Shoppers blindly accepting credit card surcharges need to understand the full impact they can have over the course of a month or a year, particularly if they’re allowed to compound, one investment adviser says.
Credit card surcharges have become common as retailers try to recover the cost of increasing use of contactless payment technology.
Use of the much cheaper eftpos network has fallen in recent years, as more shoppers opt for contactless debit and credit cards, as well as cards loaded on to phones.
In January 2017, eftpos cards were used for about 40% of in-person payments. By July 2023, its share had fallen to about 22%.
It has been estimated that New Zealanders are paying up to $90 million a year in surcharges.
Late last year, the Commerce Commission issued a draft decision outlining plans to reduce interchange fees, which make up a large part of the service fees that businesses pay when they make or receive card payments.
It said surcharges should be no more than 0.7% for contactless debit card payments and no more than 2% for credit card payments.
Consumer NZ earlier this month said there was no guarantee that the commission’s moves on interchange fees would reduce surcharges for customers, and they should be banned.
“Less thought would be required about what card to use, whether to swipe, insert or tap; what the surcharge amount is and whether there’s a way to avoid the surcharge,” spokesperson Jessica Walker said.
“You could just leave the house with your phone in your pocket, knowing you wouldn’t have to pay a hefty surcharge for the convenience of not carrying any cards. A ban makes things simpler for merchants too.”
Jeremy Sullivan, an investment adviser at Hamilton Hindin Greene, said people might not think about how much of an impact even a 2% credit card surcharge could have. It could make even a theoretically “interest free” credit card a lot more expensive than paying with eftpos or cash.
“When compounded monthly, these charges result in an effective annual cost that is higher than expected.”
He said, assuming every payment made in a month had a 2% surcharge, over a year that was equivalent to the additional cost that would be incurred with an interest rate of 26.82%.
“A 2% credit card surcharge may seem small, but when capitalised on your monthly balance, it equates to an effective annualised cost of 26.82% — comparable to taking out a high-interest loan. Many consumers overlook these charges, yet they can significantly eat into disposable income over time.
“Obviously, there’s not a surcharge on everything but every purchase that has a surcharge if it was 2% is an effective interest rate of 26%. If you were to take out a loan with a 26% per annum interest rate you’d be charged 2% a month.
“Even if it was a few hundred dollars a month it does start to eat into the money that you’re wasting effectively.”
If someone was not clearing their balance each month and also paying 13.95%, a typical low-interest card rate, that could create an effective annual cost of 44.8% including the surcharges.
“Even if you take into account the rewards points or the interest free days if you’re offsetting your mortgage there’s still a material difference.
“Some of them are higher than 2%, I’ve seen them as high as 3%. That doesn’t take into account your card fees as well. They’re designed to change people’s behaviour, make people think why don’t I just press the cheque option and save myself the money, but with payWave and so forth it makes it a bit more difficult.
“I can understand retailers doing it — if you’re running a sushi shop like the one downstairs and being charged 2.5%, their margin’s only 10%, so 25% of their profit’s going out the door if they don’t pass it on.”
Sullivan said other parts of the world had banned the charges.
“It wouldn’t be unprecedented to say you can’t do that. At the moment it’s user pays. The convenience of payWave or using your phone doesn’t really give you an option. That’s something that needs to be opened up — can you use your phone to access a chequing account as opposed to it only being payWave?”
rnz.co.nz
