A full-scale crackdown on card surcharges is underway, and they could be banned by 2026. Surcharges cost Australians up to $1 billion a year, but who is to blame and would a ban just drive up costs?
The Reserve Bank of Australia (RBA) released a 46-page document into its ongoing investigation into surcharging on Tuesday and outlined the possibility of a “broader” surcharge ban. It also flagged the chance of caps on surcharges or a ban on debit card charges so Aussies could have a fee-free option.
The cost-of-living crisis has thrust the issue into the spotlight, with the hopes better regulation could stop individuals, along with everyday Aussies trying to run businesses, from being stung by excessive charges.
Yahoo Finance has spoken to Australians stung with “outrageous” surcharges along with dozens of business owners struggling with the fees associated with digital fees, like IGA owner Kosta Tzortzis who said his profit was eaten away.
The RBA found that businesses would charge customers less if their card payment fees were lower.
So who foots the bill if surcharges are banned?
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Will a ban on surcharging increase costs for everyone?
It depends where the government’s ban starts.
There are three main players in the surcharge game: customers, merchants and those who charge businesses to provide digital payments, like banks, a tap-and-go reader service such as Square, or Visa and Mastercard.
If consumer surcharges are outlawed, businesses that currently pass on those fees would be faced with a decision about whether they would take the financial hit, or raise the cost of their overall product to cover it behind the scenes (like cash).
This means customers could pay more for products.
If consumer and business surcharges are banned, banks and payment service providers might have to cover the costs.
Leaders of major banks in Australia have argued that surcharging is no longer fit for purpose, but rejected accusations that they were profiting from customers simply trying to “access their own money”.
Labor MP Jerome Laxale has fronted a campaign for fee-free digital payments, describing the system as a “rort”.
He said businesses also shouldn’t be copping the fees given the transformation of digital payments and said banks shouldn’t be charging them.
“I question why we are all being charged fees at all. Cash is fee-free to use, so should digital,” Laxale told Yahoo Finance.
“The RBA currently provides fee-free bank-to-bank fund transfers in an instant.
“Be it through Osko, PayID, scanning a QR code or new rules to open up Apple or Google wallets, unlocking the potential of the New Payments Platform is the answer to this $4 billion nightmare.”
The cost-of-living crisis has impacted individuals as well as everyday Aussie businesses and the argument is that surcharging should be banned to stop undue pressure on both.
“Consumers shouldn’t be punished for using cards or digital payments, and at the same time, small businesses shouldn’t have to pay hefty fees just to get paid themselves,” Treasurer Jim Chalmers said.
What about cash users who don’t pay surcharges?
Cash advocate Jason Bryce expressed concerns that getting rid of surcharges will “raise prices for everyone”.
This is under the assumption that businesses will incorporate the cost of digital payments into the price of goods — much how the price of a coffee at a cafe is dictated by wages, rent and bills, not just how much milk and beans are.
Bryce’s fear is that without upfront surcharges, Aussies won’t know how much they are being squeezed to use digital payments.
But Swinburne University’s Professor Steve Worthington told Yahoo Finance that Aussies have been slugged with a “hidden” surcharge for decades and it’s all because of cold, hard cash.
“Cash was one of the main ways that we used to pay for things. The cost of paying by cash to the merchant is far more than the cost of paying by card,” he said.
How can surcharges be banned?
The government has said it will give the Australian Competition & Consumer Commission (ACCC) more than $2 million to investigate businesses that over-surcharge.
The Independent Payments Forum said the consumer watchdog needed to: “Take a good look at the loopholes being exploited by players in the payments industry who are charging outrageous fees under the guise of the ‘cost of acceptance’ to merchants which can then be surcharged to consumers.”
However, the Reserve Bank has the power to make big changes to how Australians can be charged when paying for a good or service.
The Issues Paper released on Tuesday outlines the issues the current system has faced and how it could push forward submissions for regulatory change if it is deemed to be in the public interest.
Top notes are that more people are using cards than cash, which has put pressure on merchants as costs associated with facilitating digital payments rose to estimated $6.4 billion in 2022/23.
This is where it gets a bit difficult. How much a business pays to use digital payment services varies greatly, with the RBA finding small businesses copped charges three times more expensive than larger merchants.
Then comes in which service is being used and whether the business decided to pass on the cost to consumers.
Another layer is added when some business owners sought to profit from widely accepted surcharges, hitting customers with fees much higher than it costs them to perform the transaction.
This is where the ACCC can step in.
But the RBA is concerned that Australians are now less able to avoid surcharging as fewer use cash, plus they don’t know if a surcharge will be applied, how much it will be or if they even should be copping one.
“The rise of contactless payments also makes it difficult in many circumstances for the actual dollar amount of any surcharge to be displayed to the consumer before the payment is finalised, as it can depend on what type of card is ‘tapped’ at the terminal,” the RBA said.
Contactless has created a system where debit card transactions can be pushed through to be charged like a credit card, which is at a higher rate.
The RBA has pushed for least-cost routing (LCR) which customers and merchants to be charged the lowest amount when using debit cards.
The central bank has called for submissions to determine its course of action but has floated the following options:
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Banning surcharges on debit transactions: “Preventing merchants from surcharging debit card transactions would help ensure that a surcharge-free electronic payment method is widely available to consumers that is still relatively low cost for merchants.”
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Banning card surcharges more broadly. “A ban on the ability of merchants to surcharge card payments could be applied to all card networks … This could lead to an overall increase in merchant card payment costs. Merchants may also respond by raising prices for goods and services to cover the costs that were previously recouped through surcharges.”
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Capping surcharges. Numerical caps on the level of surcharges could be set for different payment methods. For example, surcharges could be capped at 2 per cent for credit cards and 1 per cent for debit cards. Numerical caps would be much simpler than the current rules and would be easier for the ACCC to enforce
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Tightening the definition of the cost of acceptance. “Surcharges could be limited to the pure cost of payment processing, rather than the total ‘cost of acceptance’, which can include other software services that are bundled into merchant service fees.”
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Mandating differentiated pricing for transactions processed across different networks. “Rather than change the surcharging rules, the RBA could instead mandate differentiated pricing for transactions processed across different networks.”
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Mandating monitoring of surcharging by networks and aquirers.
The RBA has now asked for stakeholders to make submissions to help the RBA formulate an appropriate response to the surcharging issue. The deadline for submission is December 3.
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