In the Press
19 April 2010
Woolies being misunderstood
Australian Financial Review
Andrew Cornell
The decision by Woolworths to ban scheme debit transactions using Visa and MasterCard debitcards and instead force holders of those cards to undertake an eftpos transaction is both legal and financially smart for the retailer.
It is the consequence of two developments: Reserve Bank of Australia payments systems reforms that booted out the international schemes' "honour all cards" rule; and Woolworths' multimillion-dollar investment two years ago in its own, bank-standard, payments processing technology.
Honour all cards meant if a merchant elected to accept one kind of Visa or MasterCard product, typically a credit card, then it had to accept them all – debit cards, pre-paid cards, higher transaction fee premium cards.
The Reserve Bank of Australia's thinking in overturning this demand by the schemes was that it was anti-competitive. If the schemes came up with a new product, say pre-paid cards, merchants had to accept them – a guaranteed launch platform.
Other firms that came up with a new payments product started with the significant handicap of having to convince merchants to accept the product. Meanwhile, Woolworths' investment in its own payments "switch", which performs functions the retailer previously paid banks to do, has given it the power to discriminate transactions.
Mandating, despite customer preference, that any transaction where the funds are coming directly from a deposit account is now an eftpos transaction delivers a revenue shift of around 9¢ a transaction. Under a scheme debit transaction, Woolworth's would have paid around 4¢ – the exact amount is unknown – while it earns roughly 5¢ from an eftpos transaction.
The economic case is a no brainer and the move is no doubt not unexpected by the RBA. It's not so popular with the credit union and building society sector though which have long relied on issuing scheme debit cards in lieu of credit cards and have recommended their customers use a credit transaction at merchants to avoid the fees that typically accrue to excess eftpos transactions.
Indeed, contra Woolworth's latest directive to customers, its own staff credit union, theWoolworths Employee Credit Union, is actively promoting a Visa scheme debit card with a Football World Cup promotion and the clear recommendation to choose "credit" when making a transaction. Something Woolworths itself now bans.
What Woolworths might not have anticipated is the quite astonishingly vitriolic response of its own customers to being told how to use their cards – and perhaps incur extra banking fees.
In just one example, when the new proscription was introduced in Adelaide, the AdelaideNow website ran hot with hundreds of responses almost universally anti-Woolworths. The retailer was depicted as arrogant and greedy.
That, almost to a post, these responses misunderstood what Woolworths was doing – the cards themselves were not being banned, only the form of processing – was beside the point.
Woolworths selectively released a statement saying "contrary to some media reports,Woolworths Limited has not banned and has not started surcharging for the use of Visa Debitand MasterCard Debit cards in its stores".
What this episode reinforces is that reform and evolution of the payments system involves huge amounts of money but is completely opaque to the ordinary consumer. Where the RBA sees a more efficient system, consumers see lower rewards and higher fees. Where Woolworths sees a cost advantage, the consumer sees a rip-off.
As Alan Shields, research director at Retail Finance Intelligence, notes, Woolworths' aim "is to save itself money by cutting its interchange and processing fees. It is unclear at this stage howWoolworths will be passing this saving on to the consumer".
The answer is Woolworths is a budget and mass market retailer whose central strategy is what's known in the trade as "every day low prices". Cost reduction is paramount.
Woolworths says low costs also allow it to eschew surcharging – for the time being, no permanent commitment is given – which also benefits consumers.
The fundamental lesson here though is the complexity of payments reform.
Woolworths' unilateral decisions to ban scheme debit processing and non-Woolworths pre-paid cards does actually show the market working.
But its customers are not convinced.