Why paying by phone costs the merchant more

Payment wallets have made life a lot easier. No more carrying a wallet around, no fiddling with cards — just use your phone. But along with phone payments comes the darker side of this industry, which is to fleece the merchant at every possible avenue. That fleecing is done by the banks, the schemes and the phone manufacturers. Maybe I’m just a payments geek, but it riles me up.

It feels like the banks, Visa, Mastercard and Apple all came together and worked out how to stop merchants saving money through least cost routing.

A very smart ex-colleague of mine once said: if you want to predict what the schemes will do, just think about how they can make more profit. That has held true across every year I have watched them set interchange rates. Which is why, when it comes to payments, don’t assume your friendly banker is going to tell you everything.

A refresher on least cost routing

Least cost routing is the ability to route Visa and Mastercard debit transactions to eftpos. Check whether your own debit card has an eftpos logo on it — if it does, it can process through the eftpos rails, and those rails are usually cheaper. The exception is very small payments, under about $20, where eftpos’s flat fee can work out worse than a percentage.

It was a good thing when the RBA finally pushed least cost routing through. It had to be pushed, because the banks were in no hurry to volunteer lower profits, even after the RBA had been jawboning the idea for ages. It meant a merchant taking payment on a terminal could route Visa and Mastercard debit to eftpos.

Then the schemes went to work

It did not take long for Visa and Mastercard to start moving interchange around to suit themselves.

First, they cut debit card interchange to compete with eftpos. Good, on the face of it — except they lifted credit card interchange to offset the loss. Less good.

Second, and this is the one that matters here, they created new interchange categories such as tokenised contactless and priced them higher. Tokenised contactless is what happens when you tap your phone on a terminal instead of your card.

Those transactions cannot be routed to eftpos. Why not? Because Apple would not make as much money, so why would it allow it. Knowing that a wallet transaction could never be routed away, Visa and Mastercard were free to price that category as they liked.

So every time a customer taps a phone instead of a card, it can cost the business meaningfully more.

What that looks like on a $150 sale

Interchange on a debit card, phone versus physical card. These are the published rates as at 2022, when this was written. The point is the gap between the rows, not the absolute numbers — and note interchange caps change on 1 October 2026.

Same card. Same customer. Same $150. Roughly seven times the interchange cost, decided entirely by whether they reached for the phone or the card.

Now scale that across a business doing thousands of transactions a week, and remember the merchant has no way to steer it and no way to route around it.

What could be done

The RBA could require dual-token provisioning from Apple, so a wallet transaction carries an eftpos token as well and can be routed like any other dual-network card.

Or merchants take matters into their own hands. In New Zealand, some have started to realise what phone payments actually cost them and have taken to wrapping the contactless reader so a phone tap will not register.

Neither is a great answer. The real fix is at the scheme and wallet level, and neither has any commercial reason to move unless made to.

FAQ

Why can’t a phone payment be routed to eftpos?

Because the wallet provisions a scheme token — Visa or Mastercard — rather than a dual-network credential carrying eftpos. Without an eftpos token in the wallet there is nothing for the terminal to route to, so least cost routing has nothing to work with.

Does tapping a phone really cost a merchant more than tapping a card?

On the published interchange categories, yes. Tokenised contactless is priced above standard card-present debit, and the gap widens on larger transactions because the tokenised category is charged as a percentage while card-present debit is often a flat few cents.

Can I stop customers paying by phone?

Not really, and refusing a valid payment method is a poor way to treat a customer. What you can do is understand what proportion of your volume comes through wallets, so you know what it is costing you and can factor it into what you negotiate on the rest of your pricing.

Is this changing?

The economics may shift as interchange caps change, but the routing problem is structural: it is about what credential the wallet holds, not about the rate. Until a wallet carries an eftpos token, that volume cannot be routed no matter what the rates do.