LAMANTIA, Mr Marco, Executive Director, Square Australia SAADAT, Mr Michael, Head, International Policy, Block CHAIR: Welcome. Before we proceed, I should advise you that although the committee does not require you to give evidence under oath the hearing is a legal proceeding of the parliament and therefore has the same standing as proceedings of the House. The giving of false or misleading evidence is a serious matter and may be regarded as contempt of parliament. The evidence given today will be recorded by Hansard and attracts parliamentary privilege. I now invite you to make a brief opening statement before we proceed to questions. Mr Lamantia : Thank you, Chair, Deputy Chair and members of the committee, for the opportunity to appear today and for your work on the inquiry to date. First, here's a little bit about who we are. Block is a technology company that builds tools to help more people participate in the economy. Through Square, we make commerce and financial services accessible to merchants of all sizes by offering integrated hardware and software solutions. We operate in this market alongside Afterpay, the Australian founded buy-now-pay-later service used by millions of Australians. Between Square and Afterpay, we operate across different parts of the payment system, which gives us a practical view of how the system works for both small businesses and consumers alike. Payments can sound technical, but, at its core, it really is just about how money moves. When a consumer taps a card or a phone, there are several layers involved. There's the merchant accepting the payment, the payment provider processing it, the card schemes who set the rules and also process the transaction, and lastly there's the banks issuing the cards to the consumers who make a payment. Our submission focuses on how competition operates across those layers and where it does not. The central principle we put to the committee is this: regulatory intervention should be targeted at parts of the system where competition is not functioning and should avoid disrupting areas where competition is clearly delivering benefits. In Australia, as you've heard over the last couple of days, parts of the payment system are highly concentrated, whether that's through schemes or through major banks who are able to set the price and conditions on how participants operate in the payment system. By contrast, merchant acquiring is a highly competitive space. There's not just Square; there are tens of other new entrants in the market who have provided choice to small businesses across the country, and that choice didn't exist 10 years ago. Regulatory reform has played an important role in opening up the market. However, for more than a decade after the initial reform, competition remained limited and innovation was slow. Meanwhile, consumer behaviour has changed rapidly and card usage has increased significantly. Contactless payments are widespread, and cash volume has declined sharply. Small businesses were increasingly required to accept electronic payments just to remain viable, but the acquiring experience that they were going through was not fit for purpose. When we entered the market in 2016, we did so with a model fundamentally different to what the incumbent banks were providing at that point in time. We had a model that provided low-cost hardware that could be purchased outright, didn't require monthly fees, didn't charge for services such as chargebacks and had a simple rate, which our merchants tell us is their preference, from a simplicity point of view. When we entered into the market, we often spoke to merchants who had applied to a number of the big four banks to try and accept a card payment, and they were denied. Either they were denied because they weren't commercially viable, they were denied because the risk profile was too high, or they were denied indirectly, because the product that was being provided or offered by the big four banks at the time was not fit for a very small business. That's no longer the case. Today, small businesses have got a ton of choice, and we're proud to be here today representing not just small businesses who entrust Square but a number of PSPs and fintechs across the Australian community that are offering choice to these businesses. CHAIR: I'll hand over to the deputy chair. Mr KENNEDY: I'd love to get your views on EFTPOS and broadening it. Do scheme pricing structures disadvantage domestic payment systems such as EFTPOS? Mr Lamantia : I think it might be helpful to provide a bit of context into how we, Square, connect into EFTPOS. Unfortunately, because of the complexity in connecting directly into EFTPOS, we connect via a third-party intermediary. So an acquiring bank actually connects into EFTPOS for us. In fact, when we launched in Australia 10 years ago, we were prohibited from launching in Australia with EFTPOS acceptance. We launched only with Visa, Mastercard and American Express. Perhaps it's a question for EFTPOS and the AP+ board as to why there were concerns with Square entering the market. But we very much see a ton of value in the EFTPOS network. In fact, we would be open to connecting directly into the EFTPOS network if that meant that it would reduce our costs, and we could pass that on to our sellers. However, to