COVER ILLUSTRATION by Michel Streich

customers paying with credit and

debit cards became permissible.

This followed the Reserve Bank of

Australia’s reforms to the payments

system, which removed card schemes’

‘no-surcharge rule’ and reduced the

interchange fees paid behind the scenes.

While the initial take up rate of the

surcharge option by traders was low,

this has increased significantly in recent

times. The suspicion in some cases is that surcharges have little correlation with business costs, and that excessive surcharging is being used as a new revenue stream. The increased incidence

of internet commerce transactions, which

particularly rely on credit card payments,

also has important implications for

consumers in this context.

With the above factors in mind, the

NSW Office of Fair Trading (OFT)

approached CHOICE to conduct a joint

research project on the application of

surcharges on credit card payments for

the purchase of consumer goods and

services in the Australian marketplace.

CHOICE conducted the research and

field work, and provided this report.

In order to meet the research objectives

a number of quantitative and qualitative

research techniques are used. These

include:

members;

activity among 140 CHOICE

members;

experienced by survey respondents

in industries such as air travel,

telecommunications, holiday travel,

restaurants, utilities, taxis and petrol

stations.

opposition to and disapproval

of surcharges. 68% of the survey

respondents believe that retailers

and other businesses should not be

allowed to charge customers extra

when they pay with their credit card.

encourages consumers to use lower

cost payments systems. However,

when last presented with a surcharge,

64% of the survey respondents

report paying the fee. In some cases,

this may reflect customers’ lack

of another option at point of sale,

particularly for sectors where credit

card payments are the norm. At other

times, inadequate fee disclosure by

merchants means consumers aren’t

aware of the fee until it’s too late.

Some consumers may conclude that

a surcharge is worth paying, due to

the convenience of using a credit

card, the interest-free period or

rewards received.

to know if the surcharges they’re

presented with are fair and

reasonable, or if they’re being used as

a profit centre by merchants.

fees, meaning they’re applied as

a percentage of the transaction

amount. However, there are some

cases of flat dollar fees, including

airlines and taxis, which often

lead to concerns around excessive

surcharging.

are criticised by the card schemes

and banks, and often by international

research, sometimes sponsored by

industry. However, governments

in countries including the US

and Canada are moving towards

similar reforms. In the US alone, the

potential savings from Australianstyle

reforms are estimated at around

US$36 billion per year.

hidden behind the complexity of the

payments system reforms, which

are poorly understood, despite

their impact on the daily lives of

millions of consumers. More easily

digestible public information about

the consumer benefits of the reforms

would be helpful.

lower their transaction fees, to help

retailers to reduce their costs, and

to support the uptake of efficient

and innovative payment systems.

Options include choosing to pay with

EFTPOS debit cards, cash, and a

range of new online payment systems

that don’t attract surcharges.

Before

surcharges,

the ‘price

signal’ to

credit card

users — telling

them they

were using

a more costly

system — was

muted.

Nobody likes being asked to pay new fees,

and often our reaction as consumers is to

object and find a way to avoid the extra

cost. And that has been the response of

many consumers to the introduction

of credit card surcharges. Anger at the

fees is understandable too, especially if

they’re excessive, if consumers feel tricked

into paying a fee that wasn’t adequately

disclosed, or if no genuine alternative

payment option was available.

But surcharges are an efficient way

for retailers to recover their costs and

to encourage the use of better value

payment systems. Surcharges imposed

at the counter or petrol pump can be

fair – when they relate to the retailers’

underlying cost of cost acceptance. To

understand the rationale for what may

appear an argument in favour of fees,

it’s necessary to understand some of the

background to the famously complex

credit card payments system.

In 2003 the Reserve Bank of Australia

(RBA) introduced sweeping reforms

to the domestic payments system.

Chief among the regulator’s concerns was the level of interchange fees (see A

complex market, below), and market

dynamics that resulted in higher than

necessary costs. Before 2003, interchange for MasterCard and Visa credit card transactions was around 0.95% of the value of each transaction customers made, nearly double what it is today.

The credit card market is different to

most markets, in that it is ‘two-sided’,

with two sets of customers – merchants

(retailers and other businesses) and

cardholders and requires balancing

the charges to both. It is based on a

platform provided by the card schemes

such as American Express, MasterCard

and Visa. The card schemes provide

a payment service to customers and a

card-issuing and payment-processing

service to banks. The schemes compete

for banks to issue their cards by

offering them interchange fees that the

banks can pass onto the merchants.

Banks issuing credit cards also compete

for cardholders through their interest

rates, fees and rewards programs. In

this market, banks will try to maximise

profits by keeping the cost low to

their cardholders and recovering that

through the charges on merchants.

Unlike most ‘normal’ one-sided

markets, there’s often insufficient

competitive pressure to keep

interchange fees in check. In some

cases, the competitive pressure on

interchange fees is upward, as card

schemes compete for banks to issue

their credit cards with interchange fees.

In the US, unregulated and

unchecked credit card interchange fees

are now in the range 0.95% - 2.95%

(for each Visa transaction) and 0.9%

- 3.25% (MasterCard), yielding banks

and card schemes tens of billions of

dollars each year. These fees flow on

to higher costs to merchants, which

are eventually reflected in higher than

necessary consumer prices, which are

not only paid by the cardholders who

benefit from this system, but by all

consumers.

A complex market

payments that goes on behind the scenes

each time a credit or debit card is used. In

a simple retail transaction example, after

a customer swipes their credit card to buy

something, the shop’s bank (known as

the ‘acquiring’ bank) pays a fee, known as

interchange, to the bank that issued the customer’s

credit card (the ‘issuing’ bank). To

cover this interchange cost and to generate

a profit margin for the acquiring and issuing

banks, the shop pays a ‘merchant service

fee’ (MSF) to its acquiring bank.

The diagram on page 10 shows a typical

flow of fees for a four party system transaction,

based on the current interchange fee

(0.5%) and an average merchant fee of 1%.

In Australia, despite technological

and other advances, without regulation

or caps there was insufficient

downward pressure on interchange

fees over time. As a result, merchants’

overheads were inflated, as were the

prices that consumers paid for goods

and services.

Meanwhile, the card schemes’

‘no-surcharge rule’ in their contracts

forbade merchants from passing on an

explicit fee to customers to cover their

credit card processing costs. Retailers that

accepted credit cards for payment were

forced to include their inflated merchant

service fees in the prices of goods and

services that all customers paid. Before

surcharges, the ‘price signal’ to credit

card users – telling them they were using

a more costly system – was muted.

This combination of high interchange

fees and an absence of consumer price

signals to guide people to lower cost

payment methods gave credit cards

an artificial competitive advantage

over cheaper, more efficient systems

such as EFTPOS debit cards and cash.

It created a situation where the cost

of credit card use was subsidised by

the excessive interchange fees that

merchants – and therefore all their

customers – funded. In fact, many

credit card users were effectively paid

to use their credit cards – bloated

interchange revenue picked up the

tab for loyalty points and interest-free

periods that a section of society enjoyed

at the expense of all shoppers.

This enormous cross-subsidisation

was worth hundreds of millions of

dollars each year. In 2002, CHOICE

labelled it inefficient and inequitable.

“The banks have created a system

whereby normal pricing and incentive

signals are suppressed by crosssubsidisations

and bribes, largely in

the form of loyalty points, aimed at

encouraging cardholders to use credit

cards to the exclusion of other payment

methods,” we stated. “The introduction

of loyalty schemes changed the pace

and nature of credit card uptake, and

has been funded by those who gain

little or no benefit from them … this

[loyalty points] bribe is being funded

by other credit cardholders through

high interest rates and by all consumers

in higher prices for goods and services

charged by merchants recouping the

merchant fee they pay to cover the high

interchange rate set by banks.”

CHOICE was generally supportive of the

payments system reforms which began in

2003, resulting in three major changes to

the credit card market.

Average interchange fees for MasterCard

and Visa (the two regulated card

schemes) were reduced to around 0.5%,

down from around 0.95%. This has had

a predictable flow-on effect to merchant

service fees, which have reduced, on

average, from 1.45% of each customer’s

MasterCard or Visa transaction, to about

0.86% now. The diagram on page 10

shows this dramatic change.

A lowering of costs for MasterCard

and Visa also placed some competitive

pressure on the merchant fees for the

two unregulated credit card schemes,

American Express (Amex) and Diners

Club. Amex and Diners are three-party

systems, which negotiate merchant

fees directly with each business that

accepts their cards, rather than with a

‘middleman’ acquiring bank. Average

merchant fees for Amex have reduced

from 2.51% to 1.93%, while Diners Club’s

have reduced from 2.36% to 2.11%.

Before the reforms, the major credit

card schemes required merchants that

accepted their credit cards to also process

the same companies’ debit cards when

presented for payment, and vice versa.

Bloated

interchange

revenue

picked up

the tab for

loyalty points

periods

that a section

of society

enjoyed at the

expense of all

shoppers.

Overall, the RBA

estimates savings

to merchants through

lower merchant fees

at about $1.1 billion per

year. But it is hard to prove

that this has led to lower

retail prices to consumers,

an argument often raised by

banks and card schemes.

$1.1 billion is worth around

0.1% to 0.2% of the value of the

consumer price index, according

to the RBA. With underlying

inflation running at around 2.5%

per annum on average, a 0.2%

reduction is not observable in

retail prices. But, according to

the RBA, economic theory tells

us that, ultimately, changes in

business costs are reflected in the

prices that businesses charge.

Arguably, it’s impossible to

produce evidence showing the

impact on retail prices resulting

from these cost decreases.

Of course, nobody argues

that the reverse situation is

untrue – when businesses

face new costs, such as

taxes and levies, the

inevitable result in

competitive markets

is a higher retail

price.

For example, a shop that accepted Visa

credit cards was required to process Visa

Debit cards. Since 2006, merchants have

been free to choose which cards they

accept, allowing them to reject payment

cards they feel are too costly. This puts

competitive downward pressure on

merchant service fees.

Perhaps the most recognisable

example of the removal of ‘honour

all cards’ started this year, when

Woolworths and its group of stores

decided to stop processing MasterCard

and Visa (‘scheme’) debit cards, which

are more expensive for retailers to

process than EFTPOS debit cards.

Woolworths has continued to accept

MasterCard and Visa credit cards. It

also processes EFTPOS debit cards,

which are better value for retailers and

more profitable for Woolworths.

The third major outcome of the reforms,

and the primary focus of this report,

was the banning of card schemes’

‘no-surcharge’ rule on merchants. Before

2003, credit card schemes, in their

contracts, required that the merchants did

not pass on an explicit fee to customers

to cover their costs of card acceptance.

