The Australian Consumers’ Association is a not-for-profit company limited by guarantee.   ABN 72 000 281 925 ACN 000 281 925

CHOICE exists to unlock the power of consumers. Our vision is for Australians to be the most savvy and active consumers in the world.

As a social enterprise we do this by providing clear information, advice and support on consumer goods and services; by taking action with consumers against bad practice wherever it may exist; and by fearlessly speaking out to promote consumers’ interests – ensuring the consumer voice is heard clearly, loudly and cogently in corporations and in governments.

To find out more about CHOICE’s campaign work visit  www.choice.com.au/campaigns  and subscribe to CHOICE Campaigns

CHOICE is concerned that the price signals credit card surcharges were intended to send to consumers are being eroded by excessive surcharges which bear little relation to the cost of the transaction. This concern is reinforced by the fact that while consumers are generally not supportive of surcharging, the majority report having paid a surcharge when last presented with one, suggesting the availability of convenient, no-cost payment options is limited.

CHOICE wants credit card surcharges to provide price signals to consumers on the costs of different payment methods, thereby encouraging competition and innovation in the payments system and putting downward pressure on transaction costs.

CHOICE supports enforceable measures to limit credit card surcharges to reflect transaction costs, along with steps to increase transparency, disclosure and reporting around credit card surcharging in all retail environments.

CHOICE appreciates the opportunity to provide the following comments to the Reserve

Bank of Australia’s Review of Card Surcharging: A Consultation Document, June 2011.

Previous communication from CHOICE in 2002 supported the abolition of the ‘No

Surcharge’ rule that was imposed on merchants through their commercial agreements

the reform to end the cross-subsidisation of credit card payments, whereby fees for

accepting credit card payments had to be bundled into a retailer’s overall costs and

prices.

In late 2009 CHOICE and the NSW Office of Fair Trading conducted a joint research

Surcharges were most often experienced when purchasing air travel,

telecommunications, holiday travel, restaurants, utilities, taxis and petrol stations.

retailers and other businesses should not be able to levy surcharges.

64% of people surveyed paid the surcharge when last presented with one. In some

cases, this reflects the 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. In other cases, consumers believe that a surcharge is worth paying for the

convenience of using a credit card, the interest-free period or the rewards

program.

are fair and reasonable, or if they’re being used as a profit centre by merchants.

some cases of flat dollar fees, including airlines, which often raise concerns

around excessive surcharging.

to reduce their costs, and to support the development of efficient and innovative

payment systems. This includes choosing to pay with EFTPOS debit cards, cash, or

one of the online payment systems that don’t attract surcharges.

CHOICE Submission: RBA Payments System Board Consultation on Card Surcharging (July 2011)

CHOICE continues to believe that credit card surcharges can provide price signals to

consumers on the costs of different payment methods, thereby encouraging competition

and innovation in the payments system and putting downward pressure on transaction

costs. However, CHOICE is now concerned that the price signals credit card surcharges

were intended to send are being eroded by excessive surcharges which bear little

relation to the cost of transactions.

CHOICE supports the introduction of a limit to credit card surcharges to the extent that

it covers the merchant’s costs of providing credit facilities and encourages competition

in the payments system. CHOICE also notes with concern the level of debit card

While there is no publically available data on the total value of surcharges collected by

retailers in Australia, RBA research shows that around 40% of very large merchants, and

20% of small or very small merchants, now use credit card surcharges. CHOICE is

concerned that some retailers are charging consumers far more than what it is costing

them to process the payment and that surcharges have become a new, and growing,

CHOICE is particularly concerned with excessive surcharges in online transactions. The

use of ‘drip pricing’ distorts the total transaction cost and does not encourage the use of

cheaper payment methods or innovation. Without easily accessible payment alternatives

and clear entry-point surcharging signals, payment system monopolisation leads to

excessive surcharges potentially used for additional revenue raising. This issue has been

highlighted in recent research by East & Partners which noted that online surcharges can

difference may be attributable to the additional risk involved in transactions where the

cardholder is not present.

