Woolies restricts payment options

Many consumers were left scratching their heads after hearing that Woolworths had "banned" the use of Visa and MasterCard debit cards in its stores this month.

Consumer feedback on news websites was confused and some of it very negative, with people saying they would shop elsewhere rather than be told how to make their payments. Others complained that they would be hit with extra banking fees.

Woolworths did not actually ban the use of Visa and MasterCard debit cards. It will accept those cards - but when shoppers make their purchase, they must hit the "savings" or "cheque" button on the point-of-sale terminal. They cannot hit the "credit" button.

Australia has two retail electronic payment systems: eftpos, which was set up by the banks in the 1980s; and "scheme debit", which is a payment network operated by Visa and MasterCard. For a few years there was only eftpos but scheme debit came into the market in the 1990s and in recent years has been growing faster then eftpos.

Consumers with a transaction card that does not carry the Visa or MasterCard logo have access only to the eftpos system. Consumers who have a transaction card with a Visa or MasterCard logo have access to both of the systems.

If you hit "savings" or "cheque" on the point-of-sale terminal, the transaction will go through the eftpos network and if you hit "credit" it will go through the scheme debit network.

What Woolworths announced on April 1 was that it planned to use the eftpos network to the exclusion of scheme debit. Customers with Visa or MasterCard debit cards will not be given the option of hitting the "credit" button.

Woolies' reason for doing this is financial. Woolworths has payment technology of its own, which delivers an advantage if it uses eftpos for payments. In a transaction using the scheme debit network, Woolworths would pay about 4? to the scheme operator to cover processing costs. It earns about 5? a transaction when the payment goes through the eftpos network.

One benefit of using the "credit" button is that shoppers can sign for the purchases. For people who prefer to sign because they can't remember PIN numbers, being forced to use "savings" or "cheque" may mean they are significantly inconvenienced.

From a consumer point of view, the change may create problems, depending on who they bank with and the terms and conditions of their transaction account. Some financial institutions put a limit on the number of eftpos transactions that can be made each month before fees are charged. There are no transactions limits when using the scheme debit network.

If your bank has limits on eftpos transactions you may have to start rationing your transactions, switch to an account that offers unlimited transactions or change providers.

For customers who have several savings and transactions accounts with one financial institution, the institution may assign an account to a payment button so that customers can select the account from which they wish to make the payment by hitting "savings", "cheque" or "credit".

With "credit" no longer available at Woolworths stores, those customers will have their choices restricted.

Financial institutions may also have a daily limit on the value of payments that can be made through the eftpos network.

The scheme debit network allows transactions up to the balance of the account. That might not mean much if you are buying the groceries at a Woolworths supermarket but it could matter if you are paying a couple of thousand dollars for a computer or a TV at Dick Smith.

The scheme debit network has some features that eftpos does not. Visa and MasterCard offer a chargeback facility, where the transaction is reversed if the goods are not received, the goods are not what the customer paid for or the customer is overcharged.

Financial institutions give undertakings under the Banking Code and other code-of-practice agreements that a consumer will be protected against fraud or other unauthorised use of their cards but they do not have anything equivalent to chargeback.

Scheme debit has a number of other distinctive features that have contributed to its popularity. Visa and MasterCard debit cards can be used for online payments and payments overseas, as long as the payment goes through the scheme debit network.

Loss of access to these functions is not relevant when it comes to shopping at Woolworths but it explains why scheme debit has been an increasingly popular option with consumers.

Debit the popular payment method

Debit share of card payments rose from 34.9 per cent to 36.7 per cent in the year to February. Credit share fell from 52.7 per cent to 51.9 per cent in that time and charge card share fell from 12.5 per cent to 11.4 per cent.

Scheme debit use is growing in popularity. A credit card industry research group, MWE Consulting, estimates that more than 26 per cent of debit purchases are made using scheme debit up from 23 per cent a year ago.