Rather, these merchant service fees had to

be bundled into a retailer’s overall costs

and prices. If a retailer felt that a particular

type of card was too expensive, it could

choose not to accept that type of card, but

would risk losing customers as a result.

Now, merchants may charge fees to

customers using various cards. This

means the credit card user, and not

everyone, pays the acceptance costs. It

also sends ‘price signals’ to customers

– encouraging the choice of payment

methods that have lower overall costs.

While only the four–party credit card

schemes (MasterCard and Visa) are

regulated, American Express and Diners

Club provided the RBA with written

undertakings to remove merchant

surcharging restrictions, too.

Initially, the merchant take-up of

surcharging was slow. When businesses

introduce new fees, they may fear the

potential for a public backlash, reputation

damage and ultimately loss of business.

Consumers often react negatively to

new fees, ‘fair’ or otherwise. It is not

surprising that retailers and other

businesses were cautious.

By 2006, just 7% of merchants

were surcharging, according to

MasterCard. This appears to have been

a concern for the RBA. “The problem

is that surcharging remains relatively

uncommon and, given overseas

experience and what we have heard

from the merchants, this is likely to

remain the case,” Dr Philip Lowe, the

RBA’s Assistant Governor, Financial

System Group, said at that time. RBA

Governor Ian McFarlane praised

merchants that had introduced the new

fee, even stating “we think [merchants]

are acting in the national interest when

they [surcharge].”

Since then, the rate of surcharging

has increased significantly. A 2007

RBA paper stated that 15% of very large

companies were surcharging credit card

users; 9% of large merchants; 6% for

small; and 5% for very small merchants,

leading the bank to state in 2008

that, “while some merchants remain

reluctant to surcharge, particularly

in a face-to-face environment, the

culture against surcharging is changing

and is doing so faster than many had

expected.” The RBA was encouraged

that the growing prevalence of

surcharging had promoted better price

signals, particularly for bill payments.

These trends continued into 2010,

with the percentage of companies

surcharging rising to between 20%

(small or very small merchants) and

40% (very large merchants), according

to RBA research, (the actual number of

transactions being surcharged is much

smaller), with the average surcharge

2.7% for American Express and

Diner’s Club transactions and 1.7% for

MasterCard and Visa transactions.

Many other companies indicated

that they were considering introducing

surcharges. And, as our consumer

research in the next chapter shows, 88%

of consumers surveyed reported paying

a credit card surcharge in the past year,

with 22% paying these fees more than

10 times.

When Ian McFarlane said that retailers

adding a surcharge were acting in the

national interest, he probably wasn’t

thinking about those accused of

profiteering through excessive fees. Some

businesses appear to have embraced

surcharges as a new revenue stream, and,

once the fee is disclosed and avoidable

with another payment method, there’s

nothing to stop them from doing so.

American Express, MasterCard and

Visa all told us that there are merchants

charging customer fees that exceed their

costs of card acceptance.

In 2009, CHOICE awarded Qantas

the dubious honour of a Shonky award

for its $7.70 (including GST) to $25 per

passenger credit card surcharges , while

Cabcharge, the dominant company in

the taxi payments industry, continues

to levy a 10% surcharge for all cards

(including debit cards that cost just

cents to process). The next chapter

investigates whether some merchants

are profiteering from surcharges.

Unsurprisingly, most credit card schemes,

which opposed the payments system

reforms, are also strongly opposed to

merchant surcharging. These fees directly

impact on the likelihood that consumers

will use their cards.

Visa thinks merchants should include

the acceptance costs in their price, just

as a shop does with other expenses such

as providing a car park or paying staff

more on a Sunday, (even though not all

customers drive, or shop on a Sunday).

“One of the core tenets of the consumer

experience is that the price of an item as

advertised or on the price tag should be

the actual price paid at the checkout,”

argues General Manager Chris Clark.

“This fundamental consumer protection

has been recognised by governing bodies

around the world. If more merchants

impose surcharges, it will unfairly

penalise consumers at a time when they

are already facing the challenges of a

difficult economy and increased cost of

living expenses.”

MasterCard’s opposition to surcharges

is also fundamental – “our core issue

is that surcharging passes the cost of

accepting payment onto consumers. And

that’s absolutely not fair,” says David

Masters, Vice President, Strategy &

Corporate Affairs. MasterCard argues

that accepting card payments is a normal

cost of doing business and shouldn’t be

separately charged. “Merchants get a lot

of benefits from cards that they don’t get

from cash or cheques. Obviously, instant

payment and protection from credit

losses and fraud. And, when they accept a

payment by card (as opposed to cash) the

money goes straight into their account

without having to protect and transport

it. And the big difference – the existence

of credit cards provides merchants with

sales they wouldn’t get if people could

only spend the cash they could carry in

their wallet. Before credit cards as we

know them today, the extension of credit

was something retailers did themselves –

that risk (fraud losses) is now carried by

banks.”

American Express also told us that it

believes the costs of card payments are,

like all other costs, already built into the

cost of goods sold. And the card industry

regularly points out that its main

competitor – cash – has associated costs

for retailers that are often ignored.

1 A Qantas spokesperson

says, “Qantas strongly rejects

any suggestion, including

by CHOICE, that its card

payment fees are somehow

‘shonky’ or that Qantas is

gaining a windfall from them

…”. See further comments,

page 18.

We only found one credit card scheme

– Diners Club – that hasn’t taken a public

stand against surcharging. Perhaps one

factor is because, as the smallest and

least-accepted card scheme, it has less

bargaining power with retailers than

the others. “We have never sought to

discourage our merchants from asking

for whatever payment method they prefer,

so the regulation of surcharging was not

an issue for us,” it said in 2006 evidence

to a House of Representatives hearing.

“We regard surcharging as an issue

between the retailer and the customer,

not between the retailer and us. If the

retailer believes that it is positive for

their relationship with their customer

to negate and refuse their payment

choice, then that is what the retailer

should do. Retailers in more competitive

situations have chosen not to do that. Our

observation is that retailers who feel they

are subject to less competitive pressure

have tended to surcharge.”

reforms was to end, or at least

reduce, the cross-subsidies whereby

inflated interchange fees, funded by all

shoppers, paid for free flights, shopping

vouchers, and low annual fees of those

with rewards credit cards. And, to some

extent, this objective has been achieved

– after the reforms, we saw credit

card reward programs become more

expensive, the value of points reduced,

annual fees introduced or increased –

for cardholders. CHOICE research has

demonstrated that loyalty schemes

often aren’t worth the additional annual

fees that cardholders themselves are

now required to pay. This is particularly

true for people who end up paying interest,

because that cost will cancel out the

benefit of any rewards.

However, in the absence of merchant

surcharging, cross subsidisations to

fund loyalty points continue. Over 50% of

our online survey respondents make a

conscious effort to use their credit card

to earn rewards points, because they

must see a personal benefit in doing so.

In most cases, they won’t be surcharged.

Merchant fees for American Express

and Diners Club cards have reduced

in the past eight years, but remain, on

average, more than double those for

MasterCard and Visa transactions.

So one would expect the three-party

schemes’ cards to provide more

generous rewards, loyalty programs

and other cardholder benefits than the

four-party schemes’ standard cards.

Higher merchant fees are also used to

provide benefits to the other customer

in this two-sided market – the merchant

itself. For example, American Express

may run a marketing campaign aimed

at increasing the sales or bringing new

business to a merchant / client – for

example, an advert enclosed with the

customer’s monthly statement.

Some see these higher and

unregulated merchant fees placing

American Express and Diners Club at

an unfair competitive advantage over

Visa and MasterCard. Indeed, we’ve

seen many banks issuing Amex ‘

companion’ cards to their MasterCard

and Visa customers, presumably to

cash in on the greater merchant fee

revenue that’s available. Through their

Amex offers, the issuing banks can also

entice consumers with higher-value

loyalty schemes and rewards.

*Reading some of the overseas

literature, it’s apparent that, rather

than painting the structural change

as having created a somewhat more

equitable system, critics use the

reduction in ‘free’ credit card benefits

as evidence that the reforms have

damaged Australian consumers. The

trick being played here is equating

cardholders with all consumers – but

millions of people do not have or benefit

from credit cards. The critics often fail

to mention that those shoppers without

credit cards – and others with no-frills

cards that don’t come with loyalty

programs – now longer cross-subsidise

credit card benefits to the extent they

did before.

An intended outcome: Rewards cards less attractive

service fee.

Example of a four-party credit card transaction

decline in merchant service fees, 2003-2010

In this example, a shopper buys an item

for $100 from a shop, using his credit

card. We assume:

0.5

1.0

1.5

2.0

2.5

3.0

Diners Club

American Express

Bankcard,

MasterCard

and Visa

March 2003

June 2003

Sep 2003

Dec 2003

Mar 2004

June 2004

Sep 2004

Dec 2004

March 2005

June 2005

Sep 2005

Dec 2005

March 2006

June 2006

Sep 2006

Dec 2006

March 2007

June 2007

Sep 2007

Dec 2007

March 2008

June 2008

Sep 2008

Dec 2008

March 2009

June 2009

Sep 2009

Dec 2009

March 2010

0.5

1.0

1.5

2.0

2.5

3.0

Diners Club

American Express

Bankcard,

MasterCard

and Visa

March 2003

June 2003

Sep 2003

Dec 2003

Mar 2004

June 2004

Sep 2004

Dec 2004

March 2005

June 2005

Sep 2005

Dec 2005

March 2006

June 2006

Sep 2006

Dec 2006

March 2007

June 2007

Sep 2007

Dec 2007

March 2008

June 2008

Sep 2008

Dec 2008

March 2009

June 2009

Sep 2009

Dec 2009

March 2010

The shopper uses his credit

card for a $100 purchase

Goods and services

Transaction sent to issuing bank

for approval

$99 paid to the shop ($0.50 merchant

service fee retained)

$100 transaction - shopper pays

$100 credit card purchase

$99.50 paid by issuing bank to

acquiring bank ($100 less $0.50

interchange fee)

Shop submits the data for

authorisation ($100)

$100 credit card bill sent to cardholder

The bank that issued the customer’s credit

cards keeps an interchange fee of $0.50,

passing the rest of the transaction amount

($99.50) to the shop’s bank.

The shop’s bank processes the

transaction and retains $0.50 of

the merchant service fee

The card schemes receive

membership fees from both the

acquiring and issuing banks

The merchant accept the credit card for

payment, provides the goods, and pay a 1%

merchant service fee to its bank

Where do consumers see surcharges?

