Closing in on the Cash Economy
We have been watching with great personal interest the changes being implemented that govern credit card interchange fees.
Why? Because no matter what your financial position, there are few things more unAustralian than being ripped off by a fellow Australian. And it seems it happens everywhere.
I cannot tell you how many times I have had to ask a cabbie for a refund because he’s ‘rounded up’ my fair by a dollar or two. That alone is driving people to Uber.
And what could be more frustrating in 2016, with advanced technology at our fingertips, than walking into a café, a lunchtime noodle, sushi or dumpling takeaway, and being told ‘Cash Only’. C’mon, we have to pay tax, why shouldn’t they?
As an aside, if you are forced to pay cash, always insist on a Tax Invoice with the correct amount recorded. That way the store owner needs to enter the amount into their books and is at a higher risk of being caught if they ‘skim the till’.
Next on the list has got to be the operators who will now take your cards, but tell you there is a minimum amount you must spend with them. Do you really believe that if one store tells you their minimum spend is $10 and another store owner tells you their minimum is $15 or $20, that they actually have any idea about what the cost to them is? Or do you believe just want extort more money from you?
According to Eftpos Australia there is no interchange fee for low value transactions (those being below $15.00). Eftpos does charge a Scheme Fee of 1.3 cents to both the acquirer and the issuer on every transaction, and on transactions over $15 there is a 5 cent interchange fee.
You can read the details by clicking here.
Frequently I have tried to purchase my kids $8 worth of treats and been told the minimum is $15. Even when I explain that their incremental cost for the transaction is a few cents and therefore I am happy to be charged $8.20 (which still provides an enormous margin on what Eftpos is charging the merchant), they insist that the store ‘policy’ is $15 minimum. There is no point is arguing of course because the policy is an invention.
Other egregious scams include charging $1 for using your EFTPOS card, 50 cents for using Paywave or Paypass or your credit card or $7.50 or more to use an airline’s online booking system – the only option available.
It seems however legislation is slowly catching up with the technology, the ignorance and the crooks.
Effective from September this year, merchants will no longer be able to charge a flat fee on credit card transactions. Instead they will be required to charge a percentage of the transaction cost that reflects the actual cost. The RBA has been talking about policing merchant gauging on credit card surcharges for some time. The other legislative change – the interchange fee cap, which will come into effect in July 2017 – combined with banning of flat transaction fees should improve transparency, and give the RBA and ACCC greater ability to identify retailers that are profiteering from surcharges.
So who’s going to be hit in the listed space?
The RBA has announced that the regulatory changes that govern credit card interchange fees as set out in the draft paper from December will come into force from July 2017. This means that payments from merchants to credit card providers will be limited to 80bpts from that time on. As our senior analyst Stuart Jackson has highlighted previously, estimates of the impact on bank revenues is around $600-800m a year across all the issuers.
The new regulations were specifically designed to capture companion cards, charges for which fell outside of the old regulatory cap of 50bpts. The new regulations remove the ability of issuers to redefine charges such that they sit outside the interchange fee cap, with the 80bpts applying to all payments from merchants to issuers.
The next move will be for the banks and other card issuers to cut the rewards offers to card holders. The main impact will be on the airlines with downgrades to the number of frequent flier points that will accrue per dollar spent on the card. It is also likely to negatively impact retailers at the margin given the access to gift card purchases using rewards points.
The date of introduction is later than Stuart expected, but this creates another headwind for bank profit and ROE growth over the next couple of years with fee revenue growth likely to be flat at best. WBC’s 1H16 result already showed the impact of cuts to interchange fees and highlighted that it probably has more exposure to high interchange fee cards than its competitors.
The two airlines will be negatively impacted by this, but so will a number of retailers given how many charge 1.5-3 per cent to use credit cards. For example, Morgan Stanley put out a note last week that estimated 7 per cent of FLT’s NPAT came from the gap between the credit card fee it charges consumers relative to the interchange fee it pays.
