Review of Card Surcharging: A Consultation Document – June 2011 3. Concerns about Surcharging Practices

The purpose of removing no-surcharge rules from the credit and scheme debit card systems was to promote efficiency and competition in the Australian payments system by providing merchants the freedom to charge according to the means of payment. The intent was that the Standards would introduce normal market disciplines into negotiations between merchants and acquirers over merchant service fees and, to the extent that merchants surcharge, improve price signals facing consumers choosing between different payment methods. This in turn would lead to a more efficient allocation of resources in the payments system, which is in the public interest. The Standards therefore prevent scheme rules or any participant in a scheme from prohibiting a merchant from charging a cardholder any fee or surcharge for use of that card. At the time, it was generally expected that retail competition would ensure that merchants would not exploit cardholders, who had the option to turn to other payment instruments or go to other stores.

As discussed above, there is evidence to suggest the removal of no-surcharge rules has improved price signals to cardholders and has thereby improved efficiency in the payments system. Nevertheless, in recent years, it has become apparent that merchants have increasingly been adopting a number of surcharging practices that have the potential to distort price signals and thereby reduce the effectiveness of the surcharging reforms. Two practices are of particular concern to the Board: ‘excessive’ surcharging; and blended surcharging.

Excessive Surcharging

As discussed above, the available data indicate that the margin by which the average surcharge is above the average merchant service fee has been increasing in recent years (Graph 2.2). There is also some evidence to suggest that this margin tends to be quite wide for some industries and payment channels. These industries and channels also tend to be the segments where a higher proportion of transactions are surcharged. For example, data from the 2010 Consumer Payments Use Study suggest that the incidence of surcharging is much higher for online purchases than those made in person; respondents paid a credit card surcharge on around 18 per cent of transactions made online compared with 4 per cent of those made in person. East & Partners' data suggest that surcharges paid for online transactions also tend to be higher, at around 4 per cent of the purchase value, on average, compared with around 2 per cent for merchants with a physical presence. A related concern about surcharging that has been expressed by both industry participants and consumers is that there may sometimes be a lack of genuine payment alternatives where credit card surcharges are applied to online payments.

While there is potentially a large variation in the card acceptance costs faced by merchants, justifying significant variation in surcharges, concern has been expressed to the Bank that some merchants may be using surcharging as an additional means of generating revenue, rather than simply covering the costs of card acceptance. A similar conclusion was reached in a report published by CHOICE in November 2010, commissioned by the New South Wales Department of Fair Trading.^[1]

Blended Surcharging

The second concern is an apparent increase in the use of blended surcharging. This is where different cards are surcharged at the same rate despite significant differences in acceptance costs. For instance, a merchant may apply the same surcharge to American Express, Diners Club, MasterCard and Visa cards even though the merchant's acceptance costs are likely to be higher for some cards than others. Hence, a merchant may not be recovering all its acceptance costs, or it may be recovering its costs for some cards and more than its costs for others. In some cases, these blended surcharges have been encouraged by the higher-cost schemes. While some merchants may prefer the simplicity of applying only one blended surcharge across card schemes, this practice dulls price signals to consumers about the relative costs of different card systems.

A related issue is that there appear to be few, if any, instances where merchants apply different surcharges for different cards within a card scheme (that is, ‘differential’ surcharging). Given that premium/platinum cards typically are more costly for merchants to accept than standard or gold cards, we may expect that some merchants would impose different surcharges on these different card types. While it is ultimately the merchant's choice as to how they impose surcharges, this outcome may, in part, be the result of the structure of merchant pricing. Most merchants tend to pay one blended merchant service fee to their acquirer for a particular card scheme, with little knowledge of how this blended fee depends on their particular mix of card transactions. While many merchants prefer this simple fee structure, it provides them little information on the cost of acceptance for each different card type; hence, they may be charging the same rate for different cards simply because they do not know how different cards affect their total cost of card acceptance.

Footnote

CHOICE (2010), CHOICE Report: Credit Card Surcharging in Australia, November. [1]