Industry R esponse percent

Airlines 63.8

Telephone/Mobiles/Internet 41.9

Holiday Travel 36.2

Restaurant/Formal Dining 32.0

Utilities (e.g. electricity, gas, water) 27.2

Taxis 26.4

Petrol 21.8

Groceries 18.4

Appliances 16.2

Council rates 15.8

Insurance 13.7

Clothing/Footwear 12.0

Sporting/Entertainment 11.8

Take Away/Fast Food 8.2

Health/Medical Care 7.9

Education/Childcare 3.2

None of the Above 0.7

How often consumers pay surcharges each year

payments system reforms and

the increase in the number of

merchants choosing to surcharge their

customers. This chapter looks at:

become prevalent

to pay

from surcharges

taxi industries.

We asked our survey respondents to indicate

the industries and sectors where they

have witnessed surcharges for credit card

payments. Airlines, telecommunications,

holiday travel, restaurants, utilities, taxis and

petrol were the most common industries

identified. Around 64% of respondents had

seen surcharges applied by airlines, and

particularly when booking online, these fees

are hard to avoid. We take a closer look at

airlines’ practices later.

The survey results may in part reflect

the consumption habits of respondents;

for example, just 26% had seen surcharges

in taxis, but we know the fees are

ubiquitous in that industry (a section

below focuses on surcharging by taxis, a

special case).

The chart (right) shows that 88% of 1374

online survey respondents paid a

credit card surcharge in the previous year.

More than 50% paid a surcharge between

one and five times, while 22% had paid

surcharges more than 10 times in the

previous 12 months.

2.0

2.5

3.0

Never

Once

Twice

3 times

1.0

1.5

2.0

2.5

3.0

Never

Once

Twice

3 times

4-5 times

6-10 times

0.5

1.0

1.5

2.0

2.5

3.0

0

5

10

15

20

25

Never

Once

Twice

3 times

4-5 times

6-10 times

more than 10 times

MJaurS-n2eD-0p2eM0-02c30Ja-0u32r0S-0n23eD0-0p23eM0-02c40Ja-0u42r0S-0n24eD0-0p24eM0-02c50Ja-0u52r0S-0n25eD0-0p25eM0-02c60Ja-0u62r0S-0n26eD0-0p26eM0-02c70Ja-0u72r0S-0n27eD0-0p27eM0-02c80Ja-0u82r0S-0n28eD0-0p28eM0-02c90a-092r0-02900910

0

5

10

15

20

25

Never

Once

Twice

3 times

4-5 times

6-10 times

more than 10 times

MJaurS-n2eD-0p2eM0-02c30Ja-0u32r0S-0n23eD0-0p23eM0-02c40Ja-0u42r0S-0n24eD0-0p24eM0-02c50Ja-0u52r0S-0n25eD0-0p25eM0-02c60Ja-0u62r0S-0n26eD0-0p26eM0-02c70Ja-0u72r0S-0n27eD0-0p27eM0-02c80Ja-0u82r0S-0n28eD0-0p28eM0-02c90a-092r0-02900910

0

5

10

15

20

25

The appendices [Appendix II, Tables

11-14; Appendix IV, Table 8] list some

of the fees that survey respondents

recall having paid or witnessed.

Our consumer surveys find that

surcharges are usually ad valorem

fees, meaning they are applied as a

percentage of the transaction amount.

However, there are some cases of flat

dollar fees, including among airlines

and taxis.

Surcharges are more likely to be

applied to the costlier American

Express transactions, and such fees are

likely to be higher than surcharges for

MasterCard and Visa.

“A 1.5% surcharge by a hotel, for example,

based upon the RBA’s published average

merchant rates, represents a 70 – 80%

margin for the merchant,” says Jeremy

Griffith, Visa Director of Corporate

Relations in Australia, New Zealand and

the South Pacific. “For certain retailers and

hotels, excessive surcharging is money for

jam”.

“Some merchants are surcharging over

and above the costs of card acceptance,”

agrees American Express. Even in 2006

the company was stating that “we have

numerous cases of merchants that are

still charging more than we charge

them, with limited controls or consumer

protection to our benefit”.

But the difficulty in answering the

question of whether an individual

merchant is profiteering is that, apart

from the obvious cases, we need to know

the merchant service fee (MSF) that a

retailer pays, before knowing for sure

whether the surcharge represents an

excessive fee. Merchants are under no

obligation to publish their MSFs; indeed

this information is often considered

commercial-in-confidence by the parties

involved. If the RBA was to publish more

details, such as the specific merchant

fees paid, or even the average fees

that small, medium and large volume

businesses pay, it would be easier for

consumers to know if the surcharges

are reasonable.

“We don’t know the commercial

arrangements between merchants, such

as Qantas, and their acquiring bank,”

says Chris Clark, General Manager of

Visa. “They’re blending their American

Express fees with the four-party fees,

and we don’t know what Qantas is

including in its costs, so it is hard to say

if they’re profiting on surcharges. At

present, it is pretty much impossible for

consumers to know what a fair surcharge

is”. Says one survey respondent, “there

is no way for the average consumer to

know [the average cost that retailers pay

to process transactions], because these

arrangements are blatantly concealed by

commercial providers.”

A Qantas spokesperson says, “Qantas

strongly rejects any suggestion,

including by CHOICE, that its card

payment fees are somehow ‘shonky’

or that Qantas is gaining a windfall

from them. Qantas introduced card

payment fees following the changes

introduced by the Reserve Bank of

Australia in 2002, which provided all

merchants in Australia with the freedom

to charge fees in relation to the use of

payment cards to help reduce the level

of subsidisation of card users by noncard

users. Qantas offers consumers the

choice of other methods of payment to

avoid these fees. Qantas does not claim

that its card payment fees directly reflect

the specific amount that a financial

institution charges in respect of any

particular transaction. This amount

varies between transactions and is only

one of the costs incurred in providing

this service.”

Although merchant service fees are not

publicly available information, as described

in Chapter 1, the Reserve Bank publishes

average MSFs. As at June 2010 they are:

In a

2002

submission

to the RBA,

CHOICE argued

that the Australian

Competition

and Consumer

Commission should be

granted a surveillance

and enforcement

any instances of direct

charging, and take

action against merchant

profiteering from the

abolition of the nosurcharge

rule. Doubledipping

by the banks on

cost recovery must not

be replicated in other

“Less competitive

markets, such as

aviation, will require

monitoring and

enforcement action

against profittaking.”

0.5

1.0

1.5

2.0

2.5

3.0

MJaurS-n2eD-0p2eM0-02c30Ja-0u32r0S-0n23eD0-0p23eM0-02c40Ja-0u42r0S-0n24eD0-0p24eM0-02c50Ja-0u52r0S-0n25eD0-0p25eM0-02c60Ja-0u62r0S-0n26eD0-0p26eM0-02c70Ja-0u72r0S-0n27eD0-0p27eM0-02c80Ja-0u82r0S-0n28eD0-0p28eM0-02c90a-092r0-02900910

0

20

40

60

80

100

Credit cards Debit cards Neither

Naturally, you can expect large

merchants to pay significantly less than

the average (though the interchange

fee for MasterCard and Visa is the

floor beneath which the merchant fee

for those transactions cannot fall).

Large merchants and those with higher

credit-card processing volumes are in a

better position to negotiate good rates

with their acquiring bank, or with one

of the three-party schemes. And the

very largest retailers – including Coles

and Woolworths – have set themselves

up to ‘be’ the acquiring bank for these

transactions.

It follows that if an average-sized

retailer is charging far in excess of the

percentages above, they are probably

using surcharges as an extra revenue

stream.

On the other hand, small merchants

and those processing relatively low

volumes of credit card transactions,

may pay far in excess of the average

merchant service fees quoted above (so,

when consumers see a small merchant

that isn’t surcharging, they may like to

consider the various costs retailers face

before choosing which card to use).

The MSFs above take account of

merchant costs, including annual fees,

payment terminal fees, terminal rentals,

monthly fees, joining fees and other

associated costs charged to merchants.

Such costs can impact on particular

industries’ fees. Card fraud frequently

originates in taxis, for example. And

one card industry expert told us that

“houses-of-ill-repute” pay up to a

6% merchant fee with certain cards,

“which entirely reflects the fraud risks”.

Unsurprisingly, none of the respondents

to our consumer surveys provided

information about the surcharges that

may apply in such establishments.

More than 10% of our online survey

respondents had paid a surcharge to use

their debit card in the previous two years

(see chart below). And this is where the

fees can appear very excessive. The card

schemes have a range of interchange

rates depending on the type of merchant

processing the debit card transaction.

Here are examples of some of the rates,

all of which are available on the schemes’

websites:

paid from the issuing bank to the

acquiring bank, and in some cases,

to some large retailers directly

(Coles and Woolworths, for example,

account for about 25% of the

acquiring market). The interchange

fee for ‘cash out’ – when customers

use retailers for cash withdrawals – is

at least three times higher than the

fee for purchases.

average interchange fee for Visa Debit

transactions; MasterCard provided

a voluntary guarantee to also adhere

to that cap. Individual rates vary. For

example: the Visa Debit electronic

transaction rate is 8.8 cents, while

the supermarket rate is 6.6 cents.

The Debit MasterCard rate for all

consumer cards containing an EMV

compliant chip is 13.2 cents. All of

these rates include GST, and are paid

by the acquiring bank to the issuing

bank.

In general, these are flat fees,

irrespective of the size of the

transaction. So, when a taxi applies

a surcharge of say $3 to pay with

a debit card for a $30 cab ride,

the fee is around 25 times the

average MasterCard and Visa Debit

interchange fees, and 60 times the fee

that is paid to the taxi’s acquiring bank

for EFTPOS transactions. However, as

explained later, the actual merchant

service fee paid depends on the deal

negotiated.

Have you paid a surcharge in the last 2 years when you have used any of

the following cards?

“We were

charged by a

large hotel chain,

and the amount

seems exorbitant

when the small

company I work

bank than what we

were charged. But

who wants to carry

around thousands of

dollars cash to pay

for your holiday?”

It’s often reported that high surcharges

are more likely when companies enjoy

positions of significant market power.

This is sometimes the case, though not

always; the two major supermarket

chains, for example, dominate the

grocery market, but neither applies

surcharges.

Surcharges are often evident

in industries where consumers

particularly rely on credit cards to

make payments, including websites,

and large merchants relying on

cardholder-not-present channels

of payment (for example, for utility

bill payments). “If the customer has

no choice but to use a scheme credit

or scheme debit card, there’s much

more propensity to surcharge,” says

Bruce Mansfield of EFTPOS Payments

Australia Limited.

