Merchant Card Payment Costs and Surcharging – Issues Paper –
October 2024 2. Issues for Consultation

2.1 Overview

This phase of the Review is focused on merchant card payment costs and surcharging. In an environment of heightened concern around the cost of living and ongoing changes in payment preferences, merchants and consumers are focusing more on these issues. Merchant costs and surcharging are interrelated issues: merchants would be less likely to surcharge consumers if card payment costs were lower. Accordingly, it is timely to review whether there are further regulatory actions the RBA could take to put downward pressure on merchant card payment costs by promoting competition and efficiency, and whether the RBA’s surcharging framework remains fit for purpose. This review also recognises that some years have passed since the surcharging framework came into effect.

Merchant card payment costs

Cards (including debit, prepaid, credit and charge cards) are the most frequently used payment method in Australia, accounting for three-quarters of all consumer payments in 2022 (Graph 1). This follows a long-run shift by consumers away from paying with cash to using cards. When a merchant accepts a card payment, they are typically charged a ‘merchant service fee’ by their PSP for processing the transaction.^[1]

Given the prominence of card payments in Australia, the RBA views merchant card payment costs as a key indicator of efficiency and competition in the payments ecosystem. The RBA has introduced reforms since the early 2000s that have put downward pressure on merchant card payment costs (Gill, Holland and Wiley 2022). The average fee that merchants pay for each card payment has declined over the past two decades (Graph 1). However, increased use of cards by consumers has led to overall card payment costs for merchants rising to an estimated $6.4 billion in 2022/23. This has at least partly been offset by declines in other payment costs, such as those associated with accepting cash payments.

There are several areas where the efficiency and competitiveness of card payments could be improved:

• Merchant service fees in Australia are higher than in some other economies, including some that also regulate interchange fees. While the average card payment fee in Australia is lower than in some advanced economies such as the United States, it is higher than in some other jurisdictions such as Europe (Graph 2). This suggests that there may be room for further reductions in card payment costs, particularly as the fixed costs of providing card payment services are being spread over a higher volume and value of transactions than ever before.

• There is a big difference between the fees paid by large and small merchants in Australia. The average per-transaction fee (‘cost of acceptance’ for card payments) paid by small merchants is around three times that paid by large merchants (Graph 3).

A key driver of this difference is the ability of larger merchants to negotiate favourable wholesale fees for processing card transactions – particularly through ‘strategic’ interchange rates – and a lower margin from PSPs. The fees paid by small merchants also vary widely, with costs of accepting card payments ranging between less than 1 per cent to well over 2 per cent of transaction value (Graph 4).

• Transactions on foreign-issued cards are particularly expensive for Australian merchants to accept. On average, these transactions cost Australian merchants around 2½ per cent for debit and credit cards, which is several times larger than the cost of equivalent transactions on domestic cards (Graph 5). The high cost of foreign card transactions for Australian merchants appears to be mainly due to high wholesale costs: interchange fees can be as high as 2.4 per cent and net scheme fees are around 1.6 per cent.

• The cost of card payments is often opaque and difficult to understand. There is limited publicly available information on PSPs’ retail prices, wholesale costs, margins and transaction volumes. This can make it hard for merchants to compare pricing and switch between PSPs for a better deal. Interchange fee schedules from card networks have grown in complexity over time and their scheme fee schedules are even more complex and not publicly available. The limited information on wholesale costs may reduce the competitive pressure on card networks to lower their fees. It can also make it hard for merchants to understand the fees that they are paying and identify ways to reduce their costs.

For more information on interchange and scheme fees, see the Backgrounder on Interchange and Scheme Fees.

Surcharging

The RBA’s surcharging regulations allow merchants to surcharge consumers for the reasonable cost of accepting card payments. The RBA’s regulations were introduced in 2003 following the 1996–1997 Financial System Inquiry and joint research on card payments by the RBA and the Australian Competition and Consumer Commission (ACCC). The RBA’s regulations aim to promote the efficiency of the payments system by encouraging consumers to use lower cost payment methods and put competitive pressure on card networks to lower their wholesale fees. The ACCC has powers to take action against merchant surcharging that exceeds the merchant’s cost of card acceptance. Some benefits of surcharging are:

• Surcharging allows merchants to directly recover their card payment costs.
• Surcharging can be used by merchants to signal to consumers that they are using a relatively expensive payment method and may encourage them to switch to using lower cost payment methods. Surcharging is likely to have contributed to the pronounced shift by consumers away from (higher cost) credit cards towards (lower cost) debit cards over the past two decades.
• The ability to surcharge places pressure on PSPs and card networks to lower the fees they charge, as surcharges can incentivise consumers to switch away from using payment methods with high costs. The RBA’s view is that preventing card schemes from imposing ‘no-surcharge’ rules and allowing surcharging at the reasonable cost of acceptance have made a significant contribution to the long-run decline in the average fee that merchants pay for card transactions. The decline in fees for three-party schemes – American Express and Diners Club – is particularly notable, given that these networks are not subject to the RBA’s interchange regulation (Graph 6).

