Review of Card Surcharging: A Consultation Document – June 2011 1. Introduction

The Payments System Board imposed the no-surcharge Standards – requiring the removal of no-surcharge scheme rules – on the MasterCard and Visa credit card systems effective from 1 January 2003 and the Visa Debit system effective from 1 January 2007. Other international card schemes provided voluntary undertakings to remove their equivalent rules. The removal of these rules has allowed merchants to pass on the cost of credit card and scheme debit card transactions to customers via surcharges. The Board identified in Reform of Australia's Payments System: Preliminary Conclusions of the 2007/08 Review, released in April 2008, that the benefits of the no-surcharge Standards have been substantial, particularly in improving price signals to cardholders about the relative costs of different payment methods. The Board also noted that, in time, the Standards might be expected to add to the downward pressure on interchange fees.

As part of the 2007/08 Review, the Board considered whether a modification to the Standards to allow schemes to limit the size of any surcharges imposed by merchants was necessary. This reflected concerns expressed through consultation that surcharging was being exploited by firms with market power. The Board decided, however, that the isolated cases of high surcharges, at that time, did not provide sufficient grounds to allow the schemes to impose restrictions on all merchants and hence limit their negotiating flexibility. In fact, given that the high surcharges were likely to be a reflection of the market power of the merchants concerned, a cap on surcharges would not necessarily prevent higher prices being passed on in some other way. Survey data also suggested that, on average, surcharges were being set with reference to merchant service fees.

Since then, there has been increasing evidence to suggest that it is now becoming more common for merchants to set surcharges at levels that are higher than average merchant service fees. The increasingly widespread nature of this practice has the potential to distort price signals to cardholders and to thereby reduce the effectiveness of the reforms.

This document sets out the Board's analysis of current surcharging practices and some proposed changes that could be made to the no-surcharge Standards. Section 2 sets out current merchant surcharging behaviour and consumers' reaction to surcharging. Section 3 discusses recent surcharging practices that have raised concerns, while Section 4 sets out some proposed modifications to the no-surcharge Standards to address these concerns. Section 5 sets out the issues for consultation and Section 6 provides details of the next steps in the process.