Take, for example, hotels. A few

nights’ stay in most city hotels can

easily lead to bills of $500 to $1000

when the consumer goes to check out.

These days, few people use options

other than plastic cards to settle such

bills. The practicalities and security

concerns of carrying that amount of

cash make it unattractive for many

people. This places hotels in a good

position to surcharge, in the knowledge

that their guests will have little option

to pay the fee, whatever it might be.

And CHOICE survey respondents

often commented that hotels do apply

surcharges. “Hotels are starting to

surcharge, but how else do they ever

get paid?” asks David Masters, Vice

President, Strategy & Corporate Affairs

at MasterCard. “When was the last

time you stayed at a hotel and paid in

cash? In fact, when was the last time

you booked a hotel room and they

didn’t ask you for your card details to

secure the booking? How else would

they do that?”

A related point is that business

travellers often care less about paying

a surcharge, because ultimately their

employer will cover the expense.

The person deciding which payment

method may not have a choice (for

example, when they are provided with

one credit card for business expenses)

and in any case are not price-sensitive

to surcharges. They may have other

incentives – such as frequent flyer

points – to use the card.

“The number-one complaint we hear

from consumers is that they didn’t know

there was a surcharge until it was too

late,” says Luisa Megale, a spokesperson

for American Express.

To find out how well surcharges

are being disclosed to consumers, we

asked participants in our ‘payment

diaries’ survey to record what they

experienced. We found that, in some

cases, disclosure was inadequate, with

respondents reporting that, in 12.3% of

the 163 recorded surcharging instances,

they did not recall being notified at

all. Of those who were notified, 25.7%

recalled feeling that the method of

notification was not prominent enough.

In a separate question, respondents

who had been notified felt that in 17.4%

of 132 recorded cases, the timing of

notification was inadequate. Sometimes

this was because disclosure was only

made after the transaction had gone

through. For example, one participant,

Susan, only noticed that Origin Gas

has a 0.6% fee after she paid – “there’s

a small notation on the bill about the

surcharge – the fee is added to the

next bill”. Another said of an airline’s

surcharge notification, which she felt

was too late and not prominent enough,

“I would have paid cash had I known.”

As outlined later, cash usually isn’t an

option when booking flights online,

but there are some other ways to avoid

credit card surcharges.

Airlines

also

commonly

blend their

surcharges,

with the

high use of

corporate

up the

costs for

everyone.

When disclosure is verbal, rather

than in writing, similar problems can

arise. Ken, a diary respondent, found

that a 3.5% fee for American Express at

a hardware store was disclosed verbally

and only as the transaction was being

processed. He felt the timing was

inadequate, and that he should have

been told about the fee much sooner.

The Australian Competition and

Consumer Commission (ACCC) states

that, when merchants charge their

customers a credit card fee, they must

ensure that consumers know:

enter into the transaction.

“Businesses should get advice about

how to avoid misleading or deceiving

consumers about this charge. If in

doubt, the sensible thing to do is to

err on the side of stronger disclosure,”

according to the ACCC website. It

says options for informing consumers

(particularly for retailers) include “clear

and prominent messages on bills or tax

invoices,” and “clear and prominent instore

and/or point-of- sale signage.”

American Express is more descriptive

in its disclosure requirements to

merchants: “Merchants should display

clear and prominent in-store and/

or point of sale signage informing

customers that a fee for credit card use

will be charged, and the amount or

percentage of the fee. This also applies

to telephone sales, internet-based sales

and direct mail catalogues. Any bills or

tax invoices issued by your organisation

where credit cards are an accepted

form of payment should clearly state

if a surcharge is to be applied, and the

amount of the surcharge.”

Often, merchants charge the same

surcharge for all payment cards, even

though they have very different costs. For

example, a hotel might be charged a 2%

merchant service fee for Amex and 1%

for Visa and MasterCard, so it decides

to apply an average ‘blended’ surcharge

to consumers of 1.5%. Airlines also

commonly blend their surcharges, with

the high use of corporate and premium

cards driving up the costs for everyone.

Amex (and its customers) benefit

more than MasterCard and Visa

customers from blended surcharges.

In the above hotel example, the

fees of Amex customers are being

subsidised by those of MasterCard

and Visa. The four-party schemes

aren’t pleased. “Blended surcharges

subsidise American Express users.

There’s an unfair playing field in favour

of the unregulated schemes, American

Express and Diners Club,” says Visa

General Manager, Chris Clark. “Our

cardholders are basically subsiding

American Express, whose merchant

service fees are much higher than those

on MasterCard,” says David Masters of

MasterCard.

Amex disagrees that it has been

given an unfair advantage, and,

notwithstanding the fact it wants no

surcharging at all, believes that “equity

is achieved when one fee applies for

all cards. All costs are factored into a

sale price, it is price discrimination to

only surcharge one card scheme on the

areas where people are considered more

capable of paying,” says Luisa Megale of

American Express.

From the consumer’s point of view,

blended surcharges fail to send the

price signals that the RBA intended.

When all surcharges are the same –

or when there’s no surcharge at all

– there’s little personal incentive for

consumers to choose the best-value

payment system.

We asked online survey respondents

whether they support a shop’s right to

charge different surcharge amounts for

different cards, assuming the shop has

Banks and

retailers

to cap

a reasonable

level for

consumers.

What do consumers think about different surcharges for different cards?

feel about different surcharges applying for different types of cards, such as one fee for Amex,

I support this, because shops have to pay different fees depending on what type of credit card I

pay with 36.1%

I would prefer if the retailer had one fee for all types of credit cards 8.2%

They shouldn’t be applying any surcharges for card payments 50.2%

Don’t know 2.2%

Other 3.2%

1.9% for American Express, no fee when paying cash or EFTPOS. Which of the following do you

All credit cards should have the same fees 6.6%

There should be no extra fee for cash or cards 50.6%

This is generally a fair way to charge customers 30.4%

The shop is ripping off customers (overcharging for credit card payments) 7.9%

Other (please describe) 4.5%

decided to surcharge. The results above

suggest that 36.1% support shops that

apply different surcharges, but most

respondents prefer no surcharges at all.

In a separate survey question,

6.6% of respondents stated their

belief that all cards should attract

the same surcharge, 30.4% agreed

that surcharges close to the average

merchant service fees for each card

are fair, while again, 50.6% stated that

there should be no extra fee for cash or

cards.

On several occasions, the RBA looked

at whether a capping of surcharges is

merited, but decided against it on the

grounds that introducing a surcharge cap

would reduce the downward competitive

pressure on interchange fees.

American Express has advocated

greater consumer protection and

transparency on surcharges, but

doesn’t go so far as to advocate a cap.

MasterCard told CHOICE that it

doesn’t believe a regulated cap would

work, because that fee would become

the norm.

The Australian Payments Clearing

Association (APCA), an industry

group focused on creating an

efficient and competitive payments

system, does not oppose merchant

surcharging or advocate for a cap.

APCA is sympathetic to the RBA

argument that surcharges help to keep

interchange fees lower, but would

like to see sufficiently low barriers to

market entry, and competition between

payments systems, that would enable

interchange fee regulations to be

removed altogether. “In APCA’s view,

the long-term interests of consumers

are best served by maximising

competitive payment alternatives

for them, rather than by pricing

regulation,” says APCA Chief Executive

Chris Hamilton.

During our research, we came across

just one country where a cap is imposed

(Denmark), although there may be

others (see International trends, later).

Surcharge

Best

Practice

Code?

There may be an

opportunity for

banks, retailers and

consumer groups

to develop a Best

Practice Surcharge

Code of Conduct,

in which merchants

agree not to surcharge

beyond their merchant

service fee, or the

MSF plus a reasonable

margin. Code

displays at point of

sale would assure

customers of the

fairness of the

fees.

But, closer to home, we did discover

that there is a mechanism for capping

merchant surcharges – if merchants

and their (acquiring) banks agree to do

so. For example, part 9 of Visa’s scheme

standard (Standard 2 – Merchant

Pricing for Credit Card Purchases),

set down by the RBA, states that “...an

acquirer and a merchant may agree the

amount of any such fee or surcharge

charged to a credit cardholder will

be limited to the fees incurred by the

merchant in a respect of a credit card

transaction.” This means that banks

and retailers, could, if they wished,

agree to cap surcharges at a reasonable

level for consumers.

Yet it seems these parties are

unwilling to agree to limit surcharging.

Banks may fear that attempts to do so

would cause their merchant to look for

another acquiring bank that doesn’t

try to limit its surcharges. So there’s

no real incentive for banks to limit

surcharges. And it is easy to see why

retailers wouldn’t want to put a cap on

their credit-card revenue.

The Australian Bankers’ Association

(ABA), which opposed the Reserve

Bank’s credit card reforms, says it is

not the banks’ role to limit surcharging

– “this is the role of the regulator

or the merchant itself,” says Steven

Münchenberg, Chief Executive of the

ABA. “It is at the merchant’s discretion.

The standard says a merchant and

an acquiring bank can ‘agree’, but

the bank cannot require a cap on a

merchant’s surcharge. The option of

constraining the surcharge to the fee is

decided by the merchant, not the bank.

The ABA is unaware if there have been

any discussions or agreements made

– we have not surveyed our member

banks.”

Further, banks and card schemes

probably need to be careful in their

negotiations with retailers. According

to the ACCC website, “Part IV of the

Trade Practices Act prohibits anticompetitive

arrangements between

competitors, such as price fixing,

market sharing and boycotts. This

means that businesses must make their

own independent decision on whether

to impose a credit card surcharge.

Businesses must not engage in anticompetitive

conduct. Businesses

must not enter into agreements or

understandings with other businesses,

such as whether or not to impose a

credit card fee; or the amount of the

credit card fee that they will charge.

Such agreements or understandings are

contrary to the competition provisions

of the Trade Practices Act and

significant penalties may apply.”

American Express told us that it has

been able to dissuade some merchants

from surcharging, and to reverse their

decisions to do so, by demonstrating

figures for the lost sales that it claims

surcharges cause. It also argues the

benefits to the merchant of accepting

American Express, which include

marketing promotions, targeted customer

communications and referrals. Amex also

told us it doesn’t reduce the merchant fees

for a retailer that doesn’t want to accept

Amex – it tries to show retailer the benefit

of accepting Amex – for example, by

running a marketing campaign.

The table on the following page shows

surcharge details for airlines in Australia.

All apply surcharges, but their strategies

and pricing vary. Virgin Blue, for

example, charges a flat fee of $3.50 per

passenger, per segment (flight), for

domestic travel, and $6 per passenger, per

segment, for international flights. “We

are completely transparent in relation to

the fees we charge and we are satisfied

they are at a level which covers operating

costs while not being excessive,” said

Colin Lippiatt, Manager of Corporate

Jetstar $3.50 (domestic) P er flight Jetstar MasterCard

$5 (international) P er passenger Jetstar Platinum

M asterCard

Jetstar Voucher

I nternet Banking (POLi)

D irect Payment

(14 days before flights)

Qantas $7.70 (domestic

and trans-Tasman) P er booking BP AY 7 days before flights

$25 (international) P er passenger M asterCard Debit

Virgin Blue $3.50 (domestic) P er sector I nternet Banking (POLi)

$6 (international) P er passenger

Rex 1.76% (Visa/MasterCard) P er booking C ash

2.86% (Diners Club)

3.96% (American Express)

Tiger $7.20 (domestic) P er sector M asterCard Debit

P er passenger

Communications, Virgin Blue Group of

Airlines. The website states that credit and

debit card surcharging “is in line with

industry practice”.

Qantas also charges $7.70 to $25 for

each passenger on a single booking.

These flat dollar fees may mean

the surcharges paid on small-value

bookings heavily subsidise those paid

on large-value bookings. Also, because

all cardholders pay the same blended

surcharge, people with less costly

cards (such as the regulated schemes’

standard cards) subsidise the costs of

those with more costly corporate cards,

unregulated scheme cards, and so on. In

other words, less costly cards continue

to help pay disproportionately for the

‘free’ benefits of those with loyalty

programs. A Qantas spokesman says

“Qantas offers consumers the choice

of other methods of payment to avoid

these fees. We believe our approach

is straightforward, transparent and

ensures consumers are always aware of

what the additional cost will be. Where

a customer chooses to pay using a card

that attracts a fee, it is displayed or

advised upfront at the time of payment

and is disclosed in our advertising.”

Rex is the only airline examined

that applies percentage fees, which

vary depending on the card. “Rex has

applied the various surcharges in line

with the merchant fee applicable, as we

believe this is a fairer way, as opposed

to lumping a standard surcharge into

the fares,” a spokesperson said.

We don’t know what merchant fees

Rex pays, but its surcharges far exceed

the average merchant fees published by

the RBA.

“It drives me nuts that the car hire

companies force you to pay by credit card

and then charge you for it.” – CHOICE

member.

When a surcharge applies and is

not included in the price of goods and

services, customers must be given a way

to avoid that fee. As the airline table

above shows, the alternatives presented

to online customers are not always

practical.

For example, Qantas allows

customers to avoid credit-card

surcharges by using Debit MasterCard,

or by making a BPAY bank transfer

– but the latter has to happen at least

seven days before flying. For the

“We

recently

hired a car

from Thrifty

while on holidays.

You are required to

for the ‘privilege’.

Apparently, the only

exception to this

requirement and

charge is ‘if you are

account’. I’m pretty

sure I don’t have one

of those, nor probably

access to one of

those.”

segment of customers flying within a

week of their booking – presumably

quite common, particularly for late

‘specials’ – this is not an option.

Indeed, another intermediary website

that specialises in these late bookings

told CHOICE that 48% of its domestic

flight bookings made through the

website are for travel within seven days.

Rex allows customers to pay in

cash at its airport counters to avoid

surcharges, but it is not clear how

internet customers could do this.

Virgin Blue customers can use

an internet payments system called

‘POLi’ to avoid surcharges (see New

payment systems, below). While it is

encouraging to see new competition for

payments enter this space, consumer

awareness and use of the systems

is often very low, and some survey

respondents were critical:

it requires you to use a windows

computer to make the transaction –

doesn’t work for a Mac.”

wasn’t available on my computer.”

my bank account, so I can’t use it.”

Jetstar provides a number of ways to

avoid payment surcharges, but, again,

they’re not always practical. Direct

payments (for example, bank transfers)

must be made at least 14 days before

flying, while the only credit cards

without surcharges are the airline’s

branded Jetstar MasterCard and

Platinum MasterCard.

Innovation in the payments system is

providing new ways to avoid surcharges

and the use of credit cards, particularly

for online payments. According to a

2008 report by the Australian Payments

Clearing Association (APCA), the

availability of a range of alternatives

including recent entrants and product

innovation from Paymate (2000), Paypal

(2002) and POLi (2007) have contributed

to “workable competition” in the online

payments system.

2008 Nielsen research found a

range of internet payment choices are

available to consumers, but credit cards

dominate. The research found that

credit card had been used at some time

by nearly all internet users for online

purchases, and remain the preferred

method for around 50%. Paypal, BPAY

and direct deposits were the next most

popular payment methods.

We asked online survey respondents

whether they had used some of the

newer internet payment systems in the

last year. Use of established systems,

such as BPAY and internet banking ‘pay

anyone’ was high, and PayPal wasn’t

far behind. The use of other internet

systems such as Paymate and POLi

was low.

Which new payment methods do consumers use?

Bpay 92.1%

Pay anyone from your internet banking account 73.4%

Paypal 66.7%

POLi 1.5%

Paymate 0.7%

NETELLER 2.2%

Moneybookers 0.6%

that has been negotiated behind the

scenes. Several taxi and card industry

sources confirmed that taxis’ MSFs

tend to be higher than the broader

retail industry’s fees, mainly due to

the extremely high levels of card fraud

originating in taxis. But the service fee

more than covers the merchant fee. For

example, Cabcharge’s MSF might be 3%

to 4% for an American Express card (so

a 60%-70% service fee margin on such

transactions), or just a few cents for an

EFTPOS transaction (so closer to 100%

margin, depending on the amount of

the fare). On average, the service fee

margin works out at 92% (and has

been rising slightly according to the

company’s publicly available 2009

financial results).

We asked Cabcharge why this fee

has remained unchanged for nearly 50

years, despite all the technological and

other advances that have taken place

in that time. Group General Manager

John D’Arcy said the company doesn’t

know the origins of the 10% fee, but

thinks it “probably originally came

about because it is easier for passengers

to calculate, rather than having to work

out 7.72% of the fare, for example. For

all we know, the actual costs back in

history may have been greater than

10%, but 10% was chosen for ease of

information and because it was easy for

a passenger to calculate.” D’Arcy also

disputed that technological advances

always lead to lower costs, stating

that the introduction of chip cards

and compliance have increased the

company’s costs.

A lack of competition among

payment systems may explain how

such fees survive. In September 2010,

legal proceedings initiated by the

Australian Competition and Consumer

Commission (ACCC) resulted in

declarations by the Federal Court that

Cabcharge had misused its market

power, contravening s46 of the Trade

Practices Act 1974 on three occasions.

Long before the 2003 reforms, Cabcharge,

the company that dominates the industry

with payments systems in around 95% of

taxis nationwide, charged 10%. The fee

applied even before the advent of credit

and bank cards and goes back to the time

when paper-based payment methods,

such as the ‘blue dockets’ similar to

those you still see today, were the only

option other than cash. Today, the 10%

fee applies whether passengers use the

company’s own branded paper dockets

and plastic cards, or credit cards and

debit cards (including EFTPOS).

For Cabcharge, the average ‘servicefee

margin’ on these transactions is

staggering – on average, about 90%.

For example, for every $100 of fares

paid for with a card, the surcharge

is $10. Of that, $9 is Cabcharge’s

margin. The company prefers that the

words “profit margin” are not used

in this context and pointed out that

average fares are about $21 per trip. It

outlined to CHOICE the significant

costs Cabcharge faces after the service

fee margin is earned, including

commissions to taxi networks, costs in

running the payments system, research,

development and maintenance. The

company’s net profit after tax has

steadily risen over the last decade and

in 2009 financial year was $61 million,

providing a 21.6% total shareholder

return, much higher than the rest of

the ASX share market (7.2%, but it

was a bad year for financial markets).

Cabcharge is a diversified company,

with revenues and profits derived from

various sources and ventures, and not

just the payments business.

The service fee margin is higher

on some payment cards than others.

When customers use Cabchargebranded

cards and dockets, there’s

no merchant service fee (MSF), so

the margin is close to 100%. When

third-party credit or debit cards are

used, the margin depends on the MSF

Two of the contraventions involved

a refusal by Cabcharge to allow

competitors to process Cabchargebranded

products, while the third

related to meters and updates which

were supplied below cost, for anticompetitive

purposes.

The Federal Court ordered that

Cabcharge pay a pecuniary penalty of

$14 million for the contraventions, the

highest penalty imposed in misuse of

market power (section 46) proceedings

brought by the ACCC.

While the ACCC action did not relate

to the surcharging, more competition

between payment systems used in taxis

might help with lowering surcharges.

In recent years, Cabcharge’s market

share of the electronic payment

systems in taxis has declined from

70% to around 50%. The financial

market analyst, Veritas Securities

Limited, stated in a December 2008

report that Cabcharge’s monopoly

was over. “CAB’s historic dominance

of its market has allowed it to charge

a 10% service fee for transactions, a

processing fee that is un-matched in the

Australian retail landscape,” the report

stated. “CAB has a proven business

model, a near monopoly position in

the Australian electronic taxi payment

market and generates above average

returns, with ROE [return on equity]

averaging 17.8% since FY00 [financial

year ended June 2000]. We believe that

CAB’s near-monopoly position in taxi

fare payment processing is unwinding

rapidly, in line with improvements in

payment technology.”

While Cabcharge still sees its major

competitor as cash, there are now five

electronic payment systems competing

in taxis. One is Live Payments, which

competes not for passengers through

lower surcharges, but for drivers by

sharing a cut of the 10% fee. Cabcharge,

on other hand, pays a quarter of the fee

it receives to taxi networks (some

of which it owns), as a commission.

But it is up to the taxi network to

decide whether to share any of

this with drivers.

Another system launched in 2010

by the Australian Taxi Drivers

Association, called Transport Australia

Xpress, charges 8.49% for credit and

debit card payments, and 5% for

customers that open an account. The

company’s website states that other

costs may apply “at times of peak

demand and congestion.” While

the merchant service fees it pays are

commercial-in-confidence, industry

sources say typical taxi industry rates

are in the range 2.5% for MasterCard/

Visa credit cards, and 5% for American

Express. So the new entrant can

still make a healthy profit on these

transactions while undercutting the

dominant company in the market.

It will also share about 20% of the

surcharge revenue with drivers.

Live Payments says smaller

merchants, such as taxi payment

services, are unfairly criticised for

their surcharges. It says their fixed

costs, as a proportion of the money

that goes through their terminals, is

much higher than that of retail giants

such as department stores and airlines.

