Reserve Bank of Australia

On 18 March 2013, the amended Standards related to surcharging took effect to allow card scheme rules to limit surcharges to ‘the reasonable cost of acceptance’; the Standards continue to ensure that merchants can fully recover their card acceptance costs. The changes will not oblige the card schemes to alter their rules to limit surcharges, but it is likely to be in their interests to do so. Scheme rule changes could occur at any time from 18 March onwards. Changes would be communicated by schemes to their members that provide card acceptance services, and these institutions would then inform their merchant clients of their obligations.

The Bank originally removed the card schemes' ‘no-surcharge’ rules to better align price signals faced by consumers choosing between different payment methods to the cost for merchants to accept those payment methods. However, the Bank has become concerned that in recent years some surcharging practices have developed in a way that potentially distorts the price signals faced by consumers, thereby reducing the effectiveness of reforms undertaken by the Bank.

In particular, the Reserve Bank has been concerned about the increase in cases where surcharges appear to be well in excess of acceptance costs (‘excessive’ surcharging) and an apparent tendency for a single surcharge level to be levied across card schemes (‘blended’ surcharging), even though merchants’ acceptance costs may be significantly higher for some cards than others. As a result, the price to consumers of paying by a particular payment method may not reflect the cost to the merchant of accepting that payment, potentially leading to overuse or underuse of particular payment methods. This makes the payments system less efficient.

After extensive consultation with industry and other stakeholders on these issues, the Reserve Bank decided that it was appropriate to change its Standards related to surcharging to address these concerns.

During consultation, the Reserve Bank considered a number of options. After deciding that it was appropriate to vary the Standards related to surcharging, the Reserve Bank decided that allowing a limit based on the reasonable cost of card acceptance would be the most effective way to ensure that the Standards continue to meet the Reserve Bank's policy objectives. The Reserve Bank considered that this was the least prescriptive of the options proposed and that it was likely to achieve the most efficient outcomes by enabling surcharges to best reflect the cost of card acceptance faced by each individual merchant.

The Reserve Bank's amended Standards apply to certain card payment systems (MasterCard credit, Visa credit, and Visa Debit) and their participants. Other systems (American Express, Diners Club, and Debit MasterCard) have given undertakings to the Reserve Bank in relation to surcharging; these undertakings are being updated to reflect the amended Standards. The Reserve Bank's recent changes in effect allow all of these systems to limit merchant surcharges to the ‘reasonable cost of acceptance’ through scheme rules. The financial institutions that provide card acceptance services (or the card scheme in the case of American Express and Diners Club) will notify merchants of any changes that will affect them.

Yes. The Reserve Bank's Standards continue to prohibit schemes from imposing ‘no-surcharge’ rules. However, the amended Standards enable card schemes to implement scheme rules that limit surcharges to the reasonable cost of card acceptance.

The amended Standards make clear that the reasonable costs of card acceptance include, but are not limited to, the merchant service fee. These merchant service fees should be identifiable on statements provided by your financial institution (or card scheme in the case of American Express and Diners Club). It is the Reserve Bank's expectation that merchant service fees and other costs payable to the financial institution or scheme that provides card acceptance services will typically represent the bulk of the reasonable cost of card acceptance for merchants.

The Reserve Bank has also provided a Guidance Note to assist parties in determining what may be considered an appropriate level of card surcharges. The Guidance Note outlines the Reserve Bank's view of the costs, beyond the merchant service fee, that may appropriately be included in the reasonable cost of acceptance if the merchant chooses to do so, and how these costs may be calculated. The Guidance Note also makes clear some costs that the Bank does not consider to form part of the reasonable cost of acceptance.

No. If you are already applying surcharges that are in line with your reasonable costs of acceptance, as outlined in the Guidance Note, you should not need to make any changes to your surcharge levels as a result of the Reserve Bank's amended Standards and any resulting changes in scheme rules.

