A Variation to the Surcharging Standards: A Consultation Document – December 2011 3. Consultation

The Consultation Process

At its May 2011 meeting, the Payments System Board decided to conduct a public consultation on potential modifications to the Standards. The Bank released the document, Review of Card Surcharging: A Consultation Document, in June 2011, seeking the views of interested parties on seven interrelated questions:

1. Is there a case for modifying the Standards to allow schemes to limit surcharges?
2. Is a surcharge cap best implemented by the Board setting a transparent and specific permissible cap that is specified in the Standards, and may then be imposed in scheme rules? Or, should the Standards allow scheme rules to limit surcharges to an amount that is either reasonably related, or equal, to each particular merchant's cost of card acceptance?
3. Should there be some level of tolerance allowed around any surcharge cap?
4. Is the merchant service fee an appropriate measure of the cost of card acceptance (that can be applied consistently across all merchants)?
5. Should the no-surcharge Standards clarify that, notwithstanding any surcharging cap, scheme rules cannot prohibit merchants from applying a surcharge that is either a blended rate for each card scheme or the cost of accepting each card within a card scheme? Are there alternative ways to allow for differential surcharging?
6. Should the no-surcharge Standards require acquirers to pass on information about the merchant's cost of acceptance for each different card type if it is requested by the merchant? And, for those on ‘interchange-plus’ pricing, should the no-surcharge Standards require acquirers to pass on information about the weighted-average merchant service fee if it is requested by the merchant?
7. Is there a case for disclosure of the cost of card acceptance by merchants? Or, would it be sufficient for the Bank to collect and publish more detailed data on merchant service fees, such as the range and average of merchant service fees across merchant categories for each card scheme?

In total, 51 submissions were received, including from financial institutions, merchants, card schemes, a consumer group and private citizens, most of which are published on the Reserve Bank's website. Around 25 parties took up the invitation to discuss their submissions with the Bank. The main points made in response to the questions in the Consultation Document are discussed below.

Issues Raised During Consultation

Is there a case to modify the Standards to limit surcharges?

A number of submissions from merchants and financial institutions suggested that the Bank had not demonstrated that there is sufficient market failure to justify further modification to the Standards. These submissions suggested that excessive surcharging remains limited to a few merchants with market power. Some of these submissions questioned the veracity of the survey data presented by the Bank in its Consultation Document, arguing that both the gap between average surcharges and merchant service fees, and the rising trend in surcharge levels shown by the data might not be representative. Given that many of these submissions suggested that the cases of excessive surcharging that exist are a reflection of anti-competitive behaviour, they proposed that the issues are best investigated by the Australian Competition and Consumer Commission (ACCC) or the Australian Securities and Investment Commission (ASIC). Other suggestions put forward in place of regulatory intervention were self-regulatory or market-based solutions, such as industry codes. Some submissions also expressed a view that modifying the Standards to allow for limits on surcharges may have limited effect in certain industries or for certain transaction types.

By contrast, submissions from the four-party card schemes, a consumer group, an acquirer and some private citizens expressed support for a limit to be placed on surcharges, agreeing that excessive surcharging is becoming more commonplace, potentially undermining the Bank's previous reforms. Many submissions also raised concerns about surcharging for card transactions where there are few genuine payment alternatives, such as for online purchases. Several parties suggested that merchants that only accept card payments (or do not offer genuine alternatives) should not be allowed to surcharge.

Implementation of a cap on surcharges

The Consultation Document proposed two potential modifications to allow for some limit to be imposed on surcharges. These were:

• the Board setting a transparent and specific permissible cap in the Standards that could be adopted in scheme rules
• the Standards allowing scheme rules to limit surcharges to an amount that is either reasonably related, or equal, to each particular merchant's cost of card acceptance.