If you know of a shop keeper or chain of stores not declaring all of their revenue (you might for example see them opening the cash register without entering any amount) you can report them to the ATO HERE.
Roger Montgomery is the founder and Chief Investment Officer of Montgomery Investment Management. To invest with Montgomery, find out more.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
peter
:
I notice that almost every small cash business run by Vietnamese and some East Asian Australians is cash only. Food stores and sandwich shops, hairdressers, nail care stores, tradies, home cleaners, massage centres, car repairers etc. Not all the money goes through the till either, many have containers next to the till where they put your cash if you pay with coins or small notes.
As a community they have never trusted Government and brought their biases to Australia, thus distrust officials such as police, and dislike paying tax. (They do use Medicare though, and send their kids to schools and universities).
To be fair it is not just them, but it seems prolific in this community.
James
:
Dear Xiao Fang Xu,
I assume you attended university here and obtained a HECS-HELP loan.
That’s it from me.
John Costan
:
So glad to read that you and most of your subscribers are anti-tax avoidance Roger. Not many people are as honest or appreciative of what our system delivers despite its imperfections.
As far as taxation being theft is concerned – I kind of like the idea of having paved roads to drive my car on, traffic lights at dangerous intersections, a police force and fire brigade to call in an emergency, an armed force to ensure my way of life continues, and a universal free basic education system so we don’t have to live in a dumbed down society. (well not totally at least).
As far as tax avoidance in Greece is concerned, I don’t blame the Greeks one bit for avoiding tax when you consider how inept and corrupt their Governments were over the decades. The Government gave them their excuse to avoid paying tax.
Unfortunately Australia’s black economy is much bigger than most realise. I am always amused when I read a news article about Australia’s disappearing $100 notes. If the RBA or others want to see $100 notes out in the open, just hang around an Australian casino gaming table for a bit. Tradies are tremendous skimmers (but not the only ones of course). I was once astonished when a builder asked me to pay him $30k in cash for a job and he would ‘discount’ the job by taking off the gst. Told him I’m not walking out of a bank with that sort of money in my pocket.
Andrew Ronan
:
You are exactly rite Aaron, it very easy and safe to take the perceived high ground and simply regurgitate the law but that by no means makes you or the law rite and the proof of that is the mess the whole world is in at the moment because of the socialist supportive monetary policies the governments of the developed world are locked into today and Greece is a perfict example of that Carlos.These policies channel hard earned capital into unproductive loss making assets and activities wich results in ever higher taxes and borrowing of wich there is simply a mathematical limit to, Greece has found this limit many other country’s are approaching it this will result in default or debt write offs wich is basicly the unproductive thieving from the productive people who lent them the capital they wasted .So until we get economically capable and responsible government i will continue to pay by cash because it’s guranteed to be a far better outcome for the economy and society generally than the alternative which has proven to be a very poor investment for everyone other than the unproductive parasitic sector that grows daily as does our foolish appetite for socialism.
James
:
Dear Xiao Fang Xu
You’re writing libertarian claptrap.
Having spent a month living in an Indian village, where infrastructure was in a perennial state of decay, I have witnessed the merits of quality public goods and infrastructure.
How fair the tax system is remains a topic for ongoing constructive discussion.
Won’t you please join us?
xiao fang xu
:
why should I join you ?
The Constitution declares India a sovereign, socialist, secular, democratic republic
socialist –this is problem with india — big government
why are indian villages in perennial state of decline ?
( The right to own property is a given in much of the world. Although Indian citizens can own property, that right is limited and legally tenuous. In fact, the vast majority of the land is owned by the state.)
