The Reserve Bank of Australia (RBA) is seeking industry feedback on a proposed new fees framework that could impose bans on merchants adding surcharges for card-based payments.

In a just-released issues paper, part of an industry-wide consultation on a new card payment fees structure, the RBA presented a number of possible options for limiting or outright banning the practice of merchant-added surcharges, paid by customers, for card payments, including debit and credit card-based transactions.

The RBA, as part of a 2022 consumer survey, estimated that around seven per cent of card transactions were surcharged, up from five per cent in 2019. However, as the Reserve noted, anecdotal evidence suggests these add-on costs, which are are ultimately borne by customers, are far more pervasive, with smaller retailers and hospitality businesses, include cafes, restaurants and pubs most likely to add – frequently excessive – surcharges to card payments.

Surcharges are considered excessive if they are greater than the merchant’s cost of accepting the card payment (which in Australia currently average around 0.7 per cent of a total transaction – two to three times the amount paid in Europe).

One proposed option would see a singular ban on surcharges for debit transactions but not on credit payments.

This, the RBA wrote, “would help ensure that a surcharge-free electronic payment method is widely available to consumers that is still relatively low cost for merchants”.

This also has the benefit of addressing consumer concerns around the inability to avoid surcharges via a non-cash payment method whilst also maintaining efficient price signalling – between debit and credit/charge card transactions – which the RBA said could “help to put downward pressure on card payment costs”.

“It also addresses the desire that consumers be able to access their own funds without a fee.”

The RBA did flag potential drawbacks of a debit surcharge ban for payment services providers (PSPs) that offer single-rate pricing plans; merchants, as well, may also be “forced” to absorb the cost of these debit transactions into their margins, to raise their overall prices, or to add these surcharges to other payment methods, including cash.

An outright ban on all card-bases payment surcharges was also proposed by the RBA, echoing similar “no-surcharge” rules in the EU and UK, where interchange fees are also strictly regulated.

While such a ban would serve to simplify the rules around surcharging, a notable barrier for both merchants and consumers when applying and receiving these add-on costs, this option “may unwind the benefits of the existing framework”, the RBA said, “[dulling] the price signals between payment methods”. It would also potentially drive a shift from cheaper debit transactions towards more expensive credit and charge card transactions, with additional costs again being borne by the consumer.

“This could lead to an overall increase in merchant card payment costs. Merchants may also respond by raising prices for goods and services to cover the costs that were previously recouped through surcharges,” the RBA wrote.

Among its other surcharge models proposed by the RBA include numerical caps on surcharges (for instance, a two per cent cap for credit cards and a one per cent cap for debit payments), an imposed at-cost surcharge limit that would restrict charges to the pure cost of payment processing, and/or a requirement for card networks to improve transparency rules on how they impose surcharges.

Merchant-imposed fees have long-been a feature of card-based transactions, despite the significant increase in payments made via credit or debit cards and mobile wallets over the last two decades. Yet, as the RBA notes, current rules around payments processing charges have been unchanged since the early 2000s – a time when card payments made up less one third of consumer payments. These rules currently permit merchants to surcharge consumers “for the reasonable cost of accepting card payments”.

Today, both credit and card payments make up nearly 80 per cent of all consumer payments. Despite this, average merchant fees for card payments have reduced only modestly in this time – from just over 0.8 per cent in 2008 to around 0.7 per cent in 2024.

While the competition regulator, the ACCC, has powers to take action against merchant surcharging that exceeds the merchant’s cost of card acceptance, these powers are rarely exercised.

The Government appears to have taken notice, announcing today an additional $2.1 million for the ACCC to tackle excessive payments surcharging.

The RBA, as part of its issues paper, has also proposed reforms to least cost routing (LCR) rules, including a formal regulatory requirement imposing LCR, as well as a policy-enforced lowering of interchange benchmarks, which would force down card payment costs for merchants and likely reduce the incentive for businesses to surcharge card payments.

RBA figures from 2022/23 show that Australian consumers are paying in excess of $6.4 billion in merchant fees for card-based payments.

Submissions for the RBA’s credit and debit card fees enquiry close on 3 December 2024.