Nearly all submissions were opposed to the Bank setting a specific fixed cap, arguing that such a cap would inevitably be too high in many circumstances and too low in others. Many also saw potential for a cap of this type to become the norm for surcharging, even for merchants that have lower acceptance costs and might otherwise have adopted a lower or even no surcharge. Instead, most submissions preferred surcharges to be limited to an amount that is ‘reasonably related’ to the cost of acceptance. There were divergent views, however, about what constitutes the cost of acceptance. A number of submissions suggested that the merchant service fee is the most appropriate indicator of costs, although the majority of submissions indicated that the merchant service fee does not adequately reflect all the costs of accepting card payments. For example, other related costs of accepting card payments that were noted included: charge backs; terminal rental fees; fraud compliance; gateway fees; and terminal modifications. Accordingly, many submissions indicated that, depending on how a cap is implemented, there should be some level of tolerance to capture other related costs of card acceptance.

Most submissions were broadly in support of merchants choosing how to apply surcharges and the majority of submissions were supportive of merchants being able to differentially surcharge across card schemes. In particular, the four-party schemes were opposed to merchants applying blended surcharges across schemes where a price differential exists, citing the significant differences in the cost of card acceptance between different card schemes. However, one merchant argued that blended surcharging is a legitimate strategy employed by merchants, with the current arrangements reflecting competition between the card schemes. During consultation, some parties also suggested that the Bank should not promote or restrict any specific model of surcharging.

By contrast, many submissions questioned the benefit of clarifying the ability of merchants to surcharge differentially within a card scheme. In particular, some submissions pointed out that differentiating between card types within a scheme in real time would be a difficult technical challenge, both at the point of sale and for card-not-present transactions. Other submissions, including merchants, also cited the confusion for consumers that surcharging beyond a few different rates would cause.

Views on the most appropriate body to implement, monitor and enforce a cap on surcharges were mixed. While a number of submissions agreed that the card schemes are best placed to implement and monitor such rules, others recommended that another body, such as the Bank, should take on the role. Other parties interpreted the issues raised in the Consultation Document as relating to consumer protection and therefore suggested that the ACCC and ASIC should be involved in developing a solution.

Disclosure of merchant service fees by acquirers and merchants

A number of submissions supported measures to require acquirers to provide better information to merchants about their costs of card acceptance, though several submissions indicated that merchants are already able to obtain this information if they request it. By contrast, nearly all submissions were strongly opposed to any requirements for disclosure of merchant service fees at the point of sale, citing the fact that merchant-acquirer agreements are subject to commercial confidentiality. A related argument was that the merchant service fee might form part of a wider set of prices offered by a financial institution to merchants, so disclosing only one price might not provide an accurate picture of the competitive landscape. Some also argued that disclosure of individual merchant service fees would make acquirers reluctant to negotiate fees with merchants.

Finally, the parties that commented were generally supportive of the Bank collecting and publishing more detailed data on merchant service fees. Suggestions on the additional data that could be published included: scheme debit and eftpos merchant service fees; merchant service fees across different industries; and data on surcharge amounts.

Discussion

The Board has carefully considered the views put to it during consultation. It acknowledges in particular that the views were mixed as to whether excessive surcharging has become sufficiently widespread to warrant modification of the Standards. While the Bank believes that the costs of modifying the Standards would be relatively low and therefore that a modification could provide a net public benefit even if the incidence of excessive surcharging were relatively low, it has nonetheless sought additional data to those presented in the June 2011 Consultation Document in order to aid this discussion. Specifically, it has obtained confidential data from several acquirers on the distribution of merchant service fees for credit cards across their entire merchant books. This distributional information provides an indication of the different merchant service fees paid by a range of merchants and is therefore a richer dataset than the average merchant service fee data that the Bank regularly obtains and publishes. The Bank has also identified a cross-section of advertised surcharges in a range of industries. Based on this information, observed surcharging practices do not appear to reflect the distribution of merchant service fees. For instance, it is not uncommon to find merchants of many different types applying ad valorem surcharges at levels that are significantly greater than would be implied by the distribution of merchant service fees.^[1]

The Board also carefully considered the views expressed about whether the Reserve Bank is the appropriate body to respond to concerns about the surcharging practices discussed above. It is important to note that the Board's concerns relate to the efficiency of the payments system, for which the Board has a clear mandate, not to consumer protection. The Board's concerns therefore, reflect a judgement that these surcharging practices are potentially distorting price signals and payment patterns and that addressing them will help to ensure that the Standards continue to achieve their original aims. In light of this, the Board recognises that a modification to the Standards to allow scheme rules to impose some limit on surcharges may not address the public's concerns about all surcharging practices. A modification will, however, address inefficiencies that have arisen, in line with the Board's legislative mandate.