date, it's incredibly complex to connect directly. Therefore, we're needing to pay a third-party intermediary at this stage. Mr KENNEDY: What would government have to do to reduce that complexity and enable you or other players to do that? Mr Saadat : It's a good question. It goes to some of the broader questions around access to the NPP as well. But it's important to note that EFTPOS and the NPP do have governance structures where, for example, the big banks have a significant say over how these entities operate. Although the banks are using EFTPOS and they still issue EFTPOS cards, they do get significant incentives from the international card schemes as well. The fact that we have EFTPOS in Australia should be a great source of pride. A lot of countries now are looking at the fact that they don't have domestic payment rails available to them, and they're thinking about how to change that. It is an expensive thing to start from scratch, but we do already have that. I think there's an opportunity to see how we can strengthen EFTPOS, in particular, so that there is a greater incentive for providers in Australia to use the EFTPOS network. We have a great option for Australian consumers as well. Mr KENNEDY: Before you, we had a number of different variants of blockchain stakeholders. How do you guys think about the rails you use from EFTPOS to the banking rail system? I've read stuff from some of your founders; they're very taken with bitcoin and whatnot. As we talk about stablecoins and blockchain as a technology and the cost advantages of that, how do you think about that? Mr Lamantia : We have a very positive view, as an organisation globally, on the role that bitcoin, particularly, can play. For context, just recently in the US, we enabled all of our merchants to be able to accept a bitcoin payment at point of sale. That purchase is free of charge for those merchants. We see that there is tremendous opportunity in these alternative networks, particularly as it relates to looking at adding additional competition at a core network level. Mr KENNEDY: Why would that be limited to bitcoin? I think some of the previous committee members talked about the variability of bitcoin. I sort of get that as a concern, but when you move to a stablecoin that concern is eliminated, right? If you're saying you're offering this free of charge because it's lower cost and it's a different network, couldn't this equally be applied to stablecoin? You get rid of the variability of the asset. It's faster. It's quicker. It's cheaper. How are you thinking about that in your longer term plans for Block? To say the quiet part out loud, I get it's not as lucrative because the fees are cheaper. But you were talking earlier in your testimony about the banks operating this closed source system where they control who accesses it and they set the prices for who accesses it versus something else which is an open source system. Anyone can use it, and the costs are a fraction of it, so it seems to me like superior technology. What am I missing? Mr Lamantia : I'm unsure if you've spent a lot of time with our founder, Jack Dorsey, but certainly when you listen to Jack talk about why he created Square and why he is investing in bitcoin—to answer your question from earlier, yes, stablecoins are something that we're looking at; when that comes to life is obviously something more from a product roadmap perspective—importantly, he specifically takes issue with the fact that there are a handful of organisations globally that are essentially providing approval as to whether you can get access to the financial system. Whether it's the two-card networks or whether it's some of the major financial institutions in a specific market, everything seems to be very much on approval. Jack's view is that financial services are a fundamental right to all of us and should be provided open. Mr KENNEDY: Is there anything wrong with my logic in saying it's superior technology, it's faster and it's cheaper? It's open source, so everyone can access it, so it's democratised. If that's the case, shouldn't we—in my view, from what I've been reading about what's happening in the US, they've turned what was a leisurely five-kay jog into a 100-metre sprint now, and countries are racing for dominance in this because once you're in blockchain it's global. You can transfer from Sydney to New York. Blockchain doesn't care about what jurisdiction you're in; it happens globally. My worry as a policymaker in Australia is, if we move slower—right now we've been banking a lot of Asia. I get you're largely focused on domestic B2C transactions, but I worry we lose our extreme—we've had companies like Afterpay be invented here. We have been pre-eminent in the world and in banking Asia. Am I right to be concerned that, actually, Australia's leadership role in this could evaporate over the next five or more years? Mr Saadat : I think it's important to acknowledge the changes that are happening. We would agree with what you said, Mr Kennedy, about the fact that we do need to lean into these new technologies that do offer tremendous benefits and lower cost. Our purpose here at Square and Block is to make sure that no merchant misses a sale and to provide as many options as possible for consumers to make a payment. It's