Surcharge surprise for the Murray Inquiry

There’s something misleading about the term “surcharge”. Technically it sounds right – the “sur” prefix does denote over or above or more and a surcharge is an extra payment. But the implication is of a payment for an extra service.

Yet in almost every case in Australia where a payment is surcharged there is nothing extra. It’s the same good, the same service – the consumer has just paid more for it. And it rankles.

"There is a more profound issue here for merchants: surcharging doesn’t make sense for them – unless they have pricing power and the surcharge becomes free margin."

Nearly 80 per cent of second round submissions to the Financial System Inquiry were about surcharging. Now this was not unprompted: the submissions stemmed from a campaign by one irate consumer jack of being surcharged what he considered an exorbitant amount – when in most cases there was no alternative payment available.

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Source: Colmar Brunton, as referenced in the MasterCard FSI submission.

Nevertheless, the FSI said “over 5,000 submissions were received on the issue of ‘credit card surcharges’.” The inquiry only received around 700 submissions relating to the issues of ‘too-big-to-fail’ or ‘bail in” – the major issues for institutions. So the man who led the anti-surcharge campaign, Klaus Bartosch, is hardly Don Quixote out there.

According to research commissioned by MasterCard (remembering it is a company with a vested interest in encouraging electronic payments), Australians are most peeved by the surcharges levied by airlines, utilities, taxis, hotels and restaurants.

Looking more closely at submissions, these vexations correspond to the amount of surcharge – many believe them to be excessive and far above costs incurred by the merchant – the prevalence of surcharges in industries with pricing power or where they are industry-wide (airlines, hotels, taxis) and the lack of an intellectual case for them.

Yes, payment cards are a cost but businesses incur many costs which are not surcharged.

“There are many other costs of doing business,” Mr Bartosch told the Australian Financial Review. “This is just one of them. It has always been in the price of the products and services they charge for. So I can't understand why this should be different."

Mr Bartosch’s background is as managing director of 1st Available, an online healthcare booking service. He has told reporters his campaign came from frustration, particularly with Jetstar’s $8.50 surcharge for booking online.

He started an online petition on which now has more than 100,000 signatories – so it’s little wonder 5000 saw fit to tell David Murray. Mr Bartosch also appeared at public meetings with the FSI.

Those submissions which argue in favour of surcharging, predominantly from merchant groups, fail to demonstrate just how these particular costs are different to other costs of doing business, such as labour, utilities, energy – none of which are surcharged.

Some have argued the case, based on the Reserve Bank of Australia’s original reforms of the payment system in 2003, that cheaper forms of payment – such as Eftpos – are cross-subsidising more expensive forms such as credit cards.

Yet that argument is specious: the RBA argued the cost of use should reflect the cost of the system in order to send a signal to consumers. However the way surcharging in Australia has evolved means only credit transactions are surcharged, not (or very rarely) debit, cash or cheques. None of these are free of costs.

Surcharging in Australia hardly sends clear price signals. And, as Mr Bartosch lamented, is often not explicit when the transaction is commenced.

Take Jetstar’s flat $8.50 charge – depending on the fare involved, that surcharge could be double digits yet the most expensive average cost of accepting a card, according to RBA data, is around 2.5 per cent. Some businesses are charged more by transaction processing banks but they are small businesses, not major airlines. 

Another particularly perverse situation is where hotels – including all the major chains – ask for a credit card on check-in to insure themselves against guests causing damage or failing to pay for some services. It’s a free policy for the hotel but the consumer pays of course – even if it is only in a temporary reduction in their spending limit.

But then the hotel surcharges the customer – making him or her pay again – for using exactly the same card when checking out.

As Mr Bartosch’s co-submitters testify, these surcharges are not trivial. MasterCard’s submission argued surcharging has reached $1.6 billion annually - $130 per person.

ANZ’s rival bank across the park in Docklands, National Australia Bank, noted in itsFSI submission “current surcharging is concentrated, typically within a small group of large merchants who have market power or a geographically captive audience”.

“Smaller merchants without such market power, who do not enjoy discounted (wholesale payment fees) from the (payment card schemes), are disadvantaged,” NAB said. “We believe surcharging does not reflect reasonable cost recovery, but rather, creates an unfair advantage for some merchants. It also provides an inconsistent experience for consumers, as it does not provide clear pricing signals about the relative cost of different payment options.”

Mr Bartosch provided anecdotal support for that argument telling the AFR some businesses had told him they were concerned about his campaign because surcharging formed a large component of profits – which would be impossible were they simply recovering costs.

The unreasonable nature of surcharges, whether the quantum or how they are levied, was picked up in many submissions. The consumer group CHOICE argued for more regulation and supervision of merchant surcharging.

“The most effective solution is to appoint a government agency or regulator to enforce the RBA ruling on limiting card surcharges to the reasonable cost of acceptance,” the group said. “This should be done alongside of measures to increase transparency around the amount collected in surcharges compared to the average merchant fee and with the RBA clearly defining appropriate surcharge levels.”

Given the RBA and its Payments System Board does want consumer prices to reflect costs, this makes sense. Every kind of payment has its own costs – cash indeed has a cost not just for merchants but for government revenues as its use lubricates the black economy.

NAB cited one study from Tufts University’s study on the cost of cash in the United States which found it amounts to at least US$200bn or 3.3 per cent of median household income. Another study from McKinsey & Co proved high cash usage perpetuates a shadow economy and hinders the evolution of a digital economy. McKinsey’s analysis indicates cash generates a high social cost, exceeding 1 per cent of GDP, which is carried mostly by banks and merchants. NAB noted “the common thread throughout these studies is the positive role that electronic payments play, in both increasing economic activity and heightening levels of consumer empowerment and choice, as well as reducing the need for cash transaction monitoring”.

If nothing else, the reasonable cost of surcharging should then be adjusted to allow for these social and economic benefits.

Card industry scrutineer Mike Ebstein of MWE Consulting subjected surcharging to closer analysis for BlueNotes.

“The RBA found, on an average credit card transaction, the cost to the merchant, excluding the merchant service fee was $0.40 of which $0.31 was the Tender Time. The total cost including the merchant service fee was calculated as $0.95,” he says.

“Given ‘tap & go’ technology has reduced what was assessed by the RBA as 75 per cent of the resource cost by something like 85 per cent, the resource cost would now be closer to $0.08 rather than $0.40 with a total cost closer to $0.63 instead of $0.95. So if the new technology has reduced costs on what is now a big proportion of card traffic by this much, why haven’t surcharges been reduced?”

But there is a more profound issue here for merchants: surcharging doesn’t make sense for them – unless they have pricing power and the surcharge becomes free margin.

MasterCard’s survey found more than a third of those surveyed have decided not to complete a purchase after seeing a surcharge. A quarter decided to look for the same item elsewhere. Nearly 90 per cent of Australians are now on the lookout for surcharges and hidden fees and factor them into spending decisions.

Other research over the years has demonstrated credit card customers – the most surcharged – are the biggest spenders.

Ebstein adds “credit card transactions reduce handling costs, risk of fraud and risk of robbery.... these are not factored in to surcharge costs either”.

These are the most telling arguments in the surcharging debate: surcharging doesn’t make business sense. Unless of course it is a profit stream. Which by definition it is not supposed to be.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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