Many merchants have adopted card surcharging to reduce costs and drive customers to use alternative payment methods. However, Australian regulators consider the practice outdated.
The Reserve Bank of Australia (RBA) has proposed eliminating card payment surcharges—a move the central bank estimates could save consumers roughly A$1.2 billion per year.
“Australia seems to be in a similar situation as the U.S. with regards to payment card usage—with merchants increasingly opting to add a surcharge to card payments to offset what they feel is the high cost of the interchange fees paid to card issuing banks,” said Don Apgar, Director of Merchant Payments at Javelin Strategy & Research.
“Meanwhile, the central bank is looking at the big picture of the value and efficiency that card payments create for both consumers and merchants. It’s proposing what would amount to a compromise that bans merchants from surcharging card payments in exchange for lower interchange fees,” he said.
A Simmering Situation
The RBA also cited the decline of cash as a key reason to scrap surcharges. Since surcharging was first introduced, cash has dramatically fallen out of favor as a payment method.
With card payments now predominant, surcharges have lost their intended effect of steering consumers toward alternate payment options. Instead, they’ve effectively become a penalty for using the most common form of payment—a practice that often breeds consumer resentment.
Even so, merchants have continued to defend surcharging as a necessary measure to protect their profits.
“Recent Javelin research shows this situation simmering and beginning to boil in the U.S., as more merchants in everyday business categories turn to surcharging to offset rising card acceptance fees,” Apgar said.
“Credit card issuers are realizing record APR margins over 14%, while credit cards yield among the highest return on assets of any bank product. So there is an argument to be made that there is room to restructure interchange fees without unfairly impacting card issuers’ profitability,” he said.
An Ill-Advised Strategy
While there may be room for reform, credit card surcharging has become an ill-advised strategy for merchants. Some argue that if surcharging is banned, businesses will simply embed transaction costs into their prices, but this is often a better solution. After all, merchants don’t typically itemize other costs of doing business when presenting prices to customers.
Although surcharging may be outmoded, merchants’ ongoing calls for a revamp of the credit card model suggests it is time for a broader shift in the paradigm.
“Interchange paid to card issuers isn’t the only culprit behind rising merchant costs; brand and network fees imposed by Visa and Mastercard have driven record profitability for those companies, and payment service providers have steadily raised fees to fund tech innovation and product delivery for merchants,” Apgar said.
“Given the trend toward a hands-off regulatory environment in the U.S., it’s unlikely that the Fed will step in, as happened in Australia,” he said. “But it begs the question whether the overall fee structure for card payments needs a rethink before consumer momentum is permanently damaged by growing surcharge activity.”
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