why we've launched bitcoin payments in the US on Square; we're planning to expand that globally. It's why we're looking at stablecoins as well. We want to make sure that merchants have all of the options available to them, particularly as consumer preferences change and new ways of paying become available. Mr KENNEDY: I'm almost at time. One question, and I realise this is a tough one, is: the banks have set who can access it and they've set the fees to access that in a lot of respects, right? When you move to this technology which is lower cost and lower in fees, how do you deal with that as a business and how does the industry deal with that? You're going from revenue pools that shrink. Yes, they can be global. How do you think about that? I see it as a disincentive for the banks and some of the established providers—maybe even you—to embrace that because you're shrinking the revenue pool. Maybe that's a hard question for you to answer. Mr Lamantia : I think from a commercial viability perspective, there are a number of different ways to look at how fees are applied to services. Generally, it's a relationship between the value that somebody sees and what they're willing to pay for it. It goes very much to what you've said. The processing may be free, but that customer, whether it's ours or a bank's, may be getting other services as well and they'll be paying for those services, which may not actually be free. There's more to come, in terms of what those models would look like. But I suspect that we will look at ways to make sure that it's a commercially viable model not just as nations but also as organisations. Mr GREGG: We've heard a few stories from small businesses of PSPs going into businesses and, essentially, saying, 'Look, take this bundled package,' which includes a point of sale, and all these other wonderful value propositions for the business, 'and don't worry, because you can just pass the cost on via a surcharge to your customers.' Is there any truth to that? Mr Lamantia : Certainly not from Square's perspective. I can't comment for our competitors or other players in the market. We hear anecdotes of PSPs actually saying to a merchant, 'Hey, we will charge you 1.2 per cent, you can surcharge 1.6 per cent and we'll split the difference.' We do hear of certain behaviours that we think should be looked at more carefully. But, certainly, from Square's perspective, it is important to note that we launched surcharging 12, maybe 18, months ago. We've been in the market for 10 years and it's only been in the last year or so that we've had surcharging. We haven't been using surcharging as a way to win, or maintain, price. We haven't had to because of the value that we offer. We implemented surcharging at the request of our sellers, and we had a lot of requests for it. Mr GREGG: If surcharging were to end, for one reason or another, do you think your customers would likely re-evaluate the value proposition of your service? Mr Lamantia : The vast majority of our customers don't even surcharge. Upwards of 70 per cent to 80 per cent of our customers don't surcharge today. We can park them aside because they won't be re-evaluating anything. If you look at the last 10 per cent or 20 per cent, that'll be a conversation and a decision for them to make. What we know from speaking to our customers—and I think you've heard this a number of times over the last couple of days—is that price is an important factor, but it's not the only factor. When you're going through a buying journey for anything, you're trading off price, quality, convenience, speed and utility. You put that all into the mix and it turns out that some merchants are willing to pay; others are not. I think the beauty about the market, though, is there's tremendous choice. You heard from Mr Birmingham yesterday, proudly stating that the banks have got a 1.2 per cent fee or 1.1 per cent fee and referencing some of the others that are at 1.6 per cent. I think the piece that seemed to be missing in that conversation yesterday was the $20 to $30 monthly fee that these banks are also levying on their merchants for the vast majority of their products. They're also missing the fact that, if the funds are not deposited into their own bank account, that merchant is financially penalised. There are also pieces around what I would say are chargebacks. We don't charge for chargebacks at all. I think there was a question to Amex yesterday around who administers the chargeback system. The networks administer the chargeback system. So EFTPOS, American Express, Visa and Mastercard set the rules. Mr GREGG: Who pays the chargeback? Mr Lamantia : We pay the chargeback. I'll give you some insight into what that chargeback can cost. First and foremost, the responsibility to prove otherwise is on the merchant immediately. So there's already this instinctive bias between the issuer, or the cardholder, and the merchant. The merchant needs to prove that it didn't actually occur. If a chargeback is sent to arbitration—and the arbitrator here is the network—the fee to complete that arbitration is upwards of US$500 per chargeback for an arbitration. We find, many times, that it's just not worth going to arbitration. What we do, in goodwill for our small businesses, is we won't charge them any of the fee and