“The change in property rights regime in China is what triggered the rise of China. Everything came from that. You had greater agricultural productivity because people had greater property rights. When you had greater agricultural productivity people didn’t need to work on the farm. They moved to the cities so they could manufacture things so that they could sell things overseas. The whole Chinese story starts with property rights…. All development starts with secure property rights to land…. The same thing can happen in India.”
this list :
http://www.globalpropertyguide.com/Asia/India/property-rights-index
showing why some people are rich and some not.
what about religion:
http://www.forbes.com/sites/jerrybowyer/2013/05/29/is-religion-an-essential-driver-of-economic-growth/#46b0ad974b5d
and who is sucking those villagers dry –big indian state through taxation and inflation and ignorance.
xiao fang xu
:
Sorry need to add this.
My father worked in shoe factory in SFRY for 25 years.
My mother was bank clerk for 20 years.
they own only 1 car and furniture in the 2 bedroom unit.
after we arrive as refugee to australia after 11 years work, they pay off 2 bedroom unit in sydney and have 2 cars.
why this big difference in wealth ?
well in The Socialist Federal Republic of Yugoslavia (SFR Yugoslavia or SFRY) there was not private property –big bloated government — and BIG taxes ( yes they did not tell people about taxes ).
and I was there for 22 years — I would not invite you — here is better — but if australia continue this why that are following now –they will end up same as all socialist states end up — in the dust bin of the history.
check up venezuela — latest example
“You’re writing libertarian claptrap.”
yes I believe that freedom is important and good.
I believe that was one of the reasons why american settlers become wealthy — freedom from big government.
Simply put, freedom is the absence of government coercion. Our Founding Fathers understood this, and created the least coercive government in the history of the world. The Constitution established a very limited, decentralized government to provide national defense and little else. States, not the federal government, were charged with protecting individuals against criminal force and fraud. For the first time, a government was created solely to protect the rights, liberties, and property of its citizens. Any government coercion beyond that necessary to secure those rights was forbidden, both through the Bill of Rights and the doctrine of strictly enumerated powers. This reflected the founders’ belief that democratic government could be as tyrannical as any King.
Few Americans understand that all government action is inherently coercive. If nothing else, government action requires taxes. If taxes were freely paid, they wouldn’t be called taxes, they’d be called donations. If we intend to use the word freedom in an honest way, we should have the simple integrity to give it real meaning: Freedom is living without government coercion. So when a politician talks about freedom for this group or that, ask yourself whether he is advocating more government action or less.
xiao fang xu
:
Politicians and government employees do not pay taxes but are paid out of taxes.
“The best tax is always the lightest.” ~ Jean-Baptiste Say
“There cannot be a good tax nor a just one; every tax rests its case on compulsion.” ~ Frank Chodorov
“There can be no such thing as ‘fairness in taxation.’ Taxation is nothing but organized theft, and the concept of a ‘fair tax’ is therefore every bit as absurd as that of ‘fair theft.’” ~ Murray Rothbard
“The real issue is total spending by government, not tax reform.” ~ Ron Paul
1. Taxation is government theft. On this point, I cannot improve upon the late, great Murray Rothbard:
All other persons and groups in society (except for acknowledged and sporadic criminals such as thieves and bank robbers) obtain their income voluntarily: either by selling goods and services to the consuming public, or by voluntary gift (e.g., membership in a club or association, bequest, or inheritance). Only the State obtains its revenue by coercion, by threatening dire penalties should the income not be forthcoming. That coercion is known as “taxation,” although in less regularized epochs it was often known as “tribute.” Taxation is theft, purely and simply even though it is theft on a grand and colossal scale which no acknowledged criminals could hope to match. It is a compulsory seizure of the property of the State’s inhabitants, or subjects.
To say that taxation is not government theft is to say that the government is entitled to a portion of every American’s income.
