Merchants will be banned from surcharging the cost of accepting credit and debit card payments from October 1 this year, in a suite of controversial reforms the Reserve Bank of Australia (RBA) hopes will ultimately drive down costs for traders and consumers.
Businesses pay a percentage of each transaction in fees each time they accept a card payment, and can currently offset those fees by passing them directly to customers.
Australian consumers pay an estimated $1.6 billion in surcharges each year.
But after months of consultation and deliberation, the RBA’s Payments System Board on Tuesday said it would lift a prohibition on the eftpos, Mastercard and Visa networks from issuing ‘no surcharging’ rules.
Removing that prohibition will effectively ban surcharging overall.
The RBA conclusions paper found today’s surcharging regime — which provides a price signal to consumers, helping them choose lower-cost payment options — is no longer working as intended.
Blended payment plans — allowing merchants to apply a flat surcharge, even if different card payment types bear different processing fees — have weakened surcharging as a price signal, the RBA said.
Current surcharging rules are difficult to enforce, while declining cash use makes surcharging difficult to avoid, it added.
In a statement, Treasurer Jim Chalmers said the reforms are designed to “take pressure off consumers and businesses” and assist with the cost of living.
“Australians should be able to use debit and credit cards without being penalised, and that’s what this change will help to deliver,” he said.
In consultations, business representative groups warned the RBA that without other significant reforms, removing surcharges would heap extra cost pressures on small merchants.
Some 16% of Australian businesses currently apply surcharges, and the RBA anticipates many of those businesses will soon build the cost of card payment acceptance directly into their shelf pricing.
But the RBA hopes its reforms will encourage competition by payment services providers to provide cheaper services, which could ultimately drive down the price of card acceptance.
“Merchants that currently surcharge would be incentivised to review their payments plans and shop around for better deals so they can offer their customers the most competitive prices,” it said.
To ensure that occurs — and that merchants aren’t simply lumped with costs they would have previously offset with surcharges — the RBA said it will lower the cap on interchange fees.
A merchant’s payment services provider pays interchange fees to a customer’s card issuer each time a card transaction is processed.
These interchange fees, set by the card network, make up a large portion of the costs ultimately passed on to merchants.
Reducing interchange caps on domestic-issued cards, and introducing an interchange cap on foreign-issued cards, is forecast to reduce wholesale card payment costs for merchants by $910 million each year.
The RBA says these caps will provide the most benefit to small businesses, which face higher interchange fees on average compared to major businesses.
And to help businesses make the most of those reforms, the RBA says it will improve fee transparency from card networks and large acquirers.
The RBA hopes this transparency will trickle down to merchants, helping them make more efficient decisions around which payment service providers and acquirers they work with.
The extra clarity will help businesses “understand, reconcile and manage scheme fees and scrutinise fee changes,” and “make it easier for merchant customers to identify acquirers that pass on interchange reductions in full, and can help inform their decision to switch to those providers,” according to the paper.
“Small businesses will no longer have to wade through complex surcharging rules and will be armed with more information so they can shop around for card payment services that meet their needs,” said Chalmers.
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