we'll also refund the money back into the account that was charged back by the issuing bank. The reason I'm raising this is that, on the surface, at a direct comparison level, 1.1 per cent and 1.6 per cent may look quite different, but there are a lot of hidden fees that some of the larger institutions don't necessarily publicly talk about that small businesses really pay for and value. Mr GREGG: Those protections you refer to don't apply to a Bitcoin transaction which you do for free, do they? Mr Lamantia : Correct. Mr GREGG: When a merchant is encouraging one form payment or another, they can't normally tell the customer how to pay. But the decision that customer makes is going to really determine what protections are available for all involved, isn't it? Mr Lamantia : If you look at Bitcoin purchases, similar to account-to-account with the NPP, which has been another big discussion topic, the regimes of chargebacks or chargeback protections just don't exist. Whether that evolves and changes depends on the propensity of these types of transactions, how often they're occurring and their success. It's something that we could look at, certainly as custodians of both the person paying and the merchant accepting. But, as it stands today, those chargeback protections don't exist. Mr GREGG: One of the big mysteries this committee has been looking at is that it seems that small businesses are paying an awful lot of money to be paid, and consumers are wearing higher costs. Because small businesses are not receiving the same kinds of deals as we're seeing larger businesses get, because their input costs are higher, they are have to charge more to their customers, so they're also less competitive in the market. Where do you think the big problem is in the existing system that is causing unnecessary disparity between small and large businesses? Mr Lamantia : I can't answer specifically as to where I think the problem is that's creating small business paying more than large business. I think that is just the nature of economics, so to speak. But what I can say is that I think it is absolutely fair to acknowledge that. Surcharging, when it was introduced 20 years ago, was introduced from a very different lens in a very different landscape. Removing surcharging completely today will have an effect on sellers where they'll need to think twice about what they're being charged. Therefore, they'll go and either negotiate or shop for a better rate. CHAIR: Over to Ms Jarret. Ms JARRETT: I'll jump straight to it because I know I've only got a few minutes. You've identified a number of challenges in the payment system, and that's been reinforced by the evidence we've heard to date. But one proposal that you've put forward in relation to improving competition is differential interchange caps for small issuers. I understand that, obviously, the goal of that is to increase competition. But is there a risk that that adds to the complexity? One of the challenges we've heard is the amount of complexity in the payment system. I just want your thoughts on that. Mr Lamantia : Mr Saadat, I'll let you talk, then I can talk about complexity. Mr Saadat : Thank you for the question. It is a good question, and I think it is probably right to say there might be some complexity introduced if there is differential surcharging, depending on the size of the card issuer. But we do think it is important to have policy settings that enable competition. The risk of reducing interchange across the board is that only very, very large issuers will be able to compete in the market. We've already actually got a pretty concentrated card-issuing market in Australia, and the risk of that becoming even more concentrated is exacerbated if interchange reductions are applied across the board. I think we would point to examples of other jurisdictions where there is differential interchange based on the size of the card issuer. The United States is actually a great example of this, where they have explicitly facilitated that through regulation. You have a pretty thriving market for card issuance amongst smaller banks and smaller fintechs. It is really the differential interchange which supports that. I think it is important for us to look at that. In our submission we've pointed to a number of competition issues, where competition isn't working well. We've suggested that competition in the merchant-acquiring part of the payment system is working pretty well. But, if you look at other parts, card issuing is one area that that could really benefit from more competition. That differential interchange is one of the levers that could enable that. Ms JARRETT: As with anything, sometimes there's a short-term loss for a long-term gain, right? In relation to the small card issuers, you suggested a time limited exemption on transition arrangements. Could you provide some examples of what you think that could look like, please? Mr Saadat : It's an issue we explored as part of our submission to the Reserve Bank, and it comes from the fact that there is concern around having entrenched exemptions for different parts of the payments ecosystem. What we would say to that concern is that you could structure the differential interchange arrangements in such a way that it's only smaller entities that benefit. Once