made the
controversial move of banning the in-store credit option on debit
payments, calling the high interchange fees ‘an unnecessary layer
of cost’. But the country’s central bank has been proactive in
limiting the costs of interchange. Lachlan Colquhoun


Visa, MasterCard and Australian
consumer groups are in conflict with retail giant Woolworths’
decision to ban the use of the credit option for payments with
debit cards across its retail empire.

Woolworths, which operates one of
Australia’s leading grocery chains as well as national retail
brands selling electronics, liquor and fuel, has disabled the
credit option for consumers paying with a Visa or MasterCard debit
card. The new policy was implemented in mid-April across all of
Woolworths businesses.

The move will switch transaction
costs from the retailer to the issuers, saving Woolworthsms of
dollars a year.

When consumers use the credit
facility on their debit cards, Woolworths pays 8 cents or more, but
when a customer presses the cheque or savings option using the same
card, Woolworths receives a fee of 4 cents, shifting the
transaction to the domestic EFTPOS payments network which accounts
for 75% of all debit card transaction. In many cases, issuers pass
those fees onto card holders after a certain number of transactions
each month.

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Some large Australian corporates,
such as Qantas and retailer Aldi impose a surcharge for people
paying by credit. Woolworths main retail rival Coles has said it
has no intention to follow the Woolworths lead.

Visa’s general manager for
Australia, New Zealand and the South Pacific, Chris Clark, told
Cards International the Woolworths decision was “extremely
disappointing” and “will restrict consumer choice at the checkout”.
The Woolworths move is legal since Reserve Bank of Australia moves
to change the international ‘honour all cards’ regime.

“The ability for different payment
products to be able to compete for share of wallet is an essential
part of a healthy and robust payments system,” Clark said.

“Cardholders use Visa Debit
functionality for many reasons, and we believe its launch
introduced choice and innovation to the marketplace and provided
consumers with the additional benefits of online, telephone and
international functionality.”

The Visa debit card is particularly
popular among non-bank issuers, with more than 100 credit unions
and building societies issuing more than 1.5m cards, a product they
embraced when a previous card scheme, Bankcard, became defunct.
Debit scheme cards are growing at an annual rate of 27% in
Australia, with consumers keen to combine several payment options
in the one card as they remain shy of credit card debt.

Australian consumers made 350m
transactions on Visa and MasterCard debit cards in the year to the
end of February, up 35% on the previous 12 months and are growing
more than three times the pace of alternative electronic


Focus on helping

Visa’s Clark said he was confident
the Woolworths move would not spread through to other retailers.
Visa was also continuing to discuss the issue with Woolworths “to
reach a mutually beneficial outcome”.

“We believe retailers will continue
to realise the advantages of offering cardholders a choice at the
point of sale,” said Clark. “Debit is a key tool for migrating
consumer spending made with cash and cheques to more efficient and
lower cost electronic payments.

“We are focused on helping
merchants understand the value of debit acceptance, which gives
access to business channels such as online and mobile.”

In a statement, Woolworths finance
director Tom Pockett justified the move by saying that retailers
face higher bank fees and growing cost pressures due to the
increasing use and promotion of scheme debit cards.

“The bank fees from processing
debit transactions via MasterCard and Visa adds significant costs
to the Woolworths’ business,” Pockett said. “Every time we process
a MasterCard or Visa we incur a cost. By processing transactions
through the Australian EFTPOS network we can keep our costs

“The charges associated with the
scheme debit networks are simply an unnecessary layer of costs for
retailers that eventually trickle down to the customer.”

MasterCard has not commented.

Industry analyst Mike Ebstein, from
Melbourne-based MWE consulting, said Australian consumers had
“clearly shown” they wanted the scheme debit cards.

“The losers in this are Woolworths
customers who, by using the credit button, are able to use their
card with no transaction fee,” says Ebstein. “What Woolworths are
saying is that we are shifting the cost of the transaction from us
to you and you may in future be charged by your bank as a means of
enhancing our bottom line.

“The big question now becomes, will
Woolworths pass these savings on to their customers in the form of
lower prices? And the answer is no-one would know.”

Ebstein said the Woolworths action
was an “unfriendly move” which was pre-empting the spirit of an
ongoing Reserve Bank of Australia review of debit card interchange

“The RBA intention is clearly
stated,” said Ebstein. “They want to remove the differential in
exchange rates between scheme credit and other cards, and that has
been narrowing over the past three or four years and I am not aware
of any deviation from that intention to bring the rates closer

“So Woolworths does run the risk of
creating consumer angst unnecessarily given that the RBA is doing
that job for them.”

The Woolworths move was strongly
criticised by national consumer advocacy group Choice, which points
out that banks and credit unions charge cardholders more, and more
often, when they use the savings function on their cards, with the
highest fee being A$2.50 ($2.3) per transaction charged by the
Australian Central Credit Union.

“Most people may not be aware of
how many debit transactions they are allowed, or what their costs
are,” said Choice spokesman Christopher Zinn.

The Woolworths move, he said, could
be the “thin edge of the wedge”.

Analyst Ebstein, however, was
sceptical the Woolworths move would change much.

“”I think that most card holders will still use the card and not
be too fussed, and I doubt it will have a significant impact on
scheme debit cards,” he said. “It may restrict the degree to which
the issuers market the cards in future, but the jury is still out
because its too early to say with any certainty what the
behavioural changes will be.”