Americans should view paying their taxes like they view an armed robber telling them to hand over their money. The government doesn’t “need” the tax money to perform its constitutional functions. Taxes are not the price we pay for civilization. Taxes are the price we pay for the welfare/warfare/national security state. Americans should pay their taxes, not out of any patriotic duty or because of the Sixteenth Amendment, but so their property doesn’t get seized by the IRS, the IRS doesn’t garnish their wages, they don’t go to jail, and they don’t get killed by an IRS agent for resisting arrest.
here is Chodorov on the morality of taxation:
THE Encyclopaedia Britannica defines taxation as “that part of the revenues of a state which is obtained by the compulsory dues and charges upon its subjects.” That is about as concise and accurate as a definition can be; it leaves no room for argument as to what taxation is. In that statement of fact the word “compulsory” looms large, simply because of its ethical content. The quick reaction is to question the “right” of the State to this use of power. What sanction, in morals, does the State adduce for the taking of property? Is its exercise of sovereignty sufficient unto itself?
Taxation for social services hints at an equitable trade. It suggests a quid pro quo, a relationship of justice. But, the essential condition of trade, that it be carried on willingly, is absent from taxation; its very use of compulsion removes taxation from the field of commerce and puts it squarely into the field of politics. Taxes cannot be compared to dues paid to a voluntary organization for such services as one expects from membership, because the choice of withdrawal does not exist. In refusing to trade one may deny oneself a profit, but the only alternative to paying taxes is jail. The suggestion of equity in taxation is spurious. If we get anything for the taxes we pay it is not because we want it; it is forced on us.
Your earnings are not exclusively your own; we have a claim on them, and our claim precedes yours; we will allow you to keep some of it, because we recognize your need, not your right; but whatever we grant you for yourself is for us to decide.
The amount of your earnings that you may retain for yourself is determined by the needs of government, and you have nothing to say about it.
https://www.lewrockwell.com/2014/09/laurence-m-vance/can-there-be-a-half-way-decent-tax-policy/
As Calhoun brilliantly pointed out, there are two groups of individuals in society: the taxpayers and the tax consumers—those who are burdened by taxes and those who benefit.
Who is burdened by taxation?
The direct or immediate answer is: those who pay taxes.
Who benefits from taxation?
It is clear that the primary beneficiaries are those who live full-time off the proceeds, e.g., the politicians and the bureaucracy. These are the full-time rulers.
It should be clear that regardless of legal forms, the bureaucrats pay no taxes; they consume taxes.
Additional beneficiaries of government revenue are those in society subsidized by the government; these are the part-time rulers.
If a bureaucrat receives a salary of $5,000 a year and pays $1,000 in “taxes” to the government, it is quite obvious that he is simply receiving a salary of $4,000 and pays no taxes at all.
The heads of the government have simply chosen a complex and misleading accounting device to make it appear that he pays taxes in the same way as any other men making the same income.
The UN’s arrangement, whereby all its employees are exempt from any income taxation, is far more candid.
Naveen Dias
:
Thank you for prompting this discussion Roger. Lester makes excellent points indeed. In particular, the anecdote in point 1 about Amex cogently encapsulates the effect of competitive disadvantage that Amex is subject to. Also in point 2, the idea that small business will be most damaged by the change because of the inability to recover fees levied by merchant facility providers in place of missing out on interchange premiums is a tragic perversion of this “good news” story.
steven
:
agender
allready
halicopter
emagine
allways
latay
batts
seems I need a language translator, I thought this was an english site?
Roger Montgomery
:
It once bugged me too Steven but I realised many are commenting using technology that ‘auto-completes’. And I am not English teacher responsible for correcting spelling, grammar, syntax or the misuse of possessive pronouns.
Lester Gabriel
:
Nice article, again, Roger.
A few observations:-
1. Went to JB Hi-Fi yesterday to buy their smallest TV, for the boat we live on. Not a shareholder of JB, don’t like their business model, but they are a substantial and successful business. Q to checkout operator:- Could I use Amex, to get extra loyalty points? A: Certainly, there is a 2.6% fee. So I used my M/Card, no fee.
There is no way a business the size of JB would be charged a 2.6% merchant service fee for Amex, unless there are very few transactions. Maybe, at 2.6%, that is the case….