Cabcharge points out that unlike other

surcharging industries, such as airlines,

taxi fares are regulated and drivers do

not have the option to include the costs

of credit-card acceptance. It adds that

the 10% fee helps to subsidise low salevolume

cabs in regional areas, in what

is a low-turnover business.

But the level of the 10% surcharge

is almost universally derided – by

consumers, card schemes, banks,

and so on. It will be interesting to

monitor developments in competition

and pricing resulting from the

ACCC action.

reaction, when presented

with new fees, is to object. In

many cases, such a reaction is justified

and effective – a backlash over what

many saw as unfair and excessive

bank penalty fees in the last five years,

for example, resulted in major banks

reducing or eliminating these fees.

And a backlash against surcharges may

mean consumers will choose cheaper

forms of payment for them.

Reaction to the allowance of

surcharging has at times been

vehement, and, given the seemingly

impenetrable workings of interchange

fees and payments systems for most

consumers, it’s not surprising that a

range of parties are blamed for the

new fees. Below are some consumer

comments CHOICE received:

We designed specific questions in

our online consumer survey to find

out more about what people know and

feel about the surcharging regime, and

to gauge public understanding and

opinion.

When asked whether they think it’s

legal for retailers and other businesses to

charge consumers extra when they pay

with a credit card, just over half of the

respondents said “yes”. 17% said “no”,

23% didn’t know and 8% didn’t pick any

of these options. Several commented that

they believed surcharging was acceptable

legally, but not morally or ethically.

Interestingly, the response was

markedly different when survey

participants were asked the same

question about debit cards. Just

20% of the 1435 respondents believe

surcharging for payment with a debit

card is above the law, and 45% believe

it is illegal. The truth is, debit card

surcharging is permissible and has gone

on for many years in taxis, for example,

where EFTPOS, Debit MasterCard and

Visa Debit attract 10% fees.

Most respondents had a broad

understanding of the direction of

the flow of interchange fees for credit

card transactions. 84% of respondents

understand that, when a shop processes

a credit card transaction, it pays a fee

to its bank or card scheme, rather than

the other way around. And 37.6% of

respondents correctly identified the closest

option we gave for the average merchant

service fee that shops pay to process Visa

transactions (1%). However, just 28.7%

identified the average American Express

merchant service fee, rounded to the

nearest percentage point (2%), while 32.3%

of respondents believed the fee to be 5%.

Perhaps this is because consumers are

much more likely to see surcharges for

American Express transactions.

• “I am trying to understand how the

RBA allowing credit-card surcharges

is good for consumers? I cannot

understand why this was allowed.

Consumers should not be charged extra

for a chosen payment method. It is

something I would really like CHOICE

to take up.”

• “Merchant fees have only been passed

on directly in my experience by my

ex-telco and airlines. Still I will persevere

in having this change reversed

for what it is – a profit grab. I cannot

believe the nonsense written by the

Reserve Bank. Following letters to

Treasury, Dept of Communications

(after my ex Telco introduced the fee of

1%), it appears that the Reserve Bank

sponsored the change. Why is the

Reserve Bank involved with social engineering

that favours big business?”

• “It’s disappointing when a Government

puts a surcharge on a bill.”

Consumer commentS

54.5% of respondents believe that

shops must disclose surcharges for

credit card payments to consumers

before the transaction goes through,

with the form of this disclosure at the

retailer’s discretion. That’s correct –

the main requirement is that the fee

is disclosed before the sale, and that

consumers are not misled or deceived

about the existence or amount of the

surcharge. Just 3.9% of respondents

believe that merchants are not required

to disclose surcharges verbally or in

writing, while 7.7% did not know what

is required.

We were also interested in finding out if

people know which party stands to gain

most from surcharges – for example, the

shop, the bank, card scheme, or someone

else? From consumer comments received

by CHOICE in previous work, it seemed

some of the anger over surcharges was

misdirected. And this is fuelled by the

confusing information consumers receive

from retailers. One of our payment diary

participants, Adam, was charged 2% to

use his credit card by a restaurant that

blamed American Express for the fee.

That might have been justified, perhaps,

but, when Adam visited the restaurant

the following week and offered his

MasterCard for payment, this time

the restaurant “blamed the federal

government” for the 2% surcharge.

When presented with the example

of a medium shop with a 5% surcharge

for accepting Visa, 50.6% of responses

indicated that the shop stood to gain

the most from this fee. We are satisfied

that this was the ‘correct’ response,

given the average merchant service

fee for Visa credit card transactions

is under 1%, and the interchange fee

is about 0.5%. 15.6% of respondents

believed that the card issuing bank

gained most from this fee, while 13.0%

believed Visa was the main beneficiary.

We asked a similar question in

relation to taxis surcharging 10%.

Interestingly, 45.2% of respondents

believe the taxi companies keep the

biggest cut of the 10% of this fee, while

the most correct answer – ‘Cabcharge

or another payment system in taxis’

- was chosen by just 28.6%. However,

the former response is understandable,

given that Cabcharge owns many of the

taxi networks, including the nation’s

largest (Combined Taxi Services),

while holding close to a very dominant

position in the taxi payments industry.

Most survey respondents disapprove

of and dislike surcharges. 68.4% of

respondents think that retailers and

other businesses should not be allowed

to charge customers extra when they

pay with their credit card. When given

an opportunity to add open-ended

comments, the response was clear.

Who do consumers think benefits most from high shop surcharges?

credit card for payment. Who do you think keeps the biggest cut of this 5% fee?

The shop 50.6%

The bank that issued the credit card 15.6%

Visa 13.0%

The shop’s bank 10.6%

Don’t know 9.3%

Other 0.9%

• “It is wrong that surcharges need

to be paid. When credit cards first

emerged, it was stated that this would

never be the case. However, convenience

in using a credit card often

outweighs paying by other means.”

• “I just hate paying that extra 1 – 3%

for nothing! Airlines are awful. There

is always a credit- card fee for online

booking, but you can’t pay any other

way to my knowledge, so they have

you over a barrel. It’s very unfair and

inequitable to my mind. Shops and

other services in my experience generally

don’t charge you any fee.”

Consumer commentS

Do you think it is legal when retailers and

other businesses charge customers extra

when they pay with credit cards?

Do you think it is legal when retailers and

other businesses charge customers extra

when they pay with debit cards?

Other

Don't know

No

17.4

23.2

8

Other

Don't know

No

Yes

19.8

45

31.4

3.8

As intended, strong anti-surcharge

feelings often lead to consumer action and

changes in payment behaviour. When

last asked to pay a credit-card surcharge,

35.8% of 1246 survey respondents who

had been presented with a surcharge

stated that they chose another payment

method or cancelled their purchase

(31.9% and 3.9% respectively). However,

that leaves 64.3% of respondents who

paid the surcharge.

However, the fact that people often

pay a surcharge when presented with

one doesn’t mean they feel positive

about this experience. Many told us

how they would consider not returning

to the surcharging business again. “I

don’t pay surcharges as a matter of

principle – they lose my business,” said

one survey participant.

We also asked respondents what they

would most likely do if presented with

a 2% surcharge in a shop or restaurant.

Just 13.8% indicated that they would pay

the fee without adding a condition (e.g.

“pay once but not return”, dependent on

amount), while 59.8% stated that they’d

attempt to pay with a method that doesn’t

attract a surcharge. 1.8% indicated that

they would cancel the transaction, with

20.7% responding that they would go to

another merchant that doesn’t apply the

surcharge instead.

when you were last asked to pay a surcharge, what did you do?

0

10

20

30

40

50

60

70

80

“I

normally

and use other

means when

I’m asked to

do so.”

• “A lot of stores impose a surcharge for Amex, if so I use MasterCard instead”.

• “Amex often attracts surcharges, which I refuse to pay, instead opting to use my Visa

card, which rarely, if ever, attracts surcharges.”

• “I normally refuse to pay a surcharge and use other means when I’m asked to do so.”

• “I usually ask if there is a surcharge. I try not to use the card if there is a fee.”

• “If a surcharge is involved, I make an alternative payment.”

• “Amex-accepting shops sometimes ask for a surcharge, so I use Visa instead.”

• “I did not return to the store. When given the choice (extra to pay by credit card), I

have opted for use of the EFTPOS card.”

• “I will go out of my way to avoid surcharge. Have only paid it by accident (missed the

fine print). Have worked out that the rewards points I get are approximately equal to

1% surcharge on Visa and 2% surcharge on Amex.”

• “American Express is the worst offender and so I often choose Visa over it.”

• “These days, I generally ask if there is an extra charge for using credit cards. Our

insurer GIO, and broker AFM Insurance brokers, charge for credit cards. Telstra

started charging for the use of credit cards a couple of years ago. In these and similar

cases, my general response is to use an alternative method of payment, direct

deposit via internet banking, cheque or scheduled repayments from our savings account.”

Consumer comments

Pa yment system price signals in action

use another’s bank network’s ATM, the fee they pay appears on the screen

before the transaction is processed. Customers then have the option to decline the

transaction if they don’t want to pay the fee.

While initially some consumers objected to being asked to pay such fees,

in reality we had already been paying these costs – they just weren’t explicitly

disclosed. Direct charging now sends a ‘price signal’ designed to influence

behaviour; consumers are told the cost of using another bank’s ATM at point

of sale, and can decide whether to complete or terminate the transaction. Many

customers are now deciding foreign ATM fees are not worth paying; in 2005,

around 47% of ATM withdrawals were made at other banks’ ATMs; by May 2010,

the figure had dropped to about 37% (source RBA statistics, Table C4).

Most countries have not moved to

regulate credit card interchange fees,

or to legislate against the schemes’ ‘no

surcharging’ and ‘honour all cards’

rules. However, such reforms are being

considered in many other countries.

In recent years, more than 50 lawsuits

concerning interchange have been filed

merchants against the card networks

in the US, while in about 20 countries,

public authorities have taken regulatory

actions. Meanwhile, investigations

related to interchange fees are happening

in many more countries. The section

Selected country analysis details some

results.

It’s no surprise that foreign regulators,

industry and consumers are taking a

keen interest in the impact of Australian

regulatory changes. Government reviews

in countries such as the US and Canada

have recommended similar reforms, with

variations.

During our research it also became

evident that much of the third-party

(non-government) commentary

and research overseas, sometimes

sponsored by the card or banking

industry, is highly critical of the RBA’s

reforms. Again and again, we found

references to Australian consumers

having been harmed by the reforms,

with criticisms that often contradict

the conclusions of the 2006 House of

Representatives review, and the 2008

RBA assessment of its own reforms. The

criticisms invariably focus on:

prices have reduced in Australia,

despite a billion dollar cut in

merchants’ annual interchange costs.