However, some changes in the payments landscape since the surcharging rules were introduced may be reducing their effectiveness. In particular, consumers’ use of cash has declined significantly. In the mid-2000s, cash was the most commonly used retail payment method and was typically not surcharged, despite merchants also incurring costs to securely store and handle cash. By 2022, cash was used for just 13 per cent of transactions, with debit cards used for over half of all retail payments (Nguyen and Watson 2023). Growth of online shopping has also increased the share of transactions where cash cannot be used. At the same time, more merchants are choosing to surcharge card payments. According to the RBA’s Consumer Payments Survey, in late 2022, 7 per cent of card transactions were surcharged, up from 5 per cent in 2019 (Livermore et al 2023); anecdotal evidence suggests that the share of card transactions being surcharged has risen further since then. The incidence of surcharging is higher in some sectors, such as cafes, restaurants and pubs, than in others, such as supermarkets. The approach of PSPs to pricing card payments has also changed in recent years. Some PSPs are offering ‘automatic’ surcharging capabilities to merchants, and so marketing their payment services as ‘free’ for merchants. Merchants, especially smaller businesses, are also increasingly taking up single-rate plans that charge the same percentage fee for all card transactions.

These trends have contributed to growing public concern about payment surcharges. Issues raised with the RBA include:

• Consumers are less able to avoid surcharges, because fewer consumers use or carry cash. The growth of online shopping has also increased the share of transactions where cash cannot be used.
• Consumers dislike surcharges, which is consistent with findings of the behavioural economics literature that people view surcharges as a loss and equivalent discounts as a gain. Since people are loss averse, they dislike the perceived loss from a surcharge (Kahneman and Tversky 2000).
• Consumers sometimes do not know whether a surcharge will be applied, or how much it will be. This may be because some merchants do not disclose their surcharge rates as they are required to. 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.
• Some merchants may be charging excessive surcharges. Surcharges are considered excessive if they are greater than the merchant’s cost of accepting the card payment.
• Debit, credit and charge card transactions are often surcharged at the same rate, due to the rise of single-rate payment plans, which can be attractive to merchants for their simplicity. Such single rates are not reflective of the cost of processing debit, credit and charge card transactions. This means that consumers may be paying more than necessary for debit card transactions, given debit card transactions are much cheaper to process than credit card transactions (Graph 7). It also means that the price signal for consumers to use a lower cost payment method like debit – a key objective of the surcharging framework – is dampened. In other words, consumers using higher cost payments methods (such as credit cards) are being cross-subsidised by those using lower cost methods (such as debit cards).
• PSPs are increasingly bundling a range of services with their card acceptance services, leading to a higher fee that can then be passed on to consumers as a payment surcharge. Some single-rate payment plans also bundle in services unrelated to card payments, such as business data or inventory management services, the cost of which is then passed on to consumers through a payment surcharge.

Some of these concerns, particularly around lack of disclosure and excessive surcharging, reflect the difficulty of ensuring compliance with the surcharging rules. The large number and small size of many merchants makes enforcement challenging for the relevant competition authorities. It is difficult for consumers to hold merchants to account because they have no way of knowing the card payment costs of individual merchants, which can vary significantly. There is also a distinct lack of data available to policymakers and the public on surcharging practices.

For more information on surcharging, see the Backgrounder on Payment Surcharges in Australia.

2.2 Interchange fees

Interchange fees are paid by the merchant’s PSP to the customer’s card issuer when a card payment is made, with the PSP passing on these costs to the merchant. These wholesale fees are typically set by the card network, and they can make up a sizeable share of the card payment fees paid by merchants. The RBA has set caps and weighted-average benchmarks for interchange fees, which have helped to reduce card payment costs and limit the dispersion of fees paid by merchants of different sizes. The RBA’s view is that interchange regulation has contributed to a more efficient payments system. However, interchange fee schedules have grown in complexity and the cost of card payments remains substantial for small businesses, which pay much higher interchange fees than large businesses. In this context, the RBA seeks stakeholder views on whether changes should be made to the current interchange rules.

