RBA announces ban on credit, debit card surcharges

Surcharges on credit and debit card payments will be banned from October, the Reserve Bank has confirmed.

The ban is expected to save consumers $1.6 billion a year in unnecessary fees, as the central bank pushes ahead with a controversial reform that was fiercely opposed by small businesses when first proposed, and will likely cause a dramatic cutback in the generosity of card rewards schemes.

On Tuesday, the RBA revealed that despite fierce opposition during an extended consultation period that gathered feedback on the proposal first floated in the middle of last year, it believed merchants should no longer be able to apply surcharges on customers’ card transactions from October 1. It claimed the fees were no longer working as intended because the majority of payments were now by card, and it was difficult for consumers to avoid surcharges.

To avoid merchants baking in the cost of card payment processing into the price of goods, the RBA will also apply pressure on card issuers – largely financial institutions and “acquirers” that provide payment terminals to businesses.

Does this cover all cards, including AMEX?

The changes apply to all Mastercard, Visa and EFTPOS cards, but not to American Express, which is regulated differently. American Express, as a three-party card scheme, does not have interchange fees because the merchant’s payment service provider and the cardholder’s issuer are the same institution.

Interchange fees, which are paid by the payment terminal provider – its acquirer – to the institution that issues the card being used, will have caps lowered. Additionally, a range of transparency measures will be enforced so that fees and charges are more visible and it is easier for small businesses to shop around for better deals.

Smaller businesses tend to pay much higher fees to process payments than larger businesses which can strike deals.

The RBA also believes that by lowering the costs of processing payments for businesses, and by introducing a cap on the costly and previously unrestrained charge of processing an international credit card, merchants will save about $910 million per year.

How common is surcharging?

About 84 per cent of businesses don’t currently surcharge card payments, and so are expected to benefit from lower upstream costs, the RBA believes. However, the use of surcharging varies significantly by industry, with roughly a third of hospitality businesses surcharging, it said.

The RBA had examined banning surcharges on debit cards only, but concluded that the cost of doing so was close to the amount of banning them for both, and that retaining surcharges just for credit cards would cause small businesses confusion as to the status of each customer’s card. Millions of payment cards in Australia are dual function debit-credit cards.

Reserve Bank governor Michele Bullock said the changes would “make card payments simpler for consumers and help businesses get better value from their payment services”.

“Surcharging no longer works as intended,” she said. “Consumers and businesses find the rules complex and confusing, surcharges are often not well disclosed, and most consumers want surcharging to stop,” Bullock said.

Treasurer Jim Chalmers backed the decision, and praised the RBA’s multi-pronged plan. However, he acknowledged some small businesses may ultimately decide to increase their prices.

“We all know that Australians absolutely hate this idea that there’s a sneaky charge when you tap and go, when you get a coffee or get a beer,” he said.

“By getting some of the interchange fees down that will be a benefit to some of these small businesses that we hope that they will pass on to customers as well,” he said. “So there are swings and roundabouts here, but fundamentally this is about Australians knowing what they’re paying,” Chalmers said.

How will a surcharging ban affect small businesses?

Responding to the announcement on Tuesday, several business groups were scathing of the decision, insisting it harmed small businesses and would definitely lead to them baking their costs to process card payments into all prices.

“Low-margin small businesses will now be forced to ‘absorb’ the cost of expensive credit cards payments and pass it on in price increases for all customers, including debit card and cash users,” Brad Kelly, co-founder of the Independent Payments Forum, said.

“Small businesses and consumers are big losers in this decision as it will mean higher prices for everyone, in an already inflation-shocked economy,” Kelly said.

Wes Lambert, CEO of the Australian Restaurant and Cafe Association, called Tuesday’s announcement “the biggest early April Fools joke the RBA could have handed the hospitality industry”.

Lambert said many restaurants and cafes that currently add surcharges would likely increase their prices to cover the cost of card payment processing. “Ultimately, the consumer will pay for this.

However, payments processors welcomed the news. Lynn Kraus, CEO of Australian Payments Plus, which operates the EFTPOS network, said: “Debit is how most Australians pay for their everyday transactions. Removing surcharges on these transactions will make the payments experience simpler and more transparent, and that’s good for confidence in the system.”

John Arnott, the director of AMP Bank GO’s digital-first offering, was more measured, saying the announcement was a win for customers but that “the biggest risk (now) sits in any gap between surcharges ending and lower interchange fees actually flowing through to small businesses”.

“This is the moment for the industry to step up. The rules are clearer – now big banks and the payments ecosystems need to do the heavy lifting,” he said. “Greater transparency is a big step forward – but transparency alone won’t pay the bills. The market now needs to move quickly to turn visibility into lower prices for card payments, and it’s important small businesses start to vote with their feet,” Arnott said.

Why is the RBA changing the surcharging rules?

The RBA said the existing system has largely meant that debit and credit card users fund the cost of expensive rewards points and frequent flier schemes, despite not all users benefiting from such schemes.

For years, businesses have been able to apply surcharges to credit and debit card payments, but the amount is not supposed to exceed what it costs a business to process the payment. While average surcharges have been about 0.7 per cent of a transaction, they have ranged between 0.1 per cent to 10 per cent.

Interchange fees historically have been a significant funding source for banks in covering the costs for reward points, which are issued to customers usually for each dollar they spend. Customers can also gain bonus points for signing up to cards, which are often gamed by “points hackers” who cycle through cards to accrue bonuses.

Fee caps will now be lowered from 0.8 per cent to 0.3 per cent for consumer credit cards, and from 0.2 per cent to 0.16 per cent for debit cards. The new interchange fee on foreign-issued cards will be 1 per cent, while commercial credit cards’ cap will remain at 0.8 per cent.

Banks may issue points in their own rewards schemes, such as CommBank Awards, which the issuer can then offer to convert to points in airline loyalty schemes, such as Qantas Frequent Flyer or Virgin Velocity.

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