those entities grow to a particular size, for example, they then transition to other arrangements. It creates a fairer competitive landscape. Some parts of the system might say it's better just to have a level playing field. But unfortunately the playing field is structurally not level, so having the same interchange apply to all card issuers inherently results in poorer competition outcomes. Ms JARRETT: I know we're short on time, but could I ask you just one more question. You talked in your submission about account-to-account based payments being a critical opportunity, and central to the success of that is access to the NPP. You talked about there being two major barriers for that: requirements for ADI licences and exchange settlement accounts. You put forward in your submission quite a number of ways to reduce the burden, one of them being to enable this plug-and-play service, which piqued my interest. How do you think that would work, and who would own that? Will that add cost to end users, or would that be more borne by those within the system? Everything we're looking at is trying to make it efficient, futureproof, protecting consumers, protecting merchants et cetera. Mr Saadat : I think the enablement of more competition here would act as a pretty strong market force to ensure costs did go down rather than go up. If more organisations could access the NPP through the types of arrangements we mention in our submission, that would really enable competition to flourish in a way we're not seeing at the moment. It would also mean this critical infrastructure we've built in Australia—that is, the NPP and things like EFTPOS—just gives them a much stronger chance to compete with some of the international card payment rails that also exist. There are a number of significant economic benefits that come with that, but also from a long-term competition perspective we think it's definitely advantageous. Ms CAMPBELL: Thanks for giving evidence today. In your submission and here today you've identified two areas where competition, in your view, is not functioning, the first being card issuing and the second being digital wallets. I have a question, which is: how do you think that is impacting on costs throughout the system, and why do you think those two areas have limited competition? Mr Lamantia : I can provide some context with regard to digital wallets. What we heard a number of times from the ABA and its members yesterday was that there was a real concern specifically with Apple because it was a closed system. I think one of the numbers purported was 15 basis points that they need to pay, whereas in contrast Google doesn't have a direct cost and is incredibly open. We are an acquirer of these transactions, so what I can say is we pay more for both Google Pay and Apple Pay transactions when we accept them. We pay the same, whether they come from a free wallet, being Google, or they come from an Apple Wallet. I think there was a bit of discussion around whether we would see some of the benefits of opening up wallets and reducing fees flow down to small businesses or consumers. It's certainly not what we're seeing today in an environment where both of those options currently exist. Ms CAMPBELL: Sorry, can you expand on that—when you use a free wallet, you still pay a larger cost? Mr Lamantia : To explain in the context of the response of the ABA, there were concerns that one of the wallet providers is charging them a specific amount, and it has a very closed security system, in comparison to a number of the other wallet providers, who don't charge a direct amount and do have an open system. When these transactions are presented to us, we need to pay an additional fee because they've come from a mobile wallet. But that additional fee is exactly the same regardless of which wallet it comes from, so the wallet that doesn't charge the bank directly—the 15 basis points, supposedly—isn't any cheaper for us to accept. Ms CAMPBELL: Essentially the clip of the ticket is going through at that acquiring bank level, but the small business or the customer are being charged the same. Mr Lamantia : Correct. As an acquirer we charge the same whether it's a Google Wallet or it's an Apple Wallet. What the issuer is charged I don't have visibility of, but they indicated yesterday that Apple charges them 15 basis points and non-Apple doesn't. 'We don't see any value from the non-Apple transactions,' is what I'd say. Ms CAMPBELL: The cost differential for a small business using Square versus using more traditional methods at the point of sale, understanding that Square integrates the tap and the software—if you took all the ways you currently do that and you measured them against Square, what would that look like for a small business? Mr Lamantia : I think a good reference point is that with one of the networks yesterday there was a debate over whether they had 112 fees or they had 51. Let's just land on 51, for the benefit of doubt. But you can imagine trying to have a conversation with a small business about 51 different fees that are associated with a $5 coffee purchase. We spend a ton of time with our small businesses, as I'm sure you all do with your constituents, and what we hear from them is that they're incredibly time poor. They don't have access to the same technology and systems that a big retailer has the ability to access, so when we look at solving problems for these small businesses, one part is to be able to accept a payment; the other part is to help them run and grow their business. Our overarching theme is to provide them economic empowerment, and ultimately our role is to give them more time back to either grow their business or spend time with their friends and family. Ms CAMPBELL: I understand there's a different value proposition to your product. But if I took the more traditional ways of putting together the value that exists in your product, would I be paying more or less than if I used Square? I understand simplicity factors in here. Mr Lamantia : It would vary. Certainly what we see depends on the type of merchant. If you were to go and individually select all of those items through different vendors, it's likely going to cost you a lot more. You require different hardware. You're likely going to get into a different contract. Their pricing mechanisms are likely going to be different. There could be minimum monthly fees. I certainly don't have a ton of insight into how some of those other different software providers charge. But what we do know is that small businesses by and large—80 per cent, actually, of those we speak to—tell us they value all of those services being bundled into one. Ms CAMPBELL: Simplicity is key. When you said that a very small number of your businesses who use Square surcharge, do you have any insights as to what types of businesses are surcharging? Is it in particular industries? Is it in particular geographic locations. Mr Lamantia : We can provide that detailed data. We can provide it down to postcode if that helps. Ms CAMPBELL: That would be great. Mr Lamantia : We can take that on notice. Ms CAMPBELL: That would be wonderful. Simplification is obviously the priority you've talked about here today. If you were redesigning the payments system today, how would you make it more simple? Mr Lamantia : Again, back when we entered the market, we solved problems that we saw that existed. A small business shouldn't wait three weeks to be told whether they're approved to take a payment or not. They shouldn't have to fill out tens of pages of forms and then be reviewed. I think anything we can do to make it easier for small business to get access to the economy, to get access to the tools they need to run and grow their business, we should be looking at. Alternative payment methods, whether they're bitcoin or stablecoin or the others, I think are something we should be considering. Equally we should not be overlooking the role of artificial intelligence or gen AI, and we see that as a huge leap forward from an efficiency perspective for businesses of all sizes. Ms SITOU: I want to follow up on Ms Campbell's line of questioning around simplifying the fee structure. We heard from small business peak bodies earlier today about the benefits that would come from least cost routing. My understanding is that your business model very much relies on blended pricing. Would you consider incorporating least cost routing into how you do business? Mr Lamantia : The first thing I'd like to state is that Square have passed on the full savings of least cost routing to our sellers. In fact we've passed on more than the least cost routing savings we incurred to our sellers. Up until recently, going back a couple of years, just before we launched least cost routing, our price was 1.9 per cent for everybody. Because of least cost routing we were able to reduce that price from 1.9 to 1.6 per cent. Ms SITOU: That's still a blended price; is that correct? Mr Lamantia : It is. The reason we offer at that simple rate is that that's what businesses we speak to are telling us they prefer. There are alternative models in the market. I think somebody mentioned interchange+ where you are able to provide more of an itemised pricing of payment processing. Those models exist. In fact they were prevalent before Square entered the market. I think what you're seeing and the reason why a lot of our competitors are now also using this simple pricing model is that that's what businesses are telling us they prefer. Ms SITOU: Would there be more savings to be had by businesses if you went down a split pricing model between credit and debit? What's proportion of sales are debit and what proportion are credit? CHAIR: Can you tell us what consumers think? I know what businesses think. What do consumers reckon? Mr Saadat : It's a good question. As to whether overall small businesses would pay less if we are priced our product differently, I don't know that we have a clear answer. I think the question, though, goes to whether competition is working effectively in the part of the market Square is operating in. If competition is working effectively, that would mean that, if our wholesale costs come down, we would then pass on those cost savings to the merchants using our service. A competitive market would be characterised by many options for small businesses that they're able to choose from, very few barriers to switching and that kind of thing. We don't have monthly contracts; we don't charge ongoing fees for anything. It's very easy to switch away from Square if that's what people want to do. I