The level of interchange fees

The level of interchange benchmarks and caps was last considered in the 2019–2021 Review of Retail Payments Regulation, following recommendations by the Black Economy Taskforce (2017) and the Productivity Commission (2018) that interchange fees should be reduced or even eliminated. These recommendations were based on the argument that there is little justification for such fees in mature card systems, such as in Australia. At that time, the PSB decided not to lower the weighted-average interchange benchmarks, noting that interchange fees in Australia were relatively low by international standards and the existing framework had contributed to more efficient outcomes, including a significant shift to debit cards from credit card payments. However, the PSB did not rule out lowering these benchmarks in the future.^[2]

The RBA is interested in stakeholders’ views on whether there is now a policy case for lowering the interchange benchmarks. Lower interchange fees should feed through to lower card payment costs for merchants and could reduce the incentive for businesses to surcharge card payments. For credit transactions, the weighted-average interchange benchmark (0.5 per cent) and cap on individual fees (0.8 per cent) in Australia are higher than in some other jurisdictions, notably Europe (which has a cap of 0.3 per cent). The weighted-average cap in Australia of 0.5 per cent, which is based on calculations of eligible scheme costs for issuers from 2006, is likely to be out of date, particularly as the fixed costs of providing card issuing services are now spread over a much larger volume of transactions (RBA 2006). It is also debatable whether some of the costs included in that calculation, particularly funding costs related to interest-free periods, should be borne by merchants. Other jurisdictions are also examining how interchange benchmarks and caps should be set, with the New Zealand Commerce Commission recently questioning whether there should be any difference between interchange fee caps for credit and debit transactions (Commerce Commission 2024).

For debit card transactions, the weighted-average interchange benchmark (8 cents) and cap on individual interchange fees (10 cents or 0.2 per cent) is at a broadly similar level to interchange regulations in some other jurisdictions such as the United Kingdom and Europe (caps of 0.2 per cent). The average value of debit card transactions has remained relatively stable since the 2019–2021 Review, so the cents-based benchmark and cap would not have risen as a percent of the average value. However, there has been strong growth in the number and value of debit card transactions over the past five years, which should have put downward pressure on the cost per debit card transaction for issuers.^[3] Furthermore, the weighted-average interchange rate on debit cards has drifted noticeably below the benchmark over recent years in response to competition between the card networks. This suggests that the benchmark may now be too high.

As noted above, the cost of card payments remains substantial for small businesses. This is partly because large merchants have the bargaining power to directly negotiate much lower ‘strategic’ interchange rates from the card networks (Graph 8). The RBA is not aware of evidence to suggest that issuers face different card processing costs for smaller merchants compared with larger merchants. So the large gap between the interchange rates for small merchants and large merchants is difficult to justify.

The RBA seeks feedback on whether there is a case for regulatory intervention to narrow the gap between strategic merchant rates and the rates paid by small businesses. Possible interventions include imposing a floor on interchange rates, a maximum range between the highest and lowest interchange rates by network or reducing interchange caps for small business transactions, as has occurred in Canada for small businesses following an agreement between the Canadian Government and Visa and Mastercard (Government of Canada 2023).

Foreign card transactions

The cost of foreign card transactions is much higher for acquirers and merchants in Australia than for equivalent domestic card transactions. When a foreign card is presented at an Australian merchant, an interchange fee is paid by the merchant’s acquirer to the foreign issuer of the card. Previous RBA reviews have decided against applying interchange caps to foreign card transactions because the share of card payments made by foreign-issued cards was low and there was no evidence of issuers attempting to circumvent the Australian interchange regime by issuing cards offshore. However, since 2022, the RBA has required card networks to publish their interchange fee schedules for foreign card transactions on their websites. These schedules show that interchange rates on foreign card transactions can be as high as 2.4 per cent, which is three times the highest domestic credit interchange rates. As a result, foreign cards used in Australia are estimated to account for around 8 per cent of total interchange fees paid by merchants in Australia, despite only accounting for around 3 per cent of total transactions.^[4] These high costs for foreign card transactions may also be raising costs for domestic card transactions given the rising prevalence of single-rate plans and therefore contributing to higher surcharges.

The RBA seeks feedback on whether there is a case for capping the interchange fees on foreign card transactions in Australia, as occurs in Europe. For in-person transactions, European inter-regional interchange fees are capped at 0.2 per cent for debit cards and 0.3 per cent for credit cards; for online transactions the caps are set at 1.15 per cent for debit cards and 1.5 per cent for credit cards. The UK Payment System Regulator is proposing an interim cap of 0.2 per cent for UK-European Economic Area (EEA) consumer debit transactions and 0.3 per cent for consumer credit transactions where the transactions are made online at UK businesses (Payments System Regulator 2023). The New Zealand Commerce Commission is also considering interchange caps for foreign card transactions in New Zealand (Commerce Commission 2024).