Note, such reports don’t generally

claim the prices are not lower than

they would have been without the

reforms, just that there’s no evidence

to prove it.

expensive or reward programs less

attractive. Of course, such outcomes

were among the aims of the reforms –

to shift the cost of card use, interestfree

periods and rewards programs

to the people actually benefiting

from these features (those with credit

cards) rather than all consumers.

relation to excessive surcharges, this

is valid – we’ve described how some

merchants appear to be surcharging

in excess of the costs they’re likely to

face.

In many cases, it seems that what at

times appears to be a campaign against

the Australian reforms has worked

overseas. It’s quite rare to see reports

or commentary that support the

lowering of interchange fees, allow the

introduction of surcharges or remove

the honour-all-cards rule, even from

some consumer groups. Of course,

that the card schemes would put time

and resources into this area should

come as no surprise; it’s estimated

that a reduction of the interchange

fee to 0.5% in the US alone would be

worth $36 billion ($US) per year. “The

card schemes are fighting these battles

overseas, but they’re increasingly

losing,” says one Australian

payments system expert. “Since their

demutualisation, the international

card schemes’ point of view [as stated

in Australia] is understandably driven

by their commercial objectives,

which may be global in nature” says

another expert, Chris Hamilton of

the Australian Payments Clearing

Association. It seems that what at

times appears to be a campaign against

the Australian reforms has worked

overseas.

“A handful of large

financial institutions

and dominant credit

card companies

have long set these

and then divided them

among themselves. To

maintain these fees at five

times their transactional

and operational costs,

the card companies have

had to insulate them from

normal market pressures

… and so they have done,

in arrangements which

economists recognise

as sharing many of the

characteristics of a classic

cartel.”

are the two largest card networks in

the United States, controlling 80% of

the credit and debit card market. They

do not allow for surcharges on any of

their payment card transactions. These

prohibitions are stated in the card

networks’ rules, similar to the situation

in Australia before 2003. Merchants

must abide by the rules in order to

accept these network-branded cards.

Further, 10 US states have passed

laws to prohibit surcharges on creditcard

transactions: they are California,

Colorado, Connecticut, Florida,

Kansas, Maine, Massachusetts, New

York, Oklahoma and Texas. In the

last year, a number of states have

introduced legislation or have pending

legislation which would prohibit

debit-card surcharges (including

prepaid cards). The consumer advocacy

group, Consumers Union, has either

sponsored or supported this legislation

in California and in New York.

Visa and MasterCard range from 1%

to 3.5%, and average 1.5% to 2% per

transaction (compared with around

0.5% in Australia). This is estimated

to yield about US $48 billion (around

A$55 billion in July 2010) per year in

interchange revenue. “Merchants pass

along much of these fees in higher

prices, which all consumers bear,

regardless of how they pay for their

purchases,” says a 2010 report by

Consumers for Competitive Choice, “a

diverse national coalition of Americans

who support a strong, vibrant and

consumer-focused economy”. The

report, written by former US Under

Secretary of Commerce Robert J

Shapiro, and Jiwon Vellucci, says

“much of this fee revenue goes to

support rewards programmes that

disproportionately benefit higherincome

households.” Its report states

that for one retailer, Target, merchant

service fees have become its second

highest store-level cost, behind payroll.

“If the United States were to reduce

the interchange rate from 2.0 percent

to 0.5 percent, the savings would

be (US) $36 billion per year, less

some relatively small offsets,” wrote

consumer advocate Albert A Foer,

in an April 2010 opinion piece for

the New York Times. “All consumers

pay more at the store and more at

the pump because of unfair, nonnegotiable

non-transparent merchants

interchange fees imposed by the card

networks,” said Ed Mierzwinski,

Consumer Program Director at the US

Public Interest Research Group. And

a report by The Merchants Payments

Coalition, a group of retailers “fighting

for a more competitive and transparent

card system that works better for

consumers and merchants alike” and

with member associations collectively

representing 2.7 million stores with

50 million employees, claims that US

consumers would have saved US $125

billion in four years if similar reforms

to Australia had been introduced in the

US (details at UnfairCreditCardFees.

com).

Legislation to reduce interchange

fees has been proposed by Richard

Durbin, chair of the US Senate

Subcommittee on Financial Services

and General Government and author

of an interchange amendment to a

financial-overhaul bill. A June 2010

US Treasury report found that the

federal government alone, in the credit

card fees it pays through its agencies

such as rail services (Amtrak), defence

forces and postal services, could save

$36 to $39 million annually if it was

able to negotiate interchange fees with

MasterCard and Visa.

Interestingly, MasterCard US Chief

Executive, Robert Selander, reportedly

US Congress

passed legislation

in June directing

the Fed to regulate

fees and charges for

debit cards. Robert

Shapiro, former

Under Secretary

of Commerce in

the US, told us

“we modelled

it largely on

Australia.”

claims that consumers would be

disadvantaged by such measures

to reduce interchange fees, citing

supposed consumer detriment in

Australia. “Selander said consumers

in Australia saw their annual fees

and finance charges increase when

regulators adopted rules to reduce

interchange fees,” according to a Fox

Business report. “Moreover,” he argued,

“there is no evidence that merchants

pass on their savings to consumers.”

As explained, Selander’s comments

do not accord with the conclusions of

an Australian independent House of

Representatives review of the reforms.

In June 2009, a Standing Senate

Committee on Banking, Trade and

Commerce recommended significant

changes as part of wider reforms to the

credit-card and debit-card payments

systems. Similar to the RBA’s reforms,

they would:

no cap), and discounts;

surcharges at point of sale;

about relatively lower cost payment

options;

cards rule.

Perhaps surprisingly, a paper

published by the Consumers’

Association of Canada opposed these

reforms, citing supposed consumer

harm in Australia. “The Australian

experience has demonstrated that

government-imposed price controls on

those merchant fees end up harming

consumers,” CAC stated in a June

2009 report. It also sees surcharging

as harmful. “Surcharging means

higher prices for consumers. One

clearly displayed price should apply

regardless of payment. Our concern is

that merchant surcharges will not be

clearly explained to consumers and will

far exceed the cost of card acceptance

to the merchant. There are disturbing

examples of this already happening in

Canada.”

The report also argues against the

ability of merchants to decide which

types of cards to accept – for example,

refusing to process cards with excessive

merchant fees. “When a consumer is

told that a merchant accepts Visa, they

want to know that their particular Visa

card will be accepted by the store,”

the CAC report states. “Allowing

merchants to accept some Visa credit

cards but not others will create

massive consumer confusion. This

recommendation is unworkable and

anti-consumer.”

Nevertheless, the Canadian Senate

recommends the changes outlined

above. It is now up to the Canadian

parliament to decide whether to enact

these recommendations.

As a result of August 2009 settlements

reached with the card schemes and bank

defendants, following legal action by the

Commerce Commission, merchants can

now surcharge for MasterCard and Visa

credit card transactions. Previously, as

in Australia, surcharging was prohibited

through the various contractual

arrangements between the schemes,

banks and merchants.

Nevertheless, according to CHOICE’s

sister organisation in New Zealand,

Consumer, surcharging is currently

limited to a few industries and firms.

Here are a few we found:

BP service stations in Wellington

started surcharging in 2010,

introducing $0.60 for purchases

under $30 and $0.90 for every

transaction over $30.

charges the following ‘convenience

fees’ for credit card payments, Visa

and MasterCard: 3%, American

Express and Diners Club: 2%.

Telecom claims it “does not receive

any part of this additional fee”.

people paying fines by credit card.

customers a flat 50c fee for paying by

credit card.

As in Australia, card schemes

and banks are free to enter into

agreements with merchants requiring

their surcharges to bear a reasonable

relationship to the cost of accepting

the credit card. MasterCard’s scheme

rules now state that “surcharges

must bear a reasonable relationship

to the merchant’s costs of accepting

MasterCard products.” But any such

condition and its potential enforcement

are contractual matters between

the relevant schemes, banks and

merchants, and not the responsibility

of the regulator (the Commerce

Commission).

In the EU, there are two distinct levels

of laws: European law and national law.

Interchange and surcharging are two

distinct issues and should be treated

separately, as we describe below.

Services Directive, which came into

force in November 2009, rules on

surcharging were set at member state

level – some allowed it, most did not.

The Directive’s main provision on

surcharging, Article 52, seeks to allow

surcharging or discounting generally

throughout the EU. Section 52(3) states

“the payment service provider shall

not prevent the payee from requesting

from the payer a charge or from

offering him a reduction for the use of

a given payment instrument.”

However, EU member states can opt

out, as described in the second part

of Section 52(3). “Member States may

forbid or limit the right to request

charges taking into account the

need to encourage competition and

promote the use of efficient payment

instruments.”

According to EuroCommerce, an

organisation representing the retail,

wholesale and international trade

sectors in Europe, many member

states have made use of this opt-out to

forbid surcharging in various ways, to

the disappointment of the European

Commission. Some of the surcharging

practices in various European

countries are detailed below.

has been under Article 81 (now 101)

of the Treaty on the functioning of

the European Union (EU competition

rules). Therefore any decisions apply

directly to cross-border multilateral

interchange fees only.

At member state level, some EU

member states have taken separate

action against multilateral interchange

fees under their national version of

Article 101. This action is generally

taken by the competition authorities in

member states.

In some other member states, ‘deals’

have been reached between retailers

and banks. In France, there is a recent

move towards regulation by legislation.

Commission (EC) has taken several

actions against the four-party schemes,

mainly for alleged anti-competitive

behaviour in how these fees are set.

Some governments of member

states have also taken action at a

national level.

In 2007 the Commission stated that

MasterCard’s multilateral interchange

fees (MIF) for cross-border payment

card transactions in the European

Economic Area violate competition

rules because they increase the cost

of transactions without passing

on the benefits to consumers.

The Commission concluded that

“MasterCard’s MIF, a charge levied on

each payment at a retail outlet when

the payment is processed, inflated the

cost of card acceptance by retailers

without leading to proven efficiencies.”

MasterCard disputed this claim

but eventually agreed to drop the

interchange fee to 0.3% for credit

cards and 0.2% for debit cards. Both

are cross-border weighted averages,

and only apply to cross-border

transactions, not to the interchange

fees applying in the same country that

the card was issued in. MasterCard

still disputes the Commission 2007

decision: it is under appeal to the

European Court. The settlement is

provisional (on Commission costs of

cash study and on results of appeal, of

course).

