But the RBA also allowed merchants to add a surcharge to a transaction, the theory being merchants would price in a way to encourage usage of the lowest cost system.
"More than 5,000 of the circa 6,500 final submissions to the FSI were concerned with surcharging on card payments.”
Reality has proved to be different – as indeed many warned at the time. As a rule, rather than surcharge on economic efficiency grounds, merchants have surcharged based on market power.
For consumers, surcharging is annoying and confusing because there are no set rules and little enforcement of over-charging. Merchants too often blame someone else – usually the banks – for the surcharge when it is something they choose to impose.
And anecdotally, and according to work done on the “black economy”, some merchants have surcharged for extra profit or to encourage cash use – to avoid declaring income. The data however are imprecise here.
The RBA, in its Bulletin of December 2018, accurately and comprehensively describes the history of the regulation of payment card surcharging in Australia.
Reasonable or excessive?
The RBA first introduced regulations concerning surcharging in 2003, in theory to support competition and efficiency in the payments system. Merchants could surcharge for all payment methods, including cash and cheques, however there had to be at least one non-surcharged method of payment.
These regulations were modified in 2013 and new rules limited the amount of any surcharge to the ‘reasonable’ cost of card acceptance to the merchant. The RBA introduced further new rules in 2016, with a narrower and more precise definition of permitted card acceptance costs.
The ACCC was then charged with the responsibility to enforce the ban on ‘excessive’ surcharging – an action many had argued for back in 2003.
The 2016 regulations were in part a response to the submissions from the wider public to the 2014 Financial System Inquiry (FSI). More than 5,000 of the circa 6,500 final submissions to the FSI were concerned with surcharging on card payments (although there was a concerted campaign on this front).
It was hence no surprise that the Government in 2015 announced it would crack down on ‘excessive’ card surcharges. The ACCC has since then had several successful enforcement actions, both via infringement notices and litigation, against merchants who were surcharging ‘excessively’.
However, the commission continues to receive reports of usually smaller businesses that consumers allege are imposing excessive surcharges. For example, some merchants continue to impose fixed fee surcharges for card transactions under a certain limit (e.g. 50 cents for a purchase under $A10).
The RBA has excellent data on the average merchant fees the card systems impose on both credit and debit card transactions. However, the cost of accepting card payments can vary significantly between different merchants. Generally speaking, businesses with larger annual card transaction values tend to pay less for accepting card payments, than do smaller businesses.
So, as a rule, the smaller you are as a merchant, the more you pay in merchant fees for accepting card payments. (The type of card used can also influence merchant fees, ‘corporate’ cards and ‘premium’ credit cards generally have higher merchant fees.)
Perhaps partly because of the complexities associated with the regulation of surcharging on card payments, many businesses chose not to apply surcharges. The RBA’s Consumer Payments Survey of 2016 showed consumers paid a surcharge on only 3.5 per cent of all card payments in 2016; moreover, surcharges were paid more on credit card payments (4.7 per cent) than on debit card payments (2.5 per cent).
Merchant fees on debit card transactions can be expected to be further reduced in the near future as the RBA ‘encourages’ payment card acquirers to route debit card transactions through the eftpos acceptance channel, rather than as at present, mainly through the Mastercard and Visa channels.
ANZ, for example, has introduced what is called Merchant Choice Routing to allow this to occur.
Other countries with high levels of payment card usage, such as the United Kingdom since January 2018, have banned surcharging on card payments. This follows from a European Union directive which banned such fees on Mastercard and Visa payments. The UK Government went further and banned surcharging also on American Express and PayPal payments.
So why bother with surcharges in Australia? Judged by the number of contacts the ACCC has received regarding excessive surcharging since it took total responsibly for enforcing the law in September 2017, some merchants are still abusing the regulations. This is acknowledged in the RBA Bulletin of December 2018.
Also surcharging on card payments, be they credit or debit, is resented by consumers – as evidenced by the number of contacts the ACCC receives about perceived excessive surcharges and by the 5,000 plus submissions on this issue received by the FSI.
Having studied payments systems across the UK, Europe and Asia and given how regulation and consumer preference (for example, the great adoption of tap’n’pay contactless payment in Australia) has evolved, it strikes me the logical step is for Australia to now follow much of the world and ban surcharging.
Which would take us back to 2003…
Steve Worthington is a Professor at Swinburne University Business School