Interchange complexity and transparency

Interchange fee schedules have become more complex over time. The increase in the number of interchange categories has been associated with developments including:

• the introduction of new infrastructure, such as tokenisation
• the introduction of new products, such as instalments programs
• responses to competition, such as special rates for small and medium businesses
• the splitting of categories into card present and card not present.^[5]

While varying interchange fees could be useful for incentivising certain behaviour from acquirers and merchants, such as encouraging tokenised transactions online, the case for differentiation is not always clear. For example, it is not obvious why interchange rates should be higher for in-person transactions when using a mobile wallet rather than a physical card or why interchange rates need to be higher for online transactions.^[6] Interchange fee complexity makes it hard for merchants on unblended plans to understand and check their costs, and compare service fees across PSPs, which may hamper competition.^[7]

The RBA seeks feedback on whether there is a case to reduce the complexity, and/or enhance the transparency, of interchange fees. In particular:

• Should the card networks be required to publish aggregate data on the average interchange fees on transactions to promote transparency and competition? This would be in addition to the existing requirement in the RBA’s regulations that designated card networks publish their interchange fee schedules.
• Should there be a limit on the number of different interchange categories that a card network can set?
• Should the interchange caps be only cents-based? The argument for a cents-based cap, rather than ad valorem, for debit transactions is that most costs of processing are unrelated to the transaction value. For example, the messaging cost for a $1 payment is arguably no different to that of a $100 payment. Also, debit transactions are not subject to many of the ad valorem costs associated with credit cards, such as interest-free periods and rewards. This argument could also be extended to credit transactions if costs such as interest-free periods and rewards should not be borne by the merchant through interchange fees.
• Should the RBA’s interchange regulation be simplified by just having caps, rather than both caps and benchmarks? If so, would the interchange caps need to be lowered to prevent an increase in average interchange fees? Following the 2015–2016 Review of Card Payments Regulation, the RBA supplemented the weighted-average benchmarks with caps on individual interchange fees; this was to narrow the range of interchange fees and limit the fees that could be charged to small businesses. A key argument for the weighted-average benchmark is that it limits the average level of interchange while providing the card networks with flexibility in setting their interchange schedules, including to offer premium products that compete with three-party schemes. However, the RBA is not aware of any other jurisdiction that uses both weighted-average benchmarks and caps, which suggests that it may not be necessary to retain both for interchange regulation to be effective. The removal of the benchmarks could reduce the regulatory and administrative burden on the payments industry from the constant resetting of interchange fees by the schemes to maximise the average interchange.^[8]

Net compensation

The ‘net compensation’ provisions in the RBA’s regulations, which are designed to prevent circumvention of the interchange fee caps and benchmarks, appear to be operating broadly as intended. However, the RBA has become aware of a potential regulatory gap where indirect issuer participants sponsored by overseas entities may not technically be captured, either directly or indirectly, by the net compensation provisions. The RBA is not aware of this potential regulatory gap being exploited. However, to ensure a level playing field, the RBA proposes to consult on proposed amendments to the net compensation requirements designed to ensure that all Australian issuers are subject to them, irrespective of the domicile of any sponsor.

The RBA also welcomes comments on any other aspects of the interchange regulations.

For more information on interchange and scheme fees, see the Backgrounder on Interchange and Scheme Fees.

2.3 Scheme fees

Card acquirers and issuers pay scheme fees to card networks such as Visa, Mastercard and eftpos for using their services. These wholesale fees make up a significant share of overall card payment costs. In 2023/24, Australian acquirers paid around $1.4 billion of scheme fees (net of rebates) and issuers paid $0.4 billion. These fees are ultimately passed on to merchants and consumers, with the scheme fees charged to acquirers accounting for around one-fifth of the total card payment costs for Australian merchants.

Scheme fees have risen over time, putting upward pressure on card payment costs for merchants. There is also considerable variation in scheme fees between different card networks. It is unclear to what extent these observations reflect differences in the cost and quality of services provided by the networks. Unlike interchange fees, there are no regulations restricting the level of scheme fees. The rise in scheme fees may reflect a lack of competition in the card payments market.

The main sources of competitive pressure on scheme fees for acquirers in the debit market are:

• surcharging
• dual network debit cards allowing transactions to be routed through two different networks
• the adoption by merchants of LCR functionality, where transactions can be routed to the least-cost debit card network.

