Surcharge Leaves the Table

By Jack Kirkwood

Back at the beginning of the 21st century, cash was still king and the Reserve Bank of Australia (RBA) wanted to keep it this way. Cash was – and still technically is – the most efficient way for a consumer to complete a payment. Unlike cash sales, merchants must pay a small transaction fee to complete the purchase made every time you tap a card. This fee was the initial issue when card payments first entered the mainstream because retailers simply increased the price of their goods to accommodate this transaction cost.

This worked in principle for card payments since the consumer covered the transaction payment and the merchant received the same net revenue for their goods. The issue that arose from this, however, is that now those paying with cash faced the additional “transaction costs” even though there was no transaction cost to pay!

In 2003, the RBA prohibited card networks’ “no-surcharge” rules. This allowed merchants to put the transaction fee costs on the actual transaction as opposed to bundling it into the final price of a good. The goal was to make payments markets more efficient by highlighting the cost difference between cash and card payments to consumers.

Whilst this removal of barriers was seen as beneficial, companies quickly realised that they could either resist the change or abuse it. Throughout the rest of the decade, most merchants continued to simply add the transaction fees to total costs. There were also instances of merchants charging a flat rate surcharge, such as airlines giving customers the same surcharge per ticket regardless of ticket price.

Responding to this, the RBA changed its policies throughout the 2010s to restrict excessive surcharging and adapted it to a cost- per-card basis. It’s important to note that some cards face higher transaction costs than others, such as credit being more expensive than debit. This gets us to modern day surcharging regulations. RBA data from 2023 suggests average surcharge costs of 0.4% for debit cards, 0.8% for credit cards, and 1.3% for charge cards (such as American Express).

So, why is the story suddenly changing? Remember that surcharges were initially implemented to encourage consumers to choose the more efficient cash payments. The issue is that card payments have become far more mainstream; cash accounted for 69% of in-person transactions in 2007, but as recently as 2022 has dropped to just 13%. The dwindling usage of cash makes these surcharging policies less relevant as consumers are continuing to shift to card payments. Two reasons may explain this trend. Firstly, many merchants still refuse to surcharge, making card payments an equivalent price option to cash. Secondly, consumers are increasingly willing to accept surcharge costs. Factors such as the ease of digital card payments compared to cash give many consumers preference to simply take on the additional cost.

Last month, the RBA completed a consultation paper for the Payments Systems Board (PSB), a body within the RBA responsible for determining payment system policies. This paper proposed some options for considering a reform on surcharging policy. The options vary in the extent of their ramifications, with up to a forecasted $1.2 billion in savings for consumers.

OPTION 1: NARROW THE SCOPE OF SURCHARGING

This would place restrictions on what fees merchants can and cannot pass on to consumers. By targeting purely interchange fees (the fee merchants must pay their bank to accept the card payment), the RBA forecasts this could reduce surcharge rates by up to a third.

OPTION 2: LIFT THE BAN ON CERTAIN CARD TYPES

Debit and prepaid cards have the lowest costs associated with their transactions, largely due to lower credit risk. Debit cards are therefore a more efficient transaction option than credit cards, in the same way that cash is more efficient than debit. The RBA predicts that encouraging consumer movement to debit cards will improve market efficiency.

OPTION 3: ELIMINATE THE BAN ENTIRELY

Despite being the RBA’s preference, it is unlikely that the RBA could impose a ban completely removing surcharge. Historical evidence suggests card networks would likely reimpose their “no-surcharging” rules, which would restrict merchants from imposing surcharges entirely.

To complement this policy change, the RBA also proposes a change in interchange fees. By lowering domestic fees and placing a cap on foreign fees, the RBA hopes that merchants will have to face less backend costs of digital payments to ensure they aren’t suffering from the change in regulation. Whilst this would mean a return to including surcharge costs in final sales price of goods and services, the RBA hopes that the change will be minimal due to how few merchants are currently surcharging. The only question now is whether we will actually see these changes take effect or if this is all just wishful thinking from the Reserve Bank.