RDP 2014-14: The Evolution of Payment Costs in Australia 7. Small Businesses Costs

SMEs are likely to face different costs to larger businesses. First, the time spent in back-office processing, costs associated with fraud prevention, etc are spread across fewer transactions so the economies of scale are less favourable. Second, SMEs may face different prices for payment services compared to large businesses due to their different bargaining positions and payment needs.

This section focuses on SMEs' gross private costs (i.e. excluding inward transfers, such as surcharges) of receiving payments. To gauge how these compare with the costs of large businesses, a concurrent survey of SMEs was undertaken. Details of the survey methodology and sample are in Appendix D. The resulting sample provides valuable information on SME costs, but was small relative to the number of such businesses in Australia and is therefore unlikely to be fully representative. Accordingly, the cost estimates should be treated as having a higher degree of uncertainty than for large businesses. However, the estimates clearly show that the costs of small businesses are higher per transaction than those of large merchants.

7.1 Acceptance

SMEs typically accept at least as wide a range of payment methods as large merchants and, in some cases, wider; around half of SMEs reported that they accept five or more methods. The bulk of payments accepted by SMEs appear to be made using cash, eftpos, and MasterCard & Visa credit and debit cards (Table 8). Other payment methods account for a relatively small proportion of revenue. For example, although cheques are accepted by a majority of the sample, cheques typically account for less than 10 per cent of revenue. One reason that SMEs would accept a wide range of payment instruments is to provide customers with payment flexibility.

Table 8: Acceptance of Payment Instrument by SMEs
Per cent
Payment instrument
Share of respondents who accept that method Share of sales value for respondents who
accept that method
Median response Most common response
Cash 97 10–20 0–10
eftpos 90 20–30 20–30
MasterCard & Visa debit or credit cards 92 20–30 10–20
American Express or other card 36 0–10 0–10
Cheques 75 0–10 0–10
Direct debit/direct credit 63 0–10 0–10
BPAY 9 0–10 0–10
PayPal 8 0–10 0–10
Memo item: cash-out 14 na na

Source: Authors' calculations based on survey data

7.2 Costs

The ranking of private costs across payment instruments is broadly the same for SMEs as for large businesses (Table 9).[36],[37] American Express cards are the most expensive instrument measured in terms of the private (gross) cost per transaction, followed by MasterCard & Visa cards and then eftpos transactions.[38] However, small businesses reported cash to be the lowest-cost instrument, whereas large businesses reported that debit transactions cost less than cash. MasterCard & Visa debit transactions are found to cost more than eftpos transactions. However, the breakdown between the cost of debit and credit transactions for MasterCard & Visa is somewhat uncertain; only around one-third of SMEs that provided card cost data were able to provide a further breakdown between debit and credit transactions. In part, this may owe to some SMEs receiving blended rates for these products from their acquirers. However, even when merchants are offered differential fees, these costs can be difficult to calculate from merchant service fee statements.

Table 9: Per transaction Costs of Accepting Different Instruments
Median, dollars per average-sized transaction
Resource costs Transfers (fees and float) Total private cost Memo item: median transaction size(a)
Cash (including cheques) 0.66 0.05 0.71 33
eftpos 0.91 0.53 1.45 88
MasterCard & Visa − total 0.91 1.73 2.64 175
Debit cards 0.89 0.86 1.75 178
Credit cards 0.93 1.85 2.78 223
American Express 0.96 3.14 4.10 126

Notes: The median cost is calculated at the component level and then summed across components to give totals
(a) Median of estimated average transaction size for SMEs that provided data

Source: Authors' calculations based on survey data

The results clearly suggest that resource costs are higher for SMEs than for large merchants. While the resource costs of card transactions for large merchants are around $0.20 per transaction, for SMEs this cost is closer to $0.90 per transaction. Similarly, cash costs are higher for SMEs, at $0.66 per transaction, compared to $0.28 for larger merchants. As noted, one factor driving higher costs is that back-office costs are spread across a smaller number of transactions. This effect is apparent between SMEs and large businesses, yet it is also noticeable even between SMEs of different sizes. For example, although the time taken for back-office cash processing tasks tends to increase as the annual revenue of the business increases, the time spent per transaction falls; the median back-office cost per cash transaction is $0.29 for businesses with annual revenue above $1 million but around $0.73 for businesses with annual revenue below $1 million. In addition, given their size, small merchants are less likely to have invested in payments processing automation or use specialised processes in order to reduce costs.