Consistent with this, in recent years, debit scheme fees were consistently lower for transactions that were routable to eftpos (in-person transactions made with a physical card) than for transactions that were not yet routable (mobile wallet and online transactions) (Table 1). The ongoing rollout of LCR functionality to online and mobile wallet transactions should help to put downward pressure on these scheme fees. The decline in net scheme fees for online debit card transactions in 2023/24 is consistent with this effect.

For domestic transactions, scheme fees are higher for credit than for debit card transactions. This may partly reflect less competitive tension in the credit card market, relative to the debit market, given that almost all domestic credit cards are issued with Mastercard and Visa, the limited scope for merchants to refuse to accept these two schemes and the absence of any equivalent to LCR. It may be that surcharging, as the main source of competitive pressure, is insufficient to restrain growth in acquirer scheme fees.

Scheme fees are considerably higher for foreign-issued cards than for domestically issued cards.

Scheme fees can also be very complex and opaque. Some card networks have hundreds of fees and their fee schedules typically are not publicly available. Card networks also regularly adjust the level of their fees and add, rename or remove fees. It is unclear whether the complexity of fee schedules is necessary. This complexity means that even acquirers report that they find it difficult to understand the schedules.

The RBA’s 2019–2021 Review of Retail Payments Regulation identified a case for greater transparency of card scheme fees to promote competition and help inform merchants. While the RBA has since started collecting scheme fee data and has published some aggregate information, it has been unable to publish data on the fees charged by individual card networks (Connolly 2023). This is because the international card networks did not consent to publication, citing concerns about commercial sensitivity. This prevents market participants and end-users from directly comparing fees across networks.

The RBA seeks feedback on the extent to which these issues are hindering competition and efficiency in the payments system, whether regulatory intervention to address them is warranted and what any intervention should look like. Possible regulatory actions include:

• Publication of scheme fee data. To improve price transparency, each designated card network could be required to publish on a quarterly basis the total value of scheme fees collected from issuers and acquirers in Australia (and any rebates provided), along with the volume and value of transactions processed through each network. These data would allow stakeholders to compare the level and growth rates of these fees across networks. Smaller issuers, acquirers and merchants could particularly benefit from greater transparency, because they generally have less bargaining power with the card networks than larger institutions.

  Another option would be to require card networks to publish all their multilateral scheme fees and fee-related rules. However, given the complexity of scheme fee schedules and the lack of information on rebates, the publication of aggregate data by the networks may be more effective for promoting competition than requiring networks to publish their multilateral scheme fees and rules.

• Improved reporting to merchants. Clear reporting of scheme fees to merchants may help them better understand and check the fees that they are being charged and how they change over time. The RBA is considering options to improve transparency of merchant service fees on merchant statements (see Section 2.5 for further details).
• Regulation of scheme fees. The complexity and opacity of scheme fees could be addressed by limiting the number of scheme fees that can be charged or by requiring greater transparency of how pricing decisions are made by the card networks. This could include:
  • consolidating fee categories and standardising fees, which may make it easier for merchants and other stakeholders to understand and compare costs
  • requiring substantive documentation or a formal consultation process with stakeholders to justify new fees or fee increases, which may promote a stronger relationship between scheme fees and the cost of scheme services as is currently being considered by the UK Payment Systems Regulator (2024)
  • implementing caps for scheme fees to limit their growth, equivalent to the current interchange regulations.

For more information on interchange and scheme fees, see the Backgrounder on Interchange and Scheme Fees.

2.4 Least-cost routing

Debit cards are now the most frequently used consumer payment method in Australia. Around 85 per cent of debit cards issued in Australia are dual-network debit cards (DNDCs), which allow domestic payments to be processed via either eftpos or one of the international debit networks (Debit Mastercard or Visa Debit). With the advent of contactless technology, transactions using DNDCs defaulted to the international networks that are typically more expensive for merchants. This has resulted in higher merchant card payment costs, which are ultimately borne by consumers either as surcharges or higher overall prices for goods and services.

LCR gives merchants the ability to override the default network and route DNDC transactions via whichever of the two networks on the card costs them less to accept. This can directly reduce card payment costs for merchants while also increasing the competitive pressure on debit networks to lower their wholesale fees, thereby putting downward pressure on payment costs across the economy.