CHOICE recognises that the retail environment is fast moving towards a scenario where

almost every payment choice may attract a surcharge. In these circumstances, headline

prices will become increasingly meaningless and potentially misleading to consumers,

and we would encourage the RBA to consider future options for ensuring headline prices

are achievable for the vast majority of consumers. In the meantime, to increase

consumer awareness and understanding of credit card surcharges, CHOICE believes that

CHOICE Submission: RBA Payments System Board Consultation on Card Surcharging (July 2011)

CHOICE is also concerned about the use of a flat fee for credit card surcharges instead of

basis, a flat fee structure for payments by credit means that lower value transactions

are subsidising higher value transactions. Flat fees are regarded by many consumers as

unfair and as they are mainly seen in the aviation market, consumers understand that

cheaper, more price-sensitive private travel is subsidising more expensive less pricesensitive

For consumers to have confidence in the fairness of a cap, any controls over credit card

enforcing agency should also provide a clear avenue for consumers to raise grievances

In the remainder of this submission, CHOICE addresses the specific consultation

questions put forward by the Payments System Board.

CHOICE Submission: RBA Payments System Board Consultation on Card Surcharging (July 2011)

With increasing consumer concerns over excessive credit card surcharging, a limit may

provide some confidence that the surcharges sought are fair. CHOICE supports the

introduction of a limit to credit card surcharge to the extent that it covers the

merchant’s costs of providing credit facilities and encourages competition in the

payments system. For the surcharge limit to be a win for consumers, it needs to be

explicitly, and transparently, limited to the additional variable cost incurred by

merchants for processing transactions.

Specifically, a surcharge limit should not be used to recover a merchant's other fixed or

transactional costs. Otherwise there may not be a clear price signal between payment

methods. In contrast, if the limit is defined at a specific rate cap applicable to all

retailers, a legislated cap may well see a ‘race to the cap’ by merchants and even by

acquirer banks (i.e. by merchants’ banks as they set merchant service fees), regardless

of the actual transaction costs, and provide no incentive to compete.

In addition, a single specific rate cap would also continue the cross-subsidisation of

payment options. For merchants whose MSF is above the cap, the portion of their MSF

not covered by the single cap would have to be factored into their overall costs and

prices. Whereas for merchants whose MSF is below the cap, they would receive

additional revenue. The larger the merchant, the greater is the likelihood that they pay

the lowest MSF.

A specific single rate cap on credit card surcharges is likely to benefit the larger

merchants that are able to negotiate lower MSFs or acquirer banks that are able to

increase the MSF to the cap. Unless the additional revenue is used to lower prices, this

represents an unnecessary additional costs for consumers.

In its March 2011 super-complaint on credit and debit surcharges to the UK Office of Fair

Trading, UK consumer group Which? proposed a methodology for estimating a ‘fair’

surcharge (section 3.2). While the super-complaint specifically dealt with the market for

passenger travel services, the principle elements to calculating a fair surcharge are

broadly applicable: any surcharge should be a cost-pass through of the average variable

costs imposed by the acquiring bank. Importantly, this excludes fixed costs and any fixed

or variable costs that are part of the retailer's own processes (for example, operating

check-outs or accounts departments, etc.).

For consumers, a surcharge limit can increase confidence that the surcharges sought are

fair; however a universal single rate cap also retains some level of cross-subsidisation of

different payment options.

CHOICE Submission: RBA Payments System Board Consultation on Card Surcharging (July 2011)

There is significant consumer concern that some merchants are using their dominant

market positions to apply very excessive credit card surcharges, in effect using credit

card surcharges as a revenue stream.

As previously noted, this is a particular concern where merchants charge a flat fee for

payment by credit card instead of a percentage amount. It is currently not possible for

consumers to know with any confidence if the surcharges sought reasonably reflect

additional variable costs to the merchant of accepting credit card payments.

