25 Sep 2015
This was an FSI recommendation most consumers could easily understand and sympathise with. Almost every credit card using consumer will have been asked by a merchant to pay a surcharge on their purchase.
"The problem with regulation is the devil will be in the detail."
Steve Worthington, Professor at Swinburne Business School
Australian surcharges vary enormously and Federal Treasurer Scott Morrison said, because of this variance, the government would not legislate on a figure or percentage that could be surcharged.
Instead it would mandate merchants could only surcharge what they are being charged by the card schemes and the transaction acquirers who deal directly with the merchants.
The government has asked the Reserve Bank of Australia (RBA) to narrow its 2012 definition of merchants' 'reasonable cost of acceptance' to thus simplify the regulation of credit card surcharges, making them 'transparent, measureable and enforceable'.
Legislation will be introduced by mid-2016 to ban merchants from imposing surcharges greater than the cost of accepting card payments and the Australian Competition and Consumer Commission (ACCC) would be responsible for enforcing these new surcharging regulations.
Cracking down on surcharges is a good step for consumer confidence in payments clarity. But perhaps a more elegant solution would be to ban surcharges all together and treat the costs of accepting the various forms of payment - be it cash, cheque, credit or debit - as just another cost of doing business. All have a “cost of acceptance" and this would better signal to consumers the final cost a merchant wants to charge.
The problem with regulation is the devil will be in the detail. By going down this path a number of key issues need to be resolved before bringing any legislation to parliament.
What is to be included as a 'surcharge'? How will the wide variety of wholesale 'interchange' rates affect the cost of acceptance for merchants? And how will the ACCC 'enforce' the new surcharge standard?
Much has been made of the surcharges added by airlines and taxi operators. Most airlines call the additional credit card payments, which often appear towards the end of an on-line transaction (so-called drip pricing), a 'booking fee'.
Taxi operators using a Cabcharge terminal charge a 'processing fee' for credit card payments, as does Telstra. Ticketing agencies such as Ticketek and Ticketmaster charge 'service fees' or 'transaction charges' and these plus their 'delivery charges' have provoked much criticism about potential exploitation of market dominance.
So one question that needs to be addressed is how are surcharges to be defined? What is to be included as a 'surcharge' and what can a merchant legitimately charge for their services?
A second question is merchants who accept credit cards pay a Merchant Service Fee (MSF) to the financial institution that acquires (processes) their transactions. A large proportion of the MSF for MasterCard and Visa credit card transactions can be attributed to the 'interchange fee' which is paid by the acquirer to the card issuer. It is used to reimburse card issuers for their costs in offering credit and supporting rewards programs.
Since 2003 these interchange fees have been regulated by the RBA following the 'designation' of the MasterCard and Visa card schemes in 2001. Last month the RBA also 'designated' American Express companion cards issued by banks.
In its August 2015 submission to the Senate Inquiry into Matters Relating to Credit Card Interest Rates, the RBA describes the interchange fee payable as 'depending on the category of that transaction within a schedule of interchange rates set by the scheme'.
“The specific rate applying to a transaction will depend on the type of merchant ('strategic', service station, etc.), the type of card (various types of premium cards, corporate, etc.) and the nature of the authorisation (contactless, SecureCode, etc.), or the value of the transaction," the RBA says.
“There is a hierarchy of categories, which determine how the merchant, card and transaction categories interact. Typically, the relatively low 'strategic' interchange rates for large merchants (big retailers, service station chains) have precedence over the interchange category for the type of card, so the same relatively low rate for strategic merchants applies for all their transactions, including those for transactions using premium cards with high interchange rates.
“However merchants that do not have access to strategic or merchant specific rates will face different rates based on the type of card presented"
There is a huge range of fees according to the RBA. Charities pay no interchange; strategic merchants around 0.25 per cent and consumer premium/platinum cards charge an average of 0.94 per cent.
According to the RBA, “based on the hierarchy of interchange rates, the cost of the high interchange rates on premium or commercial cards falls entirely on small merchants and other merchants that do not benefit from special rates."
Moreover “in recent years, there has been a significant growth in the premium card segment of the credit card market, with the emergence of 'super-premium' and, more recently 'elite/high net worth' credit cards in addition to the 'gold' and 'platinum cards'. Many credit card holders have thus been 'upgraded', which enables higher interchange rates to be charged".
So the question for the regulators is, which interchange rates are to be used to help determine the cost of acceptance to merchants, so that surcharges above this level will be clearly observable?
The government has asked the ACCC to judge whether a merchant can impose a surcharge, justified by their 'costs of acceptance'.
Given the complexity of definitions and of interchange rates, the big question is whether the ACCC has the resources to monitor every surcharge rate against whatever criteria emerges as the 'costs of acceptance'? And how exactly will the ACCC enforce compliance from those merchants who accept credit cards?
Will the ACCC target the 'big players', such as the airlines, perhaps to make an example of some of the more obvious and well reported hefty surchargers? Or will they target the SMEs, who as the RBA admits often pay the higher interchange rates and thus proportionally the higher MSF's and hence could be justified in surcharging at higher rates?
Will the ACCC use fines to punish those whose surcharges exceed their 'costs of acceptance' and if so on what basis will the fines be determined? Will it suggest where surcharges exceed the costs of acceptance consumers should avoid the surcharge by paying by cash or debit card? Will bosses of organisations that surcharge over the cost of acceptance be held responsible?
There is certainly much ado about his issue – witness the 5,000 submissions. But is it all Much Ado about Nothing? If the intentions of the regulator were to use surcharging to make consumers aware of the different costs involved in payments, surely as consumers we should also be made aware of the costs of accepting cash, cheques, debit cards, PayPal or whatever other process we use.
But as a consumer, I would prefer to see a total price that each merchant wishes me to pay and that to include their utility, labour and payment acceptance costs. Nothing more!
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
25 Sep 2015
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