The RBA has been strongly encouraging LCR since 2017. In 2021, in response to slow industry progress, the RBA set an explicit expectation that PSPs offer and promote LCR in both the in-person and online environments. In 2022, the RBA set a further expectation that the industry make LCR functionality available for mobile wallet transactions by the end of 2024. To provide greater transparency on industry progress, in 2023 the RBA started to publish a table on LCR availability and take-up across the major acquirers. By June 2024, the share of merchants with LCR enabled for in-person transactions had increased to around 70 per cent.^[9] Information from PSPs suggests that this proportion should be closer to 80 per cent by the end of 2024. PSPs have also indicated that an additional 5–10 per cent of merchants have not enabled LCR for arguably valid reasons.^[10] As a result, by December 2024, the remaining share of merchants that do not have LCR enabled (without a valid reason provided by their acquirer) is projected to be close to 10 per cent.

LCR for online transactions is at a much earlier stage of progress, with only six of 12 large PSPs having made LCR available to all their merchants by June 2024, and only two providers having LCR enabled for a significant share of their merchants. The online ecosystem is also complex, with the delivery of LCR reliant on intermediaries such as gateways, which has caused some delays. The RBA expects providers, including payment gateways, to accelerate progress on making LCR widely available for online transactions and enabling LCR for merchants that could benefit from it.

An important question is whether the benefits of LCR are being passed on to merchants. The overall take-up of LCR for in-person transactions has been lifted by PSPs offering single-rate merchant payment plans – which charge the same percentage transaction fee for all card types – with LCR implemented ‘in the background’. For merchants on these single-rate plans, LCR serves to lower wholesale costs for PSPs. The extent to which any savings are passed on to merchants will depend on the pricing strategies of PSPs and the degree of competition in the market. Further, the RBA is aware of only one PSP offering a dynamic LCR solution – which evaluates and routes each individual transaction to the lowest cost network – while most other PSPs can only offer simple ‘all-or-nothing’ or threshold-based routing solutions, which may limit the potential savings.^[11]

The RBA is interested in views on whether a formal regulatory requirement is warranted for LCR for in-person transactions (excluding mobile wallets), particularly given the progress that has been made to date. For example, PSPs could be required to enable LCR for all merchants by default, with merchants able to opt out if they wish. The RBA is interested in feedback on the benefits, costs and challenges associated with a formal requirement and how it might be designed.

Stakeholder feedback on LCR for online transactions and mobile wallet transactions will be sought in a future phase of the Review given that any formal intervention in these areas would benefit from the passage of the PSRA reforms. Any formal regulatory requirement would probably need to extend to a broader range of PSPs to be effective, such as payment gateways and mobile wallet providers, where there is uncertainty as to whether they are within the scope of the existing PSRA.

For more information on LCR, see the Backgrounder on Least-cost Routing.

2.5 Transparency of merchant service fees

In Australia, there is a distinct lack of publicly available information on the merchant service fees, wholesale costs, margins and size of PSPs providing card services to merchants, which may be hampering competition and efficiency in the payments system. This lack of information can make it hard for merchants to compare pricing and switch between PSPs for a better deal and could make it difficult for PSPs to assess their competitors’ offerings. This may be hindering competition between PSPs. In addition, limited public information on wholesale costs may reduce the competitive pressure on card networks to reduce their fees and for PSPs to pass on any reductions in wholesale costs to merchants.

The RBA is considering whether PSPs should be required to publish pricing information to increase transparency and promote competition and efficiency in the card acquiring market. For example, PSPs could be required to publish each quarter their average fees, wholesale costs and margins for merchants by annual transaction volume categories (e.g. under $100,000; $100,000 to under $1 million; and $1 million and above). While average fees may not be perfectly comparable across PSPs given variation in the services they provide, this information may still help guide merchants towards a cheaper provider or negotiate a better deal with their existing provider. Currently, it can be difficult for merchants to shop around for a better deal because the only publicly available price information provided by most PSPs is for their single-rate or ‘simple’ merchant plans, where merchants pay the same percentage fee per transaction, irrespective of the type of cards used by their customers. More competitively priced plans are usually negotiated on a bespoke basis between the PSP and the merchant; this is often based on detailed card transaction information that is known to the incumbent PSP but not typically provided to merchants on their standard cost of acceptance statements. Publishing average fees, wholesale costs and margins could help PSPs assess their competitors’ offerings and highlight where their services provide additional value. The disclosures would also help policymakers gauge whether any reductions in wholesale costs are being fully passed on to merchants.

Card issuers, card networks and PSPs could be required to publish aggregate information on transaction volumes and values to boost competition and efficiency. While the RBA already collects and publishes some related data in a partially aggregated way (such as Visa and Mastercard’s combined market share of credit and charge card transactions), further disaggregation at an institutional level could provide more transparency to the payments market. This would enable stakeholders to identify the most significant players in the industry and to calculate and track changes in market shares.

