Coles taps off Visa debit in transaction network tussle

Global payments scheme Visa has been dealt a body blow by Australian grocery behemoth Coles after the supermarket chain confirmed it is switching millions of debit payments made on Australian bank-issued cards to run across the Eftpos network to reduce transaction costs.

In a move that will put pressure on Woolworths Group to follow suit, Coles has confirmed to iTnews it has switched off processing of Visa’s debit payments from its checkouts and will instead use ‘least cost routing’ to process Visa debit payments.

Importantly, the shift will also rope in contactless payments made on bank-issued debit cards sporting both Visa and Eftpos logos, ending more than a decade of multinational dominance in the domestic tap-and-go market.

“Coles periodically assesses it’s capabilities in processing payments and have determined recently, like many other acquirers and merchants in Australia, to implement merchant routing capabilities as supported by the RBA,” a Coles spokesperson told iTnews. 

“Coles routinely reviews the way it processes payments and as part of this, has determined to route dual network Visa and eftpos debit cards via the EPAL [Eftpos Payments Australia Limited] network. This decision will continue to be assessed as part of our standard review process.”

Coles’ decision kicks open the door for other major retailers to take similar cost savings measures against both Visa and Mastercard which have for decades sought to sideline Eftpos by gazumping its local debit market share.

Busting a move 

It also busts the myth that contactless payments are somehow the proprietary technology products of Visa and Mastercard, a misconception common among smaller merchants who fear losing tap transactions if they switch payment rails.

Aside from Woolies, big merchants that could also move quickly include Wesfarmers (which owns Bunnings, Kmart, Target and Officeworks), JB HiFi, Metcash (IGA Australia), SuperRetail Group (Supercheap Auto, BCF, Rebel Sports) and Harris Farm among many others.

Fuel, where margins are razor thin, is also a prime candidate.

Debit payments now a $330 billion bonanza

The decision is a big win for EPAL (Eftpos Payments Australia Limited) and payments regulator the Reserve Bank of Australia.

Coles’ move comes after a concerted campaign by the central bank pushing for lower payments acceptance costs through increased competition and allowing merchants to choose which rails their payments ride.

A key reason Coles has moved to push down costs is that more Australians than ever before are moving away from credit cards and just paying out of their bank accounts, which has serious implications for big retailers.

Payments expert Mike Ebstein of MWE Consulting told iTnews that there had been strong trend away from credit payments towards debit over the last decade, describing the last five years as “overwhelming”.

Based on the RBA’s numbers, Ebstein said the value of debit payments had this year overtaken credit payments. Debit payments value is sitting at $330 billion per annum for the 12 months to August 2019 compared to $320 billion for credit payment value the same period.

Ebstein said that while credit card spend was still growing in value – just – the number of debit cards now in the market and being issued was well ahead of credit cards.

“There are 2.5 times more debit cards than credit cards,” Ebstein said. “Debit is now the majority of cards. Debit cards are growing at 10 percent a year, credit cards are growing at 2 percent a year.”

Ebstein said that the growth was partly driven by Buy-Now Pay-Later services “because debit is what you use to access people’s bank accounts.”

Not that credit has dried up. Or there’s been a Royal Commission.

The rough road to frictionless payments

When it comes to electronic and now digital payments, Australia’s two supermarket giants have had skin in the game dating back to when now evaporating ATMs were first rolled out; Australia’s cash machines also ride the Eftpos rails.

Coles, like Woolworths, was a foundational member of Eftpos, dating back to the 1980s when banks actually paid retailers a small fee to dish out cash for them at the checkout to avoid branch telling costs.

(Australia’s two biggest retailers also run their own switches for payments, which makes negotiations easier because they don’t have to arm wrestle banks over infrastructure.)

As online economy exploded from the early noughties onwards, credit cards quickly became the default method of payment, not least because of global interoperability coupled with their practical, albeit highly insecure, way of pushing through transactions using card numbers.

Stand-up rows over payment fees are far from new. That said biffo between supermarkets

It will also be a lot easier for retailers to make the switch compared to a decade ago when a wrangle over payments fees prompted Woolworths to pull the plug entirely on Visa debit card transactions leaving cardholders and their banks in the lurch.

Generational shift

Coles’ latest move to sideline Visa debit comes as Australians, especially younger cardholders, increasingly shun high interest credit products in favour of paying direct from their savings accounts using debit facilities.

Debit payments, which draw from savings accounts, traditionally fall into two classes.

The first is proprietary debit, better known as Eftpos, which is SAV or CHQ.

The second is so called ‘scheme debit’, which run on Visa and Mastercard’s credit card rails at a higher clip, although not nearly as high as actual credit cards because of lower risk and regulatory pressure.

Scheme debit payment volumes have roared away from local stalwart Eftpos for three essential reasons: contactless; the ability to use scheme debit cards online: and access anywhere in the world that accepts Visa or Mastercard.

Fraud surge

But a major drawback of using credit card rails as a proxy to get access to bank accounts (as opposed to a credit card bill) has been a big increase in online fraud, which banks pass through to merchants.

It’s currently impossible to tell the split for online payments fraud between scheme debit and credit because Visa and Mastercard refuse to differentiate the two transaction types in their fraud reporting.

Online payments fraud in Australia is no small beer either, currently weighing in at $487 million for the 12 months to 31st December 2018.

Visa responds

The feel of stakeholder shoe leather does not appear to come as a complete surprise to Visa.

The payments giant didn’t talk directly to the snub by Coles, but instead doubled down on its history of taking innovation up to the local financial services sector.

Visa contactless payments have delivered multiple benefits to Australian retailers for many years, such as getting customers through the checkout quickly, securely and reliably, so it is important that retailers make informed choices on both the cost and value associated with the different payment networks,” a Visa spokesperson told iTnews.

“One of the main differences between networks is in the capability that is provided – that is, retailers that accept Visa can receive sales from Australian customers, international customers, and customers using mobile phones and smart watches, and, if they choose, via e-commerce.

“It's also important that retailers think about security and reliability when it comes to payments. Visa has been a leader in global payments security for almost 60 years, with one of the world’s most reliable networks,” Visa said.

Reliable … definitely.

Secure? Meh. Let’s not kid ourselves.

Let’s stick to the basics of volume and margins. Visa has that covered.

“It is the merchant acquirers that set fees for their customers and while a component of that fee relates to the payments network, it is worth noting that this component is regulated, meaning any difference between payments networks is marginal.”

Margin business? Sure is. And they just got thinner.