In 2008 the Commission started

formal competition proceedings

against Visa Europe Limited in

relation to its MIF for cross-border

point of sale transactions within the

European Economic Area, and the

honour-all-cards rule as it applies to

these transactions. The proceedings

will seek to establish whether these

practices constitute infringements

of European legislation forbidding

restrictive business practices such as

price fixing.

Previously, in 2001 the European

Commission had cleared Visa’s

honour-all-cards rule, and in 2002

exempted Visa’s proposed MIF after

the company offered substantial

reforms – a progressive reduction of

its average interchange fee from 1.1%

to 0.7% until the end of 2007, and a

cap on the MIF at the level of costs for

specific services.

Visa has now offered partial

commitments in response to the 2008

Commission action (the exemption

provision from which Visa benefited

in 2002 no longer exists).

(cardholder-present) transactions.

Ikea was the only retailer from the

sample applied an in-store surcharge,

at £0.70 (around $1.23) for credit-card

transactions.

practice in the following industries:

ticketing for cinemas, entertainment,

sporting and theatre events; airlines;

travel agents; and government.

that merchants that are not

surcharging have increased their

retail prices.

surcharging in excess of their

acceptance costs.

As in Australia, UK airlines have

been the subject of criticism. The

table below shows some UK airlines’

surcharges, which at times are higher

than in Australia. Budget carrier

Ryanair has come in for particular

criticism in the media, with a £5 per

passenger per flight surcharge. “Even

if you pay with Ryanair’s own branded

credit card, they still charge you the £5

Surcharging is allowed, but the

government is one of the few to place a

cap – according to the Danish consumer

group’s Tænk Penge (Think – Money)

magazine, the fees are limited to a

maximum of 3.75%.

Surcharging for any form of payment has

been allowed since 1991. Discounting for

cash and all other payment methods is

also allowed.

According to the consumer group

Which?, while most retailers don’t

surcharge, fees are common in certain

sectors, namely train ticket booking,

travel agents, airlines and concert/event

ticket sellers. “Some retailers impose a

set charge of, say, £4 per transaction,

whilst others charge a percentage

of, say, 3%,” says Which? principal

researcher, Martyn Saville. “Concert

and event ticket sellers are probably the

worst in this area, as they often charge

a per-ticket surcharge, even where

multiple tickets are being purchased in

one transaction.”

Similar to Australia, retailers don’t

have to include the credit or debit

card charge in the advertised price of

a service or product, as long as they

offer at least one payment method that

doesn’t incur a surcharge.

2010 research by Edgar, Dunn &

Company Management Consultants

found that surcharging in UK has

become prominent only in the last

three to five years, and that:

contacted applied a surcharge for

online card-not-present transactions,

but almost none for over-the-counter

Ta ble: UK airline surcharges

Airline £ surcharge per return ticket $A equivalent (1)

BA 9.00 15.85

BMI 4.50 7.93

Easy jet 8.00 14.09

Thomson Flights 2.5% 2.5%

Ryanair 10.00 17.61

Virgin Atlantic 6.30 11.10

Surcharging is currently prohibited by

the card schemes. Credit card use is not

widespread in France.

In 2010, the French banking

Federation (Fédération Bancaire

Française, FBF) asked Edgar, Dunn

& Company (EDC) to conduct an

independent impact study about the

potential introduction of surcharging

in France. This study took place

between January and March 2010.

The report states “The observations

and conclusions in this document

are entirely those of EDC and are not

intended in any way or form to reflect

the views or perspectives of the FBF.”

After interviews with the finance

industry, retailers and seven consumer

representative groups, it found that:

against surcharging”, the rationale

being the “negative impact for

consumers because of likely retail

price increase or at least an increase

in retail price complexity.”

concern about surcharging making

consumers more “captive” (i.e.

harder to compare retail prices

across merchants). There was also

strong concern that there might be

potential abuse in sectors where

merchants have high bargaining

power; for instance, where the

merchant has a very high market

share or a “temporary” monopoly

(e.g. taxis).

benefit from surcharging but not

small local retailers (one consumer

association believes that surcharging

will have a major negative impact on

these small local retailers).

should be capped to avoid merchant

abuse. There was no consensus about

how to set this maximum limit.

Retailers and other merchants usually

accept credit and debit cards without

surcharges. However, according to the

consumer group, Stiftung Warentest,

surcharges are common for online air

travel bookings, and, to a lesser extent,

in the taxi industry. “Airlines charge

between €4 and €10, says Stiftung

Warentest. “Berlin taxi drivers charge

€0.50, but they want to be allowed to

charge €2”.

Since 1994, the schemes’ no-surcharge

rule has been prohibited, so merchants

and retailers are permitted to add a

surcharge when accepting payment

cards. According to Consumentenbond,

a consumer group with 500,000

members, the practice for over-thecounter

payments is very rare, but more

likely to happen online, particularly

with credit cards.

“The Dutch don’t like to pay for

paying,” Consumentenbond Financial

Services advisor Ben Schellekens says.

“Surcharging for small amounts paid

with debit card was quite common up

until two years ago. Retailers and banks

launched a campaign, klein bedrag

pinnen mag, which translates ‘Small

amount, debit card payment allowed

free of charge’. When a retailer or

merchant already accepts debit cards,

additional payments with debit card

cost less than cash payments.”

It’s worth noting that the use of

payments systems in the Netherlands

has marked differences to that of

Australia. Consumentenbond says

the Netherlands payments system

is Europe’s second cheapest, after

Bulgaria. 38% of over-the-counter

payments are made with a debit card,

while credit-card payments account

for just 1%. Cash accounted for 61% of

over-the-counter payments in 2009.

Electronic (internet) banking is widely

used; cheques are regarded as obsolete.

“Despite the fact that our regulation

has not limited or banned surcharging,

consumers are not really faced with

this problem,” Test-Achats, the Belgian

consumer group, told us. “There are

just a limited number of retailers who

surcharge (a very small amount: generally

five or 10 cents) for small payments

(generally less than €10) made by debit

card”.

Test-Achats considers that the price

paid by the consumer to purchase a

good or a service must be the same

and should not vary depending on

the mean of payment used. “This

principle ensures transparency and

allows the consumer to compare prices

knowingly.”

The EU’s Payment Services Directive

provides that Member States can

decide to forbid or to limit the right

to surcharge taking into account the

need to encourage competition and

promote the use of efficient payment

instruments. In Belgium, the national

regulator has not transposed this

option, but Test-Achats foresees a

possibility to use this option in the

future by means of a Royal Decree.

experience of surcharging

in Australia is widespread,

with 88% of online survey

respondents paying a surcharge in

the previous year and 22% doing so

more than 10 times. However, despite

payments systems reforms impacting

daily on the lives of millions of

consumers, there is often confusion

about the rationale for surcharges and

the complex way in which they operate.

Of all parties involved in a creditcard

transaction, it is the consumer

who is most likely to be disempowered

by a lack of information. Inadequate

awareness of options for dealing with

surcharges, and of avenues of redress

when it is felt that the charging has

been unfair, may contribute to the

feelings of distrust, dissatisfaction and

entrapment frequently expressed by

consumers. As recorded above, such

sentiments came through clearly in our

survey results, with 68% of participants

believing that retailers and other

businesses should not be allowed to

charge customers extra when they pay

with their credit card.

Payments system reforms are

intended to empower both retailers and

consumers to choose cheaper forms

of payment. To lower transaction fees,

help retailers reduce their costs, and

support the uptake of efficient and

innovative payment systems consumers

can:

retailers and other merchants state a

price, if there is a surcharge it must

be included in the price, unless there

is a way to avoid it. If that doesn’t

happen, make an official complaint

to the Australian Competition &

Consumer Commission (ACCC)

and the Australian Securities and

Investments Commission (ASIC).

Alternative payment methods

without surcharges might include a

debit card, cash, or another newer

online payment method. However,

some companies make consumers

jump through hoops to avoid the

surcharge – for example, a bank

transfer a week in advance of

flights, or a fairly obscure internet

payment system.

merchants charge different amounts

for different payment cards. When

surcharges are cost-based, one would

expect debit cards to have zero or

very low surcharges, and MasterCard

and Visa credit cards to be cheaper

than those of American Express and

Diners Club.

that surcharge must ensure that

consumers know a fee will apply, and

the amount of that fee, before the

transaction occurs. If this doesn’t

happen, it could be misleading or

deceptive conduct and a breach of the

requirement to disclose the full price

including non-optional surcharges.

Consumers can make a complaint

to ASIC.

Despite being allowed to surcharge,

many retailers don’t, because

they fear the potential customer

backlash and loss of sales. Even when

consumers are not presented with

a surcharge, by choosing the most

efficient payment method they’ll

not only help retailers keep their

overheads down, but they (and all

consumers) will save money in the

long-run, due to less inflationary

pressure.

There’s often no surcharge, and the

interchange and merchant fees are

lower than those of credit cards.

In 2008 CRA International claimed

that, as a result of the reforms

cardholders in Australia were

paying around $480 million more in

additional fees for credit cards each

year (its calculations were based on

2006 data). In 2007, the Australian

Bankers’ Association estimated the

annual figure at an additional $1

billion, reflecting “increases in fees

and charges and a dilution in the

value of credit card loyalty points”.

We don’t know who is correct, but

we do know that loyalty and rewards

programs are worth less now than

in the past, because there’s less

interchange revenue in the system to

subsidise their costs. The real value of

rewards is often illusory anyway – if

you ever pay interest on your credit

card that will probably cancel out

the benefit of any rewards consumers

later receive. And, if cardholders are

now paying retailer surcharges to

use their rewards card for goods and

services, they should try to work out

if they’re benefitting at all.

Credit card fees may have increased

overall, but that doesn’t mean

consumers have to stick with a poor

value card. Many are available with

up to 55 interest-free days and no

annual fee.

Woolworths’ decision to process

EFTPOS but not MasterCard

and Visa Debit cards, attention

turned to the fees that banks and

credit unions charge customers for

EFTPOS transactions. Some charge

anything from $1 to $2.50, when

their processing cost for EFTPOS

purchases is just 4-5 cents. Of course,

the rip-off here lies in the bank or

credit union’s court, and not with

Woolworths. Again, consumers

don’t have to put up with paying

high EFTPOS fees to their financial

institutions. 2010 CHOICE Best Buy

low-fee bank accounts from NAB

(Classic Banking) and ING Direct

(Orange Everyday) have no fees for

an unlimited number of EFTPOS

transactions, and no fees for most

other everyday transactions.