The RBA is also considering options to improve transparency via the information that merchants receive on their regular statements from acquirers and other PSPs. Currently, some merchants report that they have difficulty understanding and checking the fees they are charged, particularly interchange and scheme fees. It may also be unclear to merchants on single-rate plans how much they are paying for the services their PSP provides over and above the wholesale cost of their transactions. One option to improve transparency for merchants could be to require PSPs to provide a breakdown of the total merchant service fee into interchange fees, scheme fees and their gross margin. PSPs could also be required to provide detailed information on scheme fees by relevant categories (e.g. network, card type, transaction type and issuer location) to merchants. Clear and meaningful information could promote competition between card networks, enable merchants to engage in more informed negotiations with PSPs and help merchants make better decisions on transaction routing. However, additional information could increase the complexity of merchant statements and may add to confusion for some merchants. Accordingly, any requirement to provide information could be made conditional on merchants opting in to receive it. The RBA welcomes views on what information, if any, PSPs should be required to provide that merchants would find useful.

A further potential issue with single-rate plans is that merchants that accept a higher share of debit card transactions effectively cross-subsidise merchants that accept relatively more credit card transactions. The RBA is considering whether, as in some overseas jurisdictions, PSPs should be required to separately price transactions processed across different networks to reduce such cross-subsidisation and to provide more efficient price signals to consumers via surcharging (see Section 2.6 for further details).

The United Kingdom has recently introduced measures to improve transparency and competition in the card acquiring market. These include requiring PSPs to provide merchants with a summary box containing key price and non-price information and to provide an online quotation tool on their website, which allows merchants to compare different providers using the information from their summary boxes (Payment Systems Regulator 2022). The RBA welcomes views on whether similar reforms should be introduced in Australia.

2.6 Surcharging

The RBA seeks feedback on whether and how the issues with surcharging raised in Section 2.1 should be addressed. Possible changes to the RBA’s surcharging framework could include, but are not limited to:

• 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. This could help address consumer concerns around the inability to avoid surcharges while maintaining efficient price signalling – at least between debit and credit/charge card transactions – which can help to put downward pressure on card payment costs. It also addresses the desire that consumers be able to access their own funds without a fee. A ban may be practically implemented by allowing card networks to reimpose no-surcharge rules for debit cards. A ban on debit card surcharging may also be easier for consumers and merchants to understand than the current surcharging rules.
  

  Such actions may lead PSPs to price debit and credit card transactions differently, which could result in lower wholesale costs for debit cards being passed on to merchants (particularly if consumers continue to shift towards debit cards). However, this could disrupt the business models of PSPs that offer single-rate pricing plans. It may also force merchants who currently surcharge debit cards to absorb the cost of these transactions into their margins or raise their prices; this could then lead to users of other payment methods, such as cash, facing higher prices. Merchants could also seek to reduce their costs by searching for better value payment services.

• Banning card surcharges more broadly. A ban on the ability of merchants to surcharge card payments could be applied to all card networks (including charge cards such as American Express) or only those subject to interchange regulation (currently eftpos and Visa and Mastercard’s credit, debit and prepaid schemes). This ban could be implemented by reinstating the ability of card schemes to impose ‘no-surcharge’ rules. Some other jurisdictions, such as the European Union and the United Kingdom, prohibit surcharging for card networks subject to interchange fee caps on the grounds that merchant card payment costs for such schemes are restrained by the interchange rules. However, these jurisdictions often have lower interchange caps than Australia. As above, such a ban would help address consumer concerns about surcharging. It could also give merchants stronger incentives to search for better value payment services. It would also simplify the rules around surcharging, which can be difficult for merchants and consumers to understand.
  

  However, this option may unwind the benefits of the existing framework. Prohibiting most or all card surcharges would dull the price signals between payment methods and could drive a shift from cheaper debit transactions towards more expensive credit and charge card transactions (because they offer consumers reward points). 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; consumers who use lower cost payment methods, such as debit cards, would then be partially subsidising those (typically higher income) consumers who use higher cost payment methods such as credit and charge cards. Finally, the competitive pressure on card networks to keep their scheme fees low may be significantly reduced without surcharging, which could lead to higher card payment costs over time. However, it is worth noting that a ban on card surcharging would not necessarily preclude merchants from offering discounts as a way to incentivise customers to pay with lower cost payment methods.