The Board also notes the views expressed by some that it should not be the card schemes that impose limits on surcharges. The Board, however, believes that this is the most practical approach to addressing the issue, given that the proposed amendment relaxes the Standards to simply restore some element of the powers that the schemes previously held through scheme rules. The Reserve Bank does not itself have powers over merchant pricing.

It is clear that there is some concern among consumers that surcharges are being imposed in circumstances where they feel they have few alternatives to using a scheme card. This is often the case for online payments, particularly where there is a desire for the payment to be confirmed in real time. Certain industries where some form of bond or deposit is required, such as the car rental and hotel industries, also rely disproportionately on scheme card payments. This issue is related to the Australian Consumer Law, which requires that any fee or charge (including a card surcharge) that is unavoidable be incorporated into the advertised price. However, in the cases that have been brought to the Bank's attention, at least one alternative payment method is available without a surcharge. The Bank has observed that in some cases the alternative (non-surcharged) payment methods offered are relatively uncommon or not available to customers of many financial institutions. Nonetheless, the Bank does not believe that preventing surcharging for online payments, as some have suggested, would lead to efficient outcomes. For instance, this would inhibit the ability of any emerging payment system with lower acceptance costs to compete, given that those lower costs could not be signalled to consumers if surcharging were prevented. The Bank would nonetheless like to see merchants that surcharge scheme products offer genuine payment alternatives.

The consultation also touched on the potential for greater differential surcharging within schemes, for instance applying a higher surcharge for premium cards than standard cards. While such a practice could potentially serve to constrain the high interchange fees that are evident in some card categories, the Bank acknowledges that merchants generally would like to avoid the complexity of such an approach. Indeed, the merchant service fees charged to many merchants do not differentiate between card types, even though the mix of cards may influence the level of fees charged over time. The Bank has contemplated the possibility that acquirers could be compelled to provide more information on the mix of transactions to merchants in order to help them understand their costs, but is satisfied this information is available on request. It nonetheless believes there is a case to make it clear in any modified Standards that schemes and acquirers cannot prevent differential surcharging within a scheme.

Finally, the Board sees some benefits in greater transparency of merchant service fees to give consumers greater comfort that the levels of surcharges they face are reasonable. However, given the widespread opposition to the proposal that merchants disclose their merchant service fees, the Board does not anticipate pursuing this particular option further. The Board believes that the modifications to the Standards proposed in this paper have the potential to give consumers greater comfort with the level of surcharges without this change. There was nonetheless widespread support for the Bank publishing more detailed information on merchant service fees at an aggregate level. The Bank will engage with acquirers to determine the most appropriate approach to doing so.

The Board has considered the views expressed in consultation on specific approaches to modifying the Standards. Its consideration of these views is incorporated in the discussion of the policy options in Section 4.

Footnote

For example, ad valorem surcharges above the level of merchant service fees that are paid by the vast majority of merchants are common among merchants in the following industries: accommodation and travel; entertainment, leisure and recreation; hospitality; professional services; rental, hiring and transport; restaurants, dining and takeaway; retail; taxis; and telecommunications and internet. Apart from the airline industry, flat-fee surcharging is not common. The distribution of the Bank's cross-section of surcharges is consistent with distributional data on surcharges provided to the Bank confidentially by East & Partners. The average surcharge for MasterCard and Visa credit card transactions from the cross-section of advertised surcharges collected by the Bank is also in line with the average from East & Partners' sample of 1.9 per cent. [1]