2. Re the “cash only”, Roger, I am not sure how much time you spend in regional Australia, but it is amazing how many businesses (small retail and trade supplies) don’t accept credit cards, and are often “cash only”. I have heard it said that in some of these areas, the cash circulates through the community… there is a joke about this, but that’s for another time!
3. The RBA 80 bpts limit – may not adversely impact large retailers, but I suspect that it will be an impost to small businesses, particularly those that are not part of a buying group (including group buying of credit card facilities). There are still “best deals” for credit card merchant facilities of 2 – 3% for Visa / Mastecard, in addition to the ongoing access fees. At least it has hopefully improved from the days when such businesses were charged 5 to 6+% merchant service fees.
4. Personally, I use credit cards if no fee is levied, otherwise it’s cash / BPay / direct credit etc. The only problem is how to best spend the loyalty points! That brings another issue …. do the points actually cover more than the card issuer’s annual fees!
At the end of the day, credit card facilities provide businesses with generally secure payment methods (with most transactions now online, the risk of ‘charge back’ is low), overnight crediting to their bank accounts and with the right software, the ability to seamlessly download the transactions to update debtor ledgers etc.
The card holder also has the benefit of a secure payment method, reliable transaction history (much to the chagrin of some former MPs amongst others) and the safety of not carrying cash around.
Roger Montgomery
:
Thanks Lester, Eftpos does charge different fees for Eftpos transactions under $15 and transactions over $15. But the fee for a transaction under $15 is ZERO! It might surprise many to know that EFTPOS is a company (being disrupted through fragmentation by the introduction of contactless systems such as Visa Paywave MasterCard Paypass et al) and is owned by eftpos is wholly owned by its 18 Members:
Adyen
Australia and New Zealand Banking Group Limited
Australian Settlements Limited
Bank of Queensland Limited
Bendigo and Adelaide Bank Limited
Cashcard Australia Limited
Citigroup Pty Limited
Commonwealth Bank of Australia
Coles Group Limited
Cuscal Limited
Indue Limited
ING DIRECT
National Australia Bank Limited
PayPal Australia
Suncorp Bank
Tyro Payments
Westpac Banking Corporation
Woolworths Limited
You can read the fee structure charged by EFTPOS here: https://www.eftposaustralia.com.au/about/resources/scheme-fees-interchange-fees/
Dylan
:
Great Article Roger.
Like you it irks me what some places will to in order to squeeze out additional revenue, from me by enforcing minimum spends or charging excess card fees. In truth I’ve started walking away as I feel that Supply/Demand is with consumer. Agree regarding your previous comments regarding lodging all revenue. If it was done consistently perhaps we wouldn’t have a ‘revenue’ problem with budget?
Cheers,
Dylan
Roger Montgomery
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I suspect Dylan, we’d still have a problem but it certainly would be smaller and the government would have more to work with leveraging other opportunities.
Michael Leslie
:
Yes, businesses complain about being over regulated; too much red tape etc. However, it is because of what has been happening that forces governments to add additional laws. It’s all a bit of a mess really.
Very timely article.
Wayne A
:
You appear to have hit a few raw nerves with this Roger. Probably because you are absolutely right, and many don’t like their entrenched attitudes and biases to be challenged.
I don’t think anyone would claim that the Government uses every taxation dollar it receives to best effect. That’s not the point though. The system we have is the one we have to live with for now, like it or not. Every bit of the tax ‘burden’ evaded by some has to be carried by others.
I’ve heard dozens of excuses, but in the end it comes down to simple greed and a lack of social conscience.
I applaud you for your honesty over the years, and for being prepared to stick your head above the parapet in spite of your success.
Roger Montgomery
:
Thanks Wayne, I am always surprised that there is support for dishonesty. Look at the state of countries where corruption and dishonesty is endemic, if not cultural – Indonesia, the Middle East, China – the disenfranchised are fleeing. And they’re fleeing to countries like Australia to escape injustice and unfairness not in search of more of it. How disappointed they must be when they find here those who would want that which they have escaped. When Australia’s defence forces – from the Anzacs on – have been called they have rarely fought to protect our soil but frequently fought to protect future generations’ freedom of choice. I don’t believe they laid down their lives to extend that freedom to ripping each other off.