• 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 (including through consumers holding merchants to account). They could also improve price signalling and reduce a number of consumer concerns, such as excessive surcharging. However, a key challenge would be determining exactly where the caps should be set and how often they should be reviewed. Limits that are too high may lead to higher surcharges and merchant fees, but limits that are too low could prevent some merchants from recouping their payment costs in full through surcharges (particularly smaller businesses).
• 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. This could help to both lower surcharges and improve price signalling, but would potentially increase the complexity of the surcharging rules.
• 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. This could lead to lower debit surcharges at some merchants, somewhat alleviating consumer concerns, while also improving price signalling. However, as above, this could require significant change from PSPs, especially those that offer single-rate plans.
• Mandating monitoring of surcharging by networks and aquirers. To aid visibility over surcharging practices and inform the regulatory response, the RBA has commenced collecting merchant-level data on surcharging from acquirers, terminal providers and other payments software providers. Additional steps the RBA could take to further improve transparency include:
• requiring card networks to include compulsory data fields on surcharging in transaction messages
• requiring the networks and/or acquirers to monitor merchant surcharging practices and ensure that surcharges do not exceed the maximum allowed under the RBA’s rules.

Such proposals to improve transparency would likely require PSPs to update their systems and may also require the definition of ‘cost of acceptance’ in the RBA’s standard to be narrowed or simplified to just include the costs charged by PSPs.

2.7 Other regulatory options and broader implications

The RBA welcomes views from stakeholders on other issues relating to card payments as well as alternative regulatory options to address the issues outlined in this paper. Stakeholders are invited to consider whether a combination of regulatory actions could assist in achieving the RBA’s objectives of competition, efficiency and safety in the payments system. The RBA is also interested in views on whether the removal or modification of any of its existing card payments regulation could assist in achieving these objectives.

The RBA recognises that its regulatory actions for card payments potentially have broader implications for other payment methods. Stakeholders are invited to raise whether any of the potential regulatory actions have broader implications for the payments system that the RBA should be aware of. Stakeholders are also invited to raise issues in the broader payments system that have implications for the design of the RBA’s policies on card payments. The RBA notes, however, that it may have limited ability to address some issues that are interconnected with merchant card payment costs and surcharging unless the proposed amendments to the PSRA are passed by Parliament.

Endnotes

Merchant service fees are comprised of interchange fees, scheme fees and an acquirer margin. Additionally, merchants face other acquiring fees, which are included in ‘total merchant fees’ for accepting card payments. [1]

Although the weighted-average interchange benchmarks were maintained following the 2019–2021 Review of Retail Payments, the cap on cents-based interchange fees on debit and prepaid card transactions was reduced to 10 cents, to reduce the cost of low-value transactions at smaller merchants. [2]

The Federal Reserve Board (2023) has proposed to lower the maximum interchange fee that a large debit card issuer can receive for debit transactions because certain costs incurred by large issuers have declined significantly since 2009, when the original maximum interchange fee was introduced. [3]

Assumes an average interchange rate for foreign card transactions of 1.75 per cent. [4]

The number of credit, dual network debit and prepaid interchange categories has increased by around 25 per cent for Visa and more than doubled for Mastercard over the past five years. [5]

New Zealand’s Commerce Commission (2024) considers there to be no reason for a difference in interchange fee rates between transactions where the physical card is present and transactions where it is not. [6]

Pricing plans can be grouped into three main types: (1) ‘unblended’ plans charge the merchant the wholesale cost of each transaction (interchange fees and scheme fees) plus an acquirer margin (this is also known as ‘interchange plus’ or ‘interchange plus plus’ pricing); (2) ‘blended plans’ charge a few different rates, each of which may cover a number of networks, card and transaction types; and (3) ‘fixed’ (or ‘simple’) plans charge the same rate for all networks, cards and transaction types. [7]

Brazil simplified its interchange regulations in 2023 for debit transactions by removing the weighted-average cap (0.5 per cent) and lowering the individual cap from 0.8 per cent to 0.5 per cent. [8]

As at June 2024, the proportion of transactions at merchants with LCR enabled (around 50 per cent) was much lower than the proportion of merchants with LCR enabled. This is likely because non-strategic, yet large, institutional merchants account for a sizeable proportion of merchants that do not currently have LCR enabled. [9]

These include: (1) the merchant has actively chosen not to enable LCR; (2) the acquirer has made an active choice to not enable LCR for the merchant (e.g. because of a difference in capabilities between the domestic and international schemes); and (3) the merchant is sufficiently large and sophisticated to make their own decisions about LCR. [10]

The ‘simple’ model involves routing all eligible transactions to one network (usually eftpos); the threshold model routes payments below a certain transaction size to Visa or Mastercard and all other payments to eftpos. This is used because eftpos is usually priced in cents and Visa and Mastercard in percentage terms. [11]