Is card surcharging justified or does it encourage rorting?

Australia’s first credit card, Bankcard, was introduced in Australia and New Zealand in 1974. The card was only of use in ‘domestic’ markets and for its first decade it dominated card payments, peaking at about five million cardholders in 1984.

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During the next two decades the two ‘international’ credit card acceptance schemes Mastercard and Visa came to prominence and Bankcard was subsequently withdrawn from the Australian and New Zealand markets in 2006.

"The rationale was to enable merchants to signal to their customers that some payment methods were more expensive to accept than others. So consumers could consider whether to pay by using a less costly method.”

In order to be successful Mastercard and Visa had to both convince consumers they could use their cards everywhere and also convince merchants there would be enough cardholders to make it worth their while to accept these cards.

To overcome this conundrum, both acceptance marques had rules which prohibited merchants from surcharging and ‘encouraged’ merchants to ‘honour all cards’, be they credit or debit cards.

Surcharging occurs when a merchant adds an ad valorem charge to a transaction carried out on a payment card. The Reserve Bank of Australia (RBA) initially intervened into this practise in 2002 with a proposal to reduce the restrictions on this payment card practise, thus increasing the transparency of the Merchant Service Fees (MSFs) charged when using payment cards.

The removal of the no-surcharging rules in Australia was effective from January 1, 2003 and their reform was part of the RBA’s remit of ‘promoting the efficiency of the payments system’.

The rationale was to enable merchants to signal to their customers that some payment methods were more expensive to accept than others. So consumers could consider whether to pay by using a less costly method.

Fees for service

This would primarily be using a debit card to make a payment, compared to a credit card – which had higher MSFs, to support reward schemes and interest free periods.

This situation prevails to this day. A September 2022 RBA Bulletin on the ‘Cost of Card Payments for Merchants’ states the average merchant fee for both Mastercard and Visa debit cards is 0.5 per cent. While the average merchant fee for Mastercard and Visa credit card transactions is 0.9 per cent.

To some extent this has been successful. The RBA’s latest consumer payment survey shows “transactions using card networks account for three quarters of consumer payments, with debit cards making up half and credit cards a quarter”.

However, surcharging by merchants now rarely discriminates between debit and credit card transactions and is instead a ‘one size fits all’ percentage. This varies between merchants but can be as high as upwards of 2.00 per cent for all card payment transactions.

A July report by the Australian fintech Zeller revealed a growing percentage of card transactions now include surcharges for consumers as some businesses (particularly SMEs) consider new ways to counteract surging operating costs. Indeed, in May 55 per cent of transactions processed through Zeller’s EFTPOS terminals included a surcharge.

The RBA’s merchant-level data shows the average MSFs tend to decrease as the merchant size increases – as  larger merchants can negotiate favourable MSFs with both the card schemes and their merchant acquirers. SMEs on the other hand often have ‘fixed’ plans, which charge the same MSF for all cards, networks and transaction types. This might help to explain the ‘one size fits all’ surcharge on some card-based transactions.

Excessive surcharges

However, we must also consider whether surcharging on card transactions is really just a ‘rort’, which costs consumers extra dollars and cents? A recent bluenotes piece, entitled ‘Coffee-nomics’, calculated the cost of ingredients in a cup of coffee. This came to about 75 cents, plus premises and machine rentals, labour, utilities and presumably MSFs. What does your coffee cost you? And is there a surcharge on it?

Certainly, every merchant has their costs of doing business and these include the costs of accepting payments, be they card, cash or online

The Australian Competition and Commission (ACCC) is the regulator for payments and in 2017 it stated “all businesses that impose payment surcharges on card transactions need to comply with the new law that bans excessive payment surcharges”.

The purpose of the ban was to stop payment surcharges that are more than the cost of accepting that payment method. A payment surcharge is considered excessive if it exceeds the ‘cost of acceptance’.

The ACCC is responsible for enforcing the ban and it can both issue an infringement notice with penalties or take court action seeking pecuniary penalties, injunctions and other orders to merchants who don’t comply.

Other countries have taken a more robust view of excessive surcharges. In 2018 the UK Treasury stated “hidden charges for paying with a debit or credit card will be banned, helping millions of UK consumers to avoid rip-off fees when spending their hard-earned money”.

“These new rules will be enforced by a government agency who will have the power to take civil action against merchants who breach the regulations. It will also enable customers to receive a refund of any unlawful surcharge that they have paid and enable them, if necessary, to take legal action to recover such surcharges”.

In Australia, the ACCC is the regulator responsible for monitoring surcharging. Does it need to raise its game?

Steve Worthington is a Professor at Swinburne University

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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