Hedley Calvert
:
I live in Dubai and therefore have credit cards issued by both Australian and UAE banks. When I use my Australian credit card for overseas purchases they charge me an overseas transaction fee of around 1%. By contrast, my UAE bank gives me a “cashback” up to 5% on the same overseas transaction! They explained to me that with the money made from fees & exchange rate margins they can afford to give something back to the customer.
It’s an example of how the big 4 banks have it far too easy. Australian consumers can definitely benefit from more competition.
Roger Montgomery
:
Amazing insight. Thanks.
Aaron Somner
:
This is the problem with taxes and socialism. It turns society against itself. Reporting other citizens to the government all because we are made to believe that the government needs more so they will be able to provide for us. They have more than enough. It is the government with the problem not us. For seven straight years they have spent billions more than what they have brought in. They cannot manage their own affairs and we think they can manage everyone elses? It is this attitude that is pushing the agender towards a cashless society in the hope that the government will get all taxes due. What then? They spend everything they get now and borrow more on top. Then they still have to raise taxes and we have lost our freedom to exchange without government standing there with their handout. It is the government that needs to change their behaviour not us. Just how much do we give them allready. Income tax, GST, stamp duty etc. It is allready half of our productive capacity every year. We work from Jan to June to pay for them and their lavish lifestyles like Bronwyn Bishops halicopter rides and $4000 dollar a week pensions.
Roger Montgomery
:
Governments have to keep asking for more when what they budget to receive doesn’t come in. You can be perfectly successful paying your tax but the playing field is made more challenging for everyone when dodgy operators are encouraged or even applauded. Integrity and honesty first. Then everything will follow.
Carlos Cobelas
:
Aaron, would you rather live in a country like Greece where too many people avoided paying any tax at all. look at what resulted !
Andrew Ronan
:
I never begrudge a small business from a bit of cash and I allways try to pay them with cash because in this country excists an extremely hostile environment for small business in general ,with insane regulations and giant billboards popping up everywhere telling everyone to sue the boss and it won’t cost you a cent ,every day these energetic industrious people risk it all just to make a pittance, I say give them a go because the government won’t and the last thing they need is a bunch of well to do latay yuppies dobbing them in. And another thing why is it Rodger that people on wages can now effectively claim their vehicle and its expenses as tax deduction through salary sacrifice arrangements these include public servants whom I know very well on high salaries, emagine what that costs the public purse when you add them together yet know one batts an eyelid ??? Leave small business alone AY
Regards Andrew
Roger Montgomery
:
Montgomery started life in the home office. It aspired to be a small business. It was a micro business if it was one at all. But every single dollar received was recorded and declared. You are part of the problem and honest small businesses suffer when others are allowed to cheat their obligations.
Pierre
:
I very much doubt there will be any impact on Bank returns as you anticipate. These regulatory changes do nothing to prevent facility providers from changing other fees, or simply increasing their establishment and service fees accordingly. Market pressure will not curb this practice as it will incrementally not be significant enough to cause competitive disruption. Further, I expect minimal, if any changes to merchant practices on the whole in the medium term. In the long term, instances of egregious surcharging may anecdotally abate, but there will be negligible financial impact. While clearly symbolically relevant for many consumers, expect a handful of enforcements and little change.
Roger Montgomery
:
Thanks Pierre…all is not lost!
James
:
A timely article, Roger. Only recently I asked a local gelato business why they only accepted cash. With PayPass ubiquitous and eliminating the need for food handlers to handle currency during every transaction, I’m not convinced a cash-only policy expedites operations.
The manager’s response to my question?
“That’s just the way it is.”
Not for long, old bean. It’s time to pay the piper.
Roger Montgomery
:
Indeed James. Nicely put.