A Variation to the Surcharging Standards:
Final Reforms and Regulation Impact Statement – June 2012 9. Implementation and Review

The Variation to the Standards

The varied Standards are largely similar to the draft varied Standards that were proposed in the December 2011 Consultation Document. Paragraph 9 of the varied Standards provides that neither the rules of a designated card scheme nor any participant in the scheme may prohibit a merchant from charging fees or surcharges to card users so as to recover part or all of the reasonable cost of acceptance by the merchant. They also provide that the merchant cannot be prohibited from applying different surcharges for different card types, either across card schemes or within a card scheme.[24]

The varied Standards do not explicitly prohibit the practice of blended surcharging across card schemes, a practice that distorts price signals to cardholders about the relative costs of different card payment methods. However, given that the Standards allow card scheme rules to limit surcharges to the reasonable cost of acceptance, merchants that choose to apply a blended surcharge across card schemes may in practice be limited by scheme rules to setting that surcharge at the cost of acceptance of the lowest cost scheme. To the extent that the merchant would not be recovering its total costs of card acceptance, blended surcharging is likely to be discouraged by the Standards.

Similarly, the Standards do not explicitly prohibit the practice of blended surcharging across debit and credit cards within a card scheme. The Bank notes that the schemes impose different interchange fee schedules for debit and credit, in line with the Bank's interchange fee Standards, and that, for most transactions, the interchange fee on a scheme debit card transaction will be less than for a credit card transaction. However, the Bank understands that this is not always reflected in acquirers' pricing to merchants; many merchants face a single merchant service fee for a particular card scheme, regardless of whether a credit or debit card is presented. The varied Standards will mean that the schemes may be able to enforce differential surcharges between debit and credit where the merchant faces a different price for each, but not where the merchant is charged the same merchant service fee and other charges for both. The Bank would like to see the differences in costs between credit and debit card transactions better reflected to merchants and encourages acquirers to move towards pricing models that would do so.

Paragraph 10 of each of the Standards defines the merchant's cost of acceptance to include, but not necessarily be limited to, the applicable merchant service fee. The cost can be determined by reference to:

  1. the cost to the merchant of the card transaction in relation to which the fee or surcharge is to be levied;
  2. the average cost to the merchant of acceptance of all credit cards of all types issued under the scheme (the same would be true of all Visa Debit cards under the Visa Debit Standard); or
  3. the average cost to the merchant of acceptance of a subset of credit cards issued under the scheme that includes the type of credit card in relation to which the fee or surcharge is to be levied (the same would be true of a subset of Visa Debit cards under the Visa Debit Standard).

The effect of this paragraph is that merchants will have flexibility in the way that they recover their costs of card acceptance from cardholders. That is, merchants may choose to recover their costs of card acceptance by applying: a different surcharge for each different card type; a single surcharge rate for all credit cards for a particular scheme (or all Visa Debit cards for the Visa Debit Standard); or some combination, such as one rate for ‘standard’ card transactions and another rate for ‘premium’ card transactions. Merchants may also apply a surcharge on either an ad valorem or a flat-fee basis.

Finally, the varied Standards also remove the now-redundant provision that currently allows a merchant to voluntarily agree with its acquirer to limit the size of any surcharge to the fees incurred by the merchant.

The varied Standards are set out in Attachments 1 and 2.

To complement the Standards, the Bank is also giving consideration to publishing a guidance note to explain the Standards. The intention of the guidance note would be to help clarify the types of costs that the Bank considers to be part of the merchant's reasonable cost of card acceptance. The costs that would be listed in the guidance note, however, would not be exhaustive, and may not be applicable to all merchants in all industries. The guidance note would not impose legal obligations on the schemes and their participants, but would seek to guide expectations. In particular, the Bank would be looking to ensure that merchant associations received the guidance note so that they could distribute information to their members, especially smaller merchants, to ensure that merchants are aware that they continue to have the right to impose surcharges so as to recover their reasonable costs of card acceptance. A draft Guidance Note is set out in Attachment 3. The Bank is seeking views from interested parties on the form of the Guidance Note and the elements that it should include.

Along with the guidance note, the Bank will investigate the potential for enhancing transparency around costs of acceptance by the Bank publishing more detailed data on merchant service fees in the future, such as by merchant sector.

Implementation Timeframe and Review

After considering the views expressed in consultation, the Bank has decided to make the varied surcharging Standards effective from 1 January 2013. This will give acquirers time to notify merchants, and if necessary, renegotiate contracts, and for the card schemes to amend their rules. The Bank would expect any revised undertakings by the American Express, Diners Club and Debit MasterCard systems to come into force at that time. The Board will monitor the effect of the variation to the surcharging Standards on an ongoing basis and will act, consistent with its obligations under the Payment Systems (Regulation) Act, if it deems further action to be in the public interest.

As noted above, the Bank is seeking feedback from interested parties on the form of a guidance note to complement and clarify the surcharging Standards. Parties wishing to comment on the draft Guidance Note should contact the Head of Payments Policy Department by 20 July at:

Head of Payments Policy Department
Reserve Bank of Australia
GPO Box 3947
Sydney NSW 2001

or

pysubmissions@rba.gov.au.

At this stage, the Bank anticipates that if it decides to publish a guidance note this will be done later in the year, prior to the Standards taking effect.

Footnote

The Bank recognises there are technical and practical difficulties that may limit a merchant's capability or willingness to differentially surcharge within a card scheme. Regardless, the Bank believes it is important to provide this flexibility for merchants in the Standards, given such difficulties may be overcome in the future, and that it is aware of a small number of merchants that currently impose differential surcharges for ‘premium’ and ‘standard’ cards. In general, the Bank is of the view that differential surcharging within a card scheme improves price signals to cardholders about the cost to merchants of accepting different card products. The Bank considers that it would be contrary to the intent of the Standards for schemes or issuing banks to take actions that prevent merchants from understanding the cost of acceptance of particular cards. [24]