Transfers are estimated to be higher for SMEs than for large merchants, particularly for card transactions. The transfer of $0.53 associated with each eftpos transaction at SMEs is significantly higher than the $0.02 transfer reported for large merchants. Transfers related to other card transactions are all above the level reported by large merchants. Again, fixed fees, such as monthly fees for terminal rental, are likely to be spread over fewer transactions for smaller merchants. Another factor is likely to be the differential pricing of per transaction fees. For instance, purchases at larger merchants are more likely to qualify for ‘strategic’ or ‘preferred’ interchange rates that are set much lower than the economy-wide average rate. This difference flows through to lower merchant service fees for larger merchants.[39]

7.3 Surcharging and Discounting of Payment Methods

Surcharging can be used to offset merchants' cost of accepting payments. According to both the Bank's survey and a survey run by the NSW Business Chamber (see Appendix D for more information), surcharging is not particularly widespread among SMEs, with only around 20 per cent of respondents indicating that they surcharge one or more methods (Table 10).

Table 10: Discounting and Surcharging of Payment Instruments by SMEs
Payment instrument Per cent of respondents who accept that method
  Discount Surcharge
Cash 5 0
eftpos 1 3
MasterCard & Visa − total 1 17
Debit cards(a) 1 5
Credit cards(a) 1 12
American Express 1 30
Cheques 1 1
Direct debit or BPAY 1 2

Notes: Based on 220 respondents to the RBA survey and 508 respondents to the NSW Business Chamber survey
(a) Results of the RBA survey only

Sources: Authors' calculations based on survey data and data provided by NSW Business Chamber

The two surveys show a relationship between the cost to the merchant of accepting the instrument and the decision to apply a surcharge to that instrument. For SMEs, the most expensive instrument to accept on a per transaction basis is American Express, which has the lowest acceptance rate across the card payment methods and is also the most likely to be surcharged. MasterCard & Visa credit cards are the next most expensive card payment method; while these are accepted widely, they have the second highest rate of surcharging.

Cash more often attracts a discount than a surcharge. On a per transaction basis, cash appears relatively inexpensive compared to other payment methods and this may explain why the use of cash is encouraged. However, the cost of cash is not trivial; measured as a proportion of the sales value at the average transaction size, the cost of a cash transaction is around 2.5 per cent. There may, of course, be other motivations for encouraging cash payments; the business may need cash on hand to offer cash-out at the point of sale or to pay staff wages, or may prefer cash as it facilitates tipping. Cash is also favoured in the ‘informal economy’, where businesses may prefer cash to keep transactions or revenue from being detected. Further, the cost of cash to merchants, which comprises mainly of costs such as time and wages, may be less visible than the costs of fees paid to payment providers.


The resource and gross private costs to SMEs shown in Table 9 can be compared with the total cost estimates for large merchants provided in Tables 2 and A1. Transfers for card transactions are comparable to those found in Tables 6, A4 and A5. [36]

Each merchant's resource costs of card payments are allocated according to the number of transactions of each card type. Discussions with small business associations prior to running the survey suggested that their members would find it difficult to allocate overhead costs across different card types. [37]

Cheque costs were not able to be measured for SMEs. [38]

For each card type, the median size of the transactions reported by SMEs was 50 per cent to 150 per cent greater than the mean transaction size at large merchants. The larger transaction size implies that per transaction costs of SMEs should be higher than for large merchants. However, even controlling for this influence on costs, the costs of SMEs are higher than for large merchants. An alternative means of comparison is the cost as a percentage of the sales value. On this basis, the private cost to SMEs of card payments remains around two to three times that of large merchants. [39]