Yes, subject to a caveat. Given that the Standards allow card scheme rules to limit surcharges to the reasonable cost of acceptance, merchants choosing to apply a blended surcharge across card schemes may in practice be limited (by scheme rules) to setting that blended rate at the reasonable cost of acceptance for the scheme with the lowest acceptance cost.

Yes. The Standards continue to ensure that merchants have the ability to fully recover their costs of card acceptance and they may do so by applying different surcharges for different card types.

If your surcharges are based on merchant service fees and other card acceptance costs paid to your financial institution (or scheme in the case of American Express and Diners Club), the Reserve Bank expects that no additional verification should be required for surcharges set in line with these costs.

Where surcharges are based on a broader range of costs of card acceptance, there is nothing in the Standards that prevents your financial institution (or a card scheme) from seeking verification of costs.

It is the Reserve Bank's expectation that merchant service fees – that is, the fees that a merchant pays to its financial institution (or scheme in the case of American Express and Diners Club) for providing card acceptance services – will typically represent the bulk of the reasonable cost of card acceptance for merchants, though it will be possible for merchants to include some additional acceptance costs. A Guidance Note issued by the Reserve Bank outlines its view of other costs that might appropriately be included if the merchant chooses to do so.

The cost of accepting card payments can vary significantly between different merchants, depending on factors such as their size, the industry they operate in and the type of cards generally presented. This means that it will often be difficult for a consumer to determine with confidence that a surcharge is excessive. The changes will largely rely on card schemes and financial institutions to determine this in cooperation with merchants.

The Reserve Bank believes that in most cases the bulk of the cost of accepting cards will be the merchant service fee charged to the merchant by the merchant's financial institution (or scheme in the case of American Express and Diners Club). The Reserve Bank publishes quarterly data on average merchant service fees for credit and charge cards in Statistical Table C3. As at the December quarter of 2012, the average merchant service fee for MasterCard and Visa transactions was 0.8 per cent, for American Express it was 1.8 per cent and for Diners Club it was 2.1 per cent.

However, consumers should note that in general large merchants are likely to face merchant service fees that are lower than average. Small merchants – which may not benefit from ‘strategic’ scheme interchange rates – are likely to face fees that are higher than average, sometimes significantly higher. Some specific sectors – for instance supermarkets, service stations and educational institutions – are likely to face lower merchant service fees than other sectors. In addition, the cost of accepting foreign-issued and corporate cards tends to be higher than other card types, so merchants that receive a large proportion of cards of this type may have higher acceptance costs. Finally, the cost to a merchant will often be higher for ‘platinum’ and other premium cards that typically offer relatively high frequent flyer or other rewards.

If consumers have concerns that a surcharge may be excessive they should raise their concerns with the merchant. If they remain concerned, they should contact either their financial institution or the card schemes represented on their card (e.g. American Express, MasterCard or Visa). This is because the Reserve Bank's recent reforms operate by allowing the card schemes to implement rules that limit a merchant's surcharges to the reasonable cost of acceptance.

Consumers should also consider using a means of payment (perhaps cash, debit card, or electronic funds transfer) that is not surcharged. Consumer protection law requires that if there is not at least one means of payment available that is not surcharged, the minimum surcharge must be built into the advertised price of the good or service. If it is not possible to advertise a single price because, for instance, a different level of surcharge applies to different payment methods, consumers must be advised a surcharge may be payable and the total price, including surcharge, must be quantified prior to payment. In this case the minimum unavoidable surcharge would still need to be included in the price of the good or service. If you have concerns that a merchant is not complying with these rules, you should contact the Australian Competition and Consumer Commission (ACCC).

A merchant is permitted to apply surcharges as a fixed dollar amount, but a card scheme may prevent it from recovering more than their cost of acceptance overall, across all transactions via that scheme.

The Reserve Bank publishes quarterly data on average merchant service fees on credit and charge cards in Statistical Table C3. While individual merchant service fees are likely to differ from the industry average (see Question 2) and the cost of acceptance may include items in addition to the merchant service fee, the data published by the Bank may be a useful starting point.