For credit card surcharges to encourage competition between payment options, the

price signals to consumers need to accurately reflect the costs of each option. If a

surcharge limit is introduced, it needs to truly reflect the cost of card acceptance. This

would be in line with the recently adopted European Union Consumer Rights Directive

Article 19 which states that:

‘Member States shall prohibit traders from charging consumers, in respect of the

use of a given means of payment, fees that exceed the cost borne by the trader

for the use of such means.’

As noted above, Which? has set out a methodology for calculating a fair surcharge.

CHOICE believes that this methodology can be adapted to the Australian context and

give consumers confidence that the surcharges being sought are fair.

The need for an allowable tolerance around a surcharge cap depends on the approach

taken to define or calculate the cap. However, for consumers to have confidence in the

fairness of a cap, any controls over credit card surcharges would need to be

accompanied by enforcement provisions.

CHOICE (then the Australian Consumers’ Association) recommended in its submission to

the 2002 RBA’s Draft Standards and Access Regime for Credit Card Schemes:

ACA recommends the Federal Treasurer grant a price surveillance and

enforcement power to the ACCC to ensure merchants do not profiteer from the

uncapped surcharge, or double-dip on merchant fee recovery from their

customers.

While price surveillance may no longer be necessary, CHOICE continues to recommend

that surcharge limits be enforced by the appropriate agency. The enforcing agency

should also provide a clear avenue for consumers to raise grievances and complaints.

CHOICE Submission: RBA Payments System Board Consultation on Card Surcharging (July 2011)

The payments industry is at best opaque. Not only is there great variability of MSFs

between card schemes, there is also great variability of MSFs between merchants and

also between the different types of cards an individual card scheme offers. So,

MasterCard’s charges are different to those charged by American Express, the rate

charged to a corner store by a card issuer is different to the rate charged by the same

card issuer to a national supermarket chain, and the rate charged by an issuer for a

basic credit card is different to the rate for a premium credit card.

Far greater transparency in MSF’s would be a welcome development. As noted above

CHOICE believes that any credit card surcharge limit needs to be transparently based on

the additional variable cost incurred by the merchant for processing transactions.

The Which? methodology for estimating a ‘fair’ surcharge, set out in its super-complaint

on credit and debit surcharges to the UK Office of Fair Trading, may be adaptable to the

Australian context. The principle of any surcharge should be a cost-pass through of the

average variable costs imposed by the merchant’s bank. This should exclude all fixed

costs and any fixed or variable costs that are part of the retailer's own processes (for

example, operating check-outs or accounts departments, etc.).

We understand that there is some suggestion of a differentiated surcharge cap to reflect

the differences in merchant service fees charged by the card schemes. While this

provides some price signalling, universal caps are still a fairly blunt instrument as they

do not reflect the actual cost of the transaction to the merchant. Again, without full

disclosure of the MSF it is not possible for consumers to make an informed assessment of

the fairness of a differentiated surcharge cap.

As previously noted, a cap can increase consumer confidence that the surcharges sought

are fair; however a universal cap also retains some level of cross-subsidisation of

different payment options. Limiting the surcharge to the additional variable cost

incurred by merchants for processing transactions provides the best price signal to

consumers and removes the need for cross-subsidisation.

CHOICE Submission: RBA Payments System Board Consultation on Card Surcharging (July 2011)

We do not propose to address this issue as it goes to the relationship between the

merchant and its acquiring bank and is not directly relevant to consumers.

As stated above, unless credit card surcharges are limited to additional variable cost

incurred by merchants for processing transactions, it is not possible for consumers to

know with any confidence if the surcharge is reasonable.

To assist with this, in addition to existing data on merchant service fees, we would urge

the RBA to publish data on the total dollar amount of surcharges collected by merchants

and to have this data disaggregated by industry, turnover, and type of customer

(business or consumer) and also by type of sale (online or in-store). As a further aide to

transparency, CHOICE also believes that the RBA should explore the viability of

establishing an online searchable register of surcharges which are considered to be

excessive.