Interactive: Tom Hounslow
Moreover, while the Andrew task force has been looking at the broader cost to society of the cash economy, all forms of payment have a ‘cost’. Old-fashioned paper cheques cost by far the most to process but cash, often perceived as ‘free’ by merchants, is not free.
Cash ‘shrinks’ – that is it may be pilfered, it is only valuable when it goes into an account, it has transport costs and security risks and – not insignificantly – it places a limit on purchasing power.
The original ‘Diners’ Club Card’ was conceived in the 50s when a regular lunch crowd ran out of money but were keen to keep their lunch going – so a ‘card’ was created which allowed them to order more food and beverage (probably beverage) and pay later. Maybe not great for their own budgets and waist lines but good business for the merchant.
That remains the case today: it makes sense to take the pain and physical barriers out of paying. Thus merchants who annoy customers by surcharging or refusing non-cash payments discourage business.
There are other hidden affects: informal surveys show where restaurants surcharge for payment at the end of the meal, diners tip less. This costs the service staff - the tip pool is smaller - while benefitting the restaurant owner. So as well as annoying customers it transfers income from staff to owners.
Given the well-documented rorts in Australia after surcharging was allowed, the RBA and the Australian Competition and Consumer Commission set up rules around what can be charged.
In the latest RBA ‘How Australians Pay: Evidence from the 2016 Consumer Payments Survey’, the bank noted the new rules which came in May 2016 as part of its Review of Card Payments Regulation.
“Under the new rules, surcharges cannot be more than the average amount that it costs a merchant to accept a particular type of card for a given transaction,” the bank said.
“The aim of the new standard was to improve price signals to consumers about the relative costs of different payment methods, and to eliminate instances of excessive surcharging (including in particular industries where this practice had emerged in recent years).
“These changes led to reductions in the value of surcharges levied by some large merchants – particularly domestic airlines – on some lower-value transactions.”
The payments industry has long argued enforcement of these rules will be a challenge. While the major volume and value of surcharging is via larger merchants who are perhaps easier to monitor, for consumers some of the more annoying incidences are where smaller merchants place ad hoc minimums on payment or levy flat rate surcharges such as 30c or 50c – which for a cup of coffee or newspaper (an ancient form of pulp-based communication) –equates to 10 to 20 per cent.
The UK’s answer is to ban the lot - effectively acknowledging accepting a payment is a cost of doing business. The rules also “tackle surcharging by local councils and government agencies”.
“In 2010, the total value of surcharges for debit and credit cards was an estimated £473 million,” the UK Treasury found.
Here at ANZ, the view is the relatively new surcharging regime needs time.
“Surcharging can add friction and frustration to the customer payment experience,” the bank’s head of products Bob Belan says. “In 2016 the RBA, in consultation with Banks and other payment industry participants, made regulatory changes that now prevent the excessive surcharging of customers while still allowing merchants to recoup their payment processing costs.”
There’s no doubt the payments ecosystem is incredibly complex – even for network economists who make a living from dissecting the entrails of costs and benefits.
Who benefits from an electronic transaction? The bank, yes. But also the merchant. And the consumer who has the convenience and maybe loyalty points. So who should pay for it?
Those parties all also incur costs. How do you allocate them? The RBA has long argued there is market failure in the setting of wholesale interchange rates – they only ever seemed to rise and that rise was all too even. But it now also accepts its solution – surcharging – is open to rorting.
In a paper for Monash University and the Australian Centre for Financial Studies, two economists, Stephen King and Rodney Maddock, argue in fact the complexity is insoluble.
They argue for what they call “direct charging”: “Under this model, each merchant sets prices for goods and services that do not depend on the payment instrument proffered by the customer. There is no surcharging (so we can eliminate one level of regulation)”.
“The customer will be (or may be) charged a fee directly by her financial institution,” they posit. “As with automatic teller machine (ATM) withdrawals, this will be presented as an electronic message and give the customer the option of aborting the payment. The essential point of the direct charging concept is that the customer can see the fee that she will be charged for using that particular payment method.”
It’s a different approach to the UK and the RBA but it does have the benefit of being simple. And it doesn’t require a value judgement on whether surcharging is a rip off.
Andrew Cornell is managing editor at bluenotes