guess the starting point for that question is: is competition working effectively? We would say it is working effectively. We're a small player in a market that has many players in it. Where competition isn't working effectively within the payments ecosystem is exactly where you've been looking at over the past two days. There are parts of the payments system that are not characterised by normal market forces, where there are very dominant organisations that are able to set prices. That is not the part of the market we're operating within. We would say our ability to offer the service we do reflects the demand that exists out there from small businesses. They want the kind of service that Square offers. We have very strong net promoter scores. Businesses really like the offering. If they don't like the offering, they've got plenty of choice within the market to go somewhere else. From that perspective, while it is right to question the competitive dynamics, where we're operating we see really healthy competition given the structure of the market. Mr Lamantia : Just before I answer the Chair's question with regard to the consumer view of surcharging, a number of times yesterday the Canada example was brought up around regulating payment service providers and acquirers from passing on savings from the small business programs that the networks implemented. Some subtle context that may have been missed in that conversation yesterday and through lived experience, given Square is in that market, we did adhere to that program—we do still today—and we passed on the interchange savings, and very quickly thereafter one of the networks went and introduced new scheme fees and increased their scheme fees. We weren't in a position to be able to pass those fees on to our sellers. We've lowered our price on an act of good faith, on a view that interchange fees had come down and we were participating in a program, but we have no ability to forecast what other fees are going to be coming around the corner, even outside of these programs. Our intent is to always try to pass on as much as we can, if not everything that we can, when we're participating in these programs. Unfortunately, what we've seen is that it's not always that simple. CHAIR: Okay. Sorry, Ms Sitou, but I need to move on, if that's okay Ms SITOU: No worries, Chair. CHAIR: Mr Laxale. Mr LAXALE: You said you're an acquirer. I just want to understand where you distribute the funds that you collect. So you charge 1.6 per cent and you collect it. You obviously keep a bit. Where does the rest go? Mr Lamantia : There are a number of different fees. We would need to pay a bank to deposit those moneys into various other bank accounts in the country. We would need to pay a network their network fees and interchange fees, that they would then go on and pass on to the cardholder and issuer. We also have static costs of running a business. Part of the fee goes into paying for the hardware that we design and develop ourselves, for the more than 1,000 people that we employ here in Australia to serve and support small businesses. There are costs associated in that 1.6 that are directly related to the payment system, and then there are other fixed costs, as any other business has that is running a business here in Australia. Mr LAXALE: Are those payment costs charged at a wholesale rate, which obviously is the focus of this inquiry and what the RBA are looking at. Mr Lamantia : Are you talking about scheme fees or interchange? Mr LAXALE: Both. Mr Lamantia : Both scheme and interchange fees are set by the schemes, by the networks. We are a direct acquirer of two of those networks. We're not with EFTPOS. Mr LAXALE: So that means you go straight to Visa, you go straight to Mastercard? Mr Lamantia : Correct. Mr LAXALE: They give you a rate. Mr Lamantia : Correct; they'll give us a rate. Mr LAXALE: Is that a strategic rate? Mr Lamantia : It's not what you've heard over the last couple of days during this reference. That is the strategic merchant rate. We don't have that, as much as we'd love one. Mr LAXALE: Why not? Why don't they? I'm assuming you asked for one. Mr Lamantia : It's a question for the networks as to why they wouldn't give us one. I would assume it's based on our size in comparison— Mr LAXALE: Square is pretty big though, right? Mr Lamantia : We may be big, but we certainly wouldn't be as big as a Coles or a Woolworths or a JB Hi-Fi or a Qantas. There are certainly a lot of other large payment-processing retailers in the country. Mr LAXALE: So if you can't get a strategic rate, how is a small business meant to get lower rates? They can't. Mr Lamantia : They can't. Again, what you're seeing is in all parts of the economy. Big business has the ability to get much lower rates than smaller businesses do. Mr LAXALE: Do you offer lower rates as well? Do you offer custom rates as well? What's the lowest rate that you offer your clients? Mr Lamantia : It varies from client to client. Mr LAXALE: I understand that. What's the lowest? Mr Lamantia : Do we have— Mr Saadat : I don't think we would publicly disclose that, for commercial reasons. Mr LAXALE: It's part of the problem, isn't it? Mr Saadat : The 1.6— Mr LAXALE: It is part of the problem, though, isn't it, like transparency on the fees. How are small businesses meant to compete when we don't know? Mr Saadat : It is a fair question. Our ability to answer that question is very different to a very large entity's ability to answer that question. It's worth pointing out that the 1.6 that has been referenced applies to merchants that process up to $250,000 of transactions. Above that it is a negotiated rate. Mr LAXALE: Each one over $250,000 is negotiated? Mr Saadat : That's right. We've heard evidence given to the hearing that small businesses could be up to $10 million in revenue. For us, that's a very large small business. Certainly 80 per cent of the businesses who use Square process under $100,000 a year. It's a very different profile of merchant as well, and it reflects the diversity of small businesses in this country. And of those 80 per cent, there could be merchants using Square every second weekend because they are at a farmers market processing transactions. Mr LAXALE: What is your percentage of debit versus credit in terms of tap and go? Mr Saadat : We haven't published that, but it's broadly the same as the figures the RBA has put out. Mr LAXALE: RBA have published that you use LCR 100 per cent of the time. You said it's just brought down your fees by 0.3 per cent, which is great. It's widely accepted that EFTPOS is the cheapest tap-and-go payment. Do you pay 1.6 per cent for EFTPOS or do you pay less? Mr Lamantia : I think it depends on what you classify as a cost of using the EFTPOS network. Mr LAXALE: I'll use the RBA's numbers. The RBA say that domestic debit transactions generally cost around 0.3 of a per cent, whilst Visa and Mastercard debit transactions average around 0.5 per cent. Are you paying around that? Mr Lamantia : I'm not sure that we can speak to specifics around what we're paying, but what I can say is that that figure wouldn't be including all the other costs that I mentioned earlier around us being able to provide our service in the country. It doesn't take into account the AML checks that we need to do on customers that we onboard. It doesn't take into account the money that we need to spend in order to create the products that these customers want from a hardware perspective and get them certified with EFTPOS, with Visa and with Mastercard. It doesn't take into account the $35 fee that we may be charged by EFTPOS when we raise a chargeback. There are other fees. Mr LAXALE: Yes, but do you give your customers the option to surcharge just the cost of the payment? You're adding in terminals, subsidisation, the software that you developed—all that stuff's being passed on to the consumer, when surcharging is meant to represent the cost of payment. Mr Saadat : What merchants are able to surcharge is policy set by the Reserve Bank, but we allow merchants to surcharge any amount that is compliant with the RBA requirements. Some choose— Mr LAXALE: If you charge 1.6 per cent, a merchant can charge, say, 0.5 per cent? Mr Saadat : They can if they want to. Mr LAXALE: But shouldn't the surcharge be to recover the cost of the payment, not the cost of the software and the hardware? Mr Saadat : What surcharging should be is a matter for policy. That's not something we set. Small businesses obviously have a range of costs that they need to recover, but what costs can be recovered are explicitly set out in RBA policy. Mr LAXALE: You're making additional revenue off debit transactions, which is going in and subsidising a whole heap of other things. Mr Saadat : We've structured our pricing and our product offering in a way that creates simplicity for small businesses. Mr LAXALE: And costs for consumers. Mr Saadat : I don't think we would agree with that, because we're offering small businesses a package of services that they need to run their businesses. You could slice and dice the pricing in all sorts of different ways. I think whether or not small businesses end up paying more or less is actually a different question. Whether or not consumers end up paying more or less then becomes a relevant question because the service that we're offering is a service that businesses need, and we happen to package and price in the way that we do. If there were a market failure in that segment of the market, then I think your questions around why we are pricing it this way and whether we should consider pricing it another way would be very valid, but we're not operating in a part of the market where competition isn't working. Businesses have a choice. They can go to another provider and get a different type of payment product. Given that competition is working in that part of the market, I think it's fair to focus on the part of the market where competition isn't actually working. CHAIR: We're going to need to wrap it up. Mr LAXALE: Okay. CHAIR: I know. Questions on notice are a great thing. Mr Saadat said, 'If you don't like it, you can go somewhere else.' Jokes! Mr LAXALE: The Senate! I'm not going to the Senate! CHAIR: It's been a long two days. You've got to have some levity. Thank you for appearing today. The committee secretariat will contact you in relation to any matters arising out of today's hearing. You will be sent a copy of the transcript of your evidence and will have an opportunity to request corrections to transcription errors. We're going to move on to the final session..