Standard on Merchant Pricing
On 1 January 2003, the Reserve Bank's standard on merchant pricing will come into force. The standard removes the restriction imposed by the international credit card schemes which prevents merchants from recovering from cardholders the costs of accepting credit cards. The standard provides that neither the rules of a designated credit card scheme nor any participant in the scheme may prohibit a merchant from charging a credit cardholder any fee or surcharge for use of a credit card in a transaction.
The standard will apply to the MasterCard and Visa credit card schemes; the Bankcard scheme does not impose restrictions on merchant pricing. On 1 January 2003, the undertakings provided by American Express and Diners Club to the Reserve Bank to remove merchant restrictions in their respective schemes will also come into force.
Why did the Reserve Bank introduce the standard on merchant pricing?
Restrictions on merchant pricing imposed by the international credit card schemes prevent merchants from passing merchant service fees onto customers who choose to use credit cards. Merchants therefore face an 'all or nothing' choice – accept credit cards and absorb the merchant service fees into their overall cost structure, or refuse to accept credit cards at all. Their ability to resist credit cards has been increasingly eroded as consumers respond to current price incentives by increasing the take-up of credit cards and demanding to make more and more use of them. Merchants have only limited negotiating power to put pressure on merchant service fees and indirectly, interchange fees.
In the absence of regulatory action by the Reserve Bank, the community as a whole, not just those who use credit cards, would continue to bear the costs of providing credit card services, in the form of higher prices for goods and services. This burden is diffused over a wide range of merchants, in which varying mixes of payment instruments may be used, and over millions of consumers undertaking a myriad of transactions. In total, however, the impact on the general level of prices is likely to be significant. Merchant service fees on credit cards currently cost merchants around $1.5 billion a year.
Impact on merchants
The Reserve Bank's standard on merchant pricing will remove a restraint on trade imposed by the international credit card schemes that denies merchants the freedom to set prices for customers that promote the competitiveness of their business. The standard will ensure that a merchant accepting a credit card is free to charge according to the means of payment; if it so wished, it could charge a 'fee for service' for accepting the credit cards of these schemes. At the same time, a merchant may voluntarily agree with its acquirer to limit the size of any 'fee for service' to the fees incurred by the merchant in respect of credit card transactions.
Freedom for merchants to charge according to the means of payment will introduce normal market disciplines into negotiations between merchants and acquirers over merchant service fees, and eliminate the 'all or nothing' choice currently facing merchants deciding whether to accept credit cards. In principle, the higher are merchant service fees levied by an acquirer, the greater the incentive the merchant has to pass the fees onto credit cardholders. This will give smaller merchants in particular, paying the highest merchant service fees, more bargaining power to negotiate lower merchant service fees.
Impact on consumers
If merchants charge a 'fee for service' for accepting credit cards, cardholders using their credit cards will face more of the resource costs of providing credit card payment services. They will, of course, have the option of avoiding those costs by switching to lower cost payment instruments. The higher costs of credit cards will no longer need to be built into the prices of goods and services paid by all consumers, whether or not they pay by credit card. Overall, the community will benefit from more efficient price signals.
Some merchants that had previously refused to accept credit cards because of their costs might decide to do so when they can pass these costs onto credit cardholders. A larger network of merchants accepting credit cards will benefit all credit cardholders.
Further details of the Reserve Bank's final reforms to credit card schemes in Australia and their implementation schedule are provided in the Regulation Impact Statement.
More information on the roles of the Australian Securities and Investments Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC) in these reforms is contained on their websites at: