Questions & Answers Card Payments Regulation

Merchants incur costs when they accept a payment from a customer. Different payment methods can have very different costs. For example, cards that provide significant rewards to consumers are typically more expensive for merchants. Surcharging provides merchants with the ability to pass the cost of accepting more expensive payment methods back to the customers who use those methods.

When merchants have the right to apply a surcharge to more expensive payment methods they are able to provide price signals that encourage consumers to use less expensive payment methods. By helping to hold down payment costs, the right to surcharge helps to hold down the price of goods and services charged to all consumers.

Merchants have the right to impose a cost-based surcharge on card payments, but any surcharge is limited to the amount it costs the merchant to accept that type of card for that transaction. There are three key elements to the surcharging framework:

1. The definition of card acceptance costs. Acceptable costs are limited to fees paid to the merchant's acquirer (or other payments facilitator) and certain other observable costs paid to third parties for services directly related to accepting particular types of cards.
2. Acquirers and payment facilitators must provide merchants with an annual statement that clearly sets out their average cost of acceptance for each of the card payment systems regulated by the RBA. Acceptance costs must be expressed in percentage terms.
3. The Australian Competition and Consumer Commission (ACCC) has investigation and enforcement powers over cases of possible excessive surcharging.

The goal of the RBA's surcharging standard is to improve price signals to consumers about the relative costs of different payment methods. Excessive surcharging diminishes the effectiveness of these price signals. The standard helps eliminate instances of excessive surcharging through transparency and enforcement. Merchants must be provided with easy-to-understand information about their costs of card acceptance, which will enable them to make informed decisions about whether to accept higher-cost payment methods and, if they do, whether to surcharge them. Where merchants do decide to impose surcharges, consumers can be confident that these represent the actual costs to the merchant. Consumers can make a complaint to the ACCC if they consider that a surcharge is excessive.

Merchants remain subject to all the obligations under the Australian Consumer Law.

Card schemes such as American Express, Mastercard and Visa cannot prevent or deter merchants from recovering the costs of accepting card payments. Banks and other payment facilitators are not allowed to prohibit or deter merchants from charging a surcharge on a particular payment instrument. Schemes, banks and payment providers cannot refuse to provide card acceptance services to a merchant solely because that merchant plans to surcharge or because of the level of their surcharge. They can, however, seek to ensure that a surcharge does not exceed the merchant's cost of acceptance.

Merchants incur costs when they accept a payment from a customer. Different payment methods can have very different costs. Cards that provide significant rewards to consumers are typically more expensive for merchants.

When merchants have the right to apply a surcharge to more expensive payment methods they are able to provide price signals that encourage consumers to use payment methods that are less expensive. By helping to hold down payment costs, the right to surcharge helps to hold down the price of goods and services charged to all consumers. It also reduces the extent to which those who pay with cheaper payment methods are subsidising those consumers – typically from higher income households – who use more expensive payment methods.

Surcharges must not be more than the amount that it costs a merchant to accept a particular type of card for a given transaction. For example, debit cards are typically less expensive for merchants to accept than credit cards. It is important that merchants do not impose surcharges in excess of their actual payment costs. Merchants will know how much that is from statements supplied by their bank or payments provider; these must contain easy-to-understand information on the average cost of acceptance for each payment method.

These statements will express acceptance costs in percentage terms and the standard defines the cost of acceptance in percentage terms. This should ensure that merchants who wish to surcharge – including in the airline industry – will generally do so in percentage terms rather than as a fixed dollar amount.

If merchants wish to surcharge two or more payment methods at the same rate (e.g. all credit cards from American Express, Mastercard and Visa; or both debit and credit cards from a particular system) they are required to set the surcharge at the lowest cost of those different payment methods.

Merchants that choose to surcharge will generally offer a non-surcharged payment method. This will typically be a payment type with a lower cost of acceptance for the merchant. If no surcharge-free method is offered, the amount of the surcharge should be built into the base price and not added on to the price of an item. Consistent with requirements under the Australian Consumer Law, merchants are required to prominently disclose the terms of any surcharge. A consumer who wishes to avoid paying a surcharge should ask the merchant to identify an alternative non-surcharged payment method.

While merchants are allowed to impose cost-based surcharges on card payments, surcharges must not exceed the permitted surcharge specified in the RBA standard. The standard defines the cost of acceptance and includes transparency measures to ensure merchants have clear information on the payment costs they face.

Merchants of different sizes and in different industries have a wide range of payment costs. However, as a guide, payments through the domestic eftpos system are usually quite low cost for merchants, around 0.3 per cent of the transaction value. Debit Mastercard and Visa Debit may cost many merchants around ½ per cent, though for some merchants the cost of these cards is combined with credit card costs. Mastercard and Visa credit may cost many merchants more than ¾ per cent. And it is common for merchants to pay 1 to 1½ per cent for an American Express card payment. In general, smaller merchants face higher payment costs than larger merchants and may have higher costs than these typical ranges.

Consumers who have concerns over whether a payment surcharge is excessive can contact the ACCC. The ACCC has investigation and enforcement powers over cases of possible excessive surcharging.

Merchants cannot avoid the rules by calling their payment surcharges something else while still applying them to some payment methods and not others.

However, the surcharging framework only applies to payment surcharges – that is, to fees that are specifically related to payments or apply to some payment methods but not others. Some merchants apply fees, such as ‘booking’ or ‘service’ fees, which are unrelated to payment costs and apply regardless of the method of payment (this is for instance common in the ticketing industry). The surcharging framework is not intended to apply to these fees but merchants are required to meet all provisions of the Australian Consumer Law in terms of disclosure of any such fees.

Surcharging in the taxi industry remains the responsibility of state regulators. Until a few years ago, surcharges of 10 per cent were typical in that industry. However, state authorities have since introduced regulations to limit surcharges. In Queensland, New South Wales, Western Australia, South Australia, the Northern Territory and the Australian Capital Territory a maximum surcharge of 5 per cent is permitted, while in Victoria the maximum surcharge is 4 per cent. As new payment methods and technologies emerge, it is likely to be appropriate for caps on surcharges to be reduced below 5 per cent. The Government and the RBA will continue to monitor developments in the taxi industry with a view to assessing whether further measures are appropriate.

Card payments for hire cars and ride-sharing services are within the scope of the RBA's surcharging standard and potential ACCC enforcement.

The RBA standard is intended to ensure that merchants have the right to surcharge for payment cards while also ensuring that consumers are not surcharged excessively, consistent with the Competition and Consumer Act 2010. A merchant cannot surcharge a card transaction at a rate that exceeds the merchant's average cost of acceptance for that transaction for the relevant card system. The ACCC has responsibility for enforcement in the event that a merchant is attempting to surcharge excessively.

The framework emphasises the right of merchants to surcharge to cover their acceptance costs and signal differences in costs to consumers. It also improves the transparency of payment costs to merchants.

Under the RBA's surcharging standard, merchants receive an annual statement from their acquirer or payments facilitator that clearly sets out their average cost of acceptance for each of the card payment systems regulated by the RBA. These transparency measures, which help merchants to know how much it costs them to accept card payments, should contribute to downward pressure on payment costs. This information also enables merchants to make more informed decisions about whether to accept higher-cost payment methods and, if they do, whether to surcharge them.

The RBA standard and the ACCC's enforcement powers currently apply to payment surcharges in five card systems – eftpos, Debit Mastercard, Mastercard Credit, Visa Debit and Visa Credit.^[1] However, other card systems may include conditions in their merchant agreements that are similar to the limits on surcharges under the RBA's standard, in which case merchants may be contractually bound to similar caps on what they can surcharge cards from other systems. Over time other payment types could be added via regulation.

Merchants are permitted to surcharge, but are not required to do so. Under the framework a merchant who decides to surcharge a particular type of card may not surcharge above their average cost of acceptance for that card type.

It is likely that most merchants who decide to surcharge debit or credit cards will do so based purely on what they are charged for payments by their acquirer or payment facilitator; this includes costs such as merchant service fees, terminal fees, and any other fees incurred in processing card transactions.

Merchants are able to surcharge any of the cards covered by the RBA's standard up to the average percentage cost of acceptance in their annual statement for that card type. However, some merchants may have other costs (as outlined below) of accepting a particular type of card that they would like to include in their surcharge. If those costs meet the requirements for inclusion and can be documented, merchants may add them to the costs charged by their acquirer or payment facilitator over the previous year and, based on their total costs, calculate their average percentage cost for that card system. Merchants may not surcharge above this average cost.

As required by the RBA's surcharging standard, merchants receive annual statements from their acquirer or payment facilitator that show the average percentage cost over the past year for each of the card types covered by the RBA/ACCC framework; this is based on costs such as merchant service fees and terminal rental costs. An acquirer is the entity (often a bank) which has relationships with card companies such as eftpos, Mastercard and Visa that enable it to provide merchants with the ability to accept card payments. Alternatively, a merchant may use the services of a payment facilitator, a non-bank entity which has arrangements with an acquirer that allow it to offer card acceptance services to merchants. The RBA has worked with acquirers and payment facilitators on the design of easy-to-read statements that are reasonably standard across the industry. If a merchant wishes to surcharge for some costs in addition to those paid to their acquirer or payments facilitator, they will have to keep records of the costs paid to other providers.

In addition to the fees paid to the merchant's acquirer or payment facilitator for standard card acceptance services, merchants may include some additional types of costs if they are directly related to accepting that particular card type.

These are:

• gateway fees paid to a payment service provider
• the cost of fraud prevention services paid to an external provider
• any terminal costs paid to a provider other than the merchant's acquirer or payments facilitator
• fraud-related chargeback fees (but not the cost of any actual chargebacks)
• the cost of insuring against forward delivery risk. This applies to agents (such as travel agents) who pay an external party to insure against the risk that the agent will be liable to a customer for the failure of a principal supplier (such as an airline or hotel) on payments accepted via cards.

In each case, these costs must be specific to the particular types of cards that the merchant is surcharging, rather than being a cost that applies to all payment methods accepted by the merchant. Furthermore, they must be costs paid to an external provider and verified by contracts, statements or invoices. A merchant's internal costs cannot be included in a surcharge.

In the event that merchants wish to include additional costs that are part of the cost of acceptance for one or more of the six regulated card systems, they should calculate the proportion of those costs applying to particular systems, allocating costs based on total transaction values for each system over the previous year. The cost attributable to any particular system may then be included in the surcharge on payments for that particular system.

An example of the calculation of acceptance costs for costs in addition to the merchant service fee is explained below.

Some merchants have more than one acquirer or payment facilitator, for example one for their point-of-sale transactions and another for their online transactions. Where this is the case, it is reasonable for merchants to use the information on the statement provided by their main acquirer or payment facilitator. If merchants wish to be more exact about their payment costs, they may calculate an average acceptance cost, weighting the costs of their different acquirers by the value of transactions through the two entities.

Merchants may choose to reset their surcharges frequently based on evidence of their average cost of acceptance over the most recent twelve-month period. However, the RBA's standard has been designed so that merchants will be able to identify their payment costs once a year and set their surcharge for the next year based on that information. They must then review that surcharge in a year's time when they receive a new annual statement about their payment costs.

Merchants may choose to set the same surcharge for a number of different payment systems, provided that the surcharge is no greater than the average cost of acceptance of the lowest cost system included. For example, a merchant may choose to set the same surcharge for two credit card systems, which have average costs of acceptance of 1 per cent and 1.5 per cent. In this case, the maximum common surcharge that could be charged would be 1 per cent. However, if the merchant wished to surcharge the two systems separately, it could charge 1 per cent and 1.5 per cent as appropriate. In this example, the merchant would not be able to blend both these costs into a 1.25 per cent surcharge, since it would be surcharging excessively for the scheme that cost 1 per cent.

The RBA's standard requires all acquirers to ensure that merchants receive statements that clearly set out merchants' average cost of acceptance for each card scheme.

There may be merchants who wish to surcharge but do not have statements covering 12 months, for instance because they have not been established for that long. These merchants should make good faith estimates of their payment costs based on their available information – for example, any recent monthly statements they have, invoices and contracts from their acquirers, payment facilitators or payment service providers.

Merchants may also wish to include items such as gateway fees paid to a payment service provider, the cost of fraud prevention services, any terminal costs paid to a provider other than their acquirer or payments facilitator, fraud-related chargeback fees (but not the chargebacks themselves) or the cost of insuring against forward delivery risk. If they wish to include such items, they will have to gather information on these costs over the past year and then calculate the amounts attributable to particular payment systems as outlined in Box 1 below. Based on data for the total value of transactions in each system, they will be able to calculate the additional percentage amount that may be included in the cost of acceptance and the permitted surcharge.

View examples of how to calculate average costs of acceptance from information on payment costs under some different types of merchant plans.

In most cases payment costs are charged to merchants in percentage terms, so it will typically be appropriate that any surcharge is also expressed in percentage terms. Accordingly, the standard defines the cost of acceptance in percentage terms and requires acquirers to provide information on payment costs in these terms.

However, this does not prevent a merchant from capping the surcharge it applies at a fixed amount. For example, if a merchant has an average cost of acceptance for a particular scheme of 1 per cent, it could choose to apply a surcharge of 1 per cent up to a maximum surcharge of $10. In such cases a 1 per cent surcharge would be applied to payments up to $1000, and a surcharge of $10 would apply to payments greater than $1000 (which would be less than the average cost of acceptance for that scheme).

Alternatively, if a merchant's cost of accepting a particular payment method is truly a flat amount (for example, if the merchant's acquirer charges a flat fee of say 10 cents to all eftpos transactions), then a flat surcharge of the same amount on all transactions would not be excessive.

Nothing in the standard alters the existing obligation of merchants to comply with the provisions of the Australian Consumer Law, set out in the Competition and Consumer Act. Sections 18 and 29 prohibit merchants from engaging in misleading or deceptive conduct and making false or misleading representations with respect to the price of goods or services, and section 48 prohibits component or partial pricing if the represented price only constitutes part of the total price of the goods or services.

The rules previously applied to all American Express companion cards, i.e. American Express cards issued by banks. However, following the 2019-21 Review of Retail Payments Regulation, the RBA revoked the designation of the American Express companion card system as the major banks had stopped issuing companion cards.

The RBA has not designated UnionPay, JCB, Diners Club, or the American Express proprietary card systems. Accordingly the RBA's standard does not apply to transactions carried out using those systems. However, these payment systems (and others) may include conditions in their merchant agreements that are similar to the framework under the RBA's standard. In such cases merchants may be contractually bound to surcharge caps in those systems, similar to the caps enforced by the RBA's standard. If excessive surcharging became an issue for these systems it will be open to the RBA to reconsider the regulatory arrangements.

Undertakings

Diners Club and UnionPay have provided the Bank with undertakings (Diners Club; UnionPay) in relation to no-surcharge rules, and American Express has provided a similar undertaking in relation to proprietary card transactions.

PayPal and BPAY are payment systems in their own right that merchants and consumers may use. Consumers can fund transactions through those systems from a number of sources, including their credit card or their bank account. The cost to a merchant of accepting PayPal or BPAY reflects fees for those systems, so any surcharge applied on those systems is not a credit card surcharge.^[2]

PayPal and BPAY are not currently designated, so transactions through those systems will not themselves be covered by the RBA's standards. However, these payment systems could include conditions in their merchant agreements that are similar to the framework under the RBA's standard. If excessive surcharging became an issue for either system the RBA could reconsider the regulatory arrangements.

PayPal

PayPal updated its user terms and conditions on 19 October 2016 to permit merchant surcharging. Paragraph 11.2(c) of the updated User Agreement for PayPal Services allows merchants to surcharge PayPal transactions as long as the surcharge does not exceed the amount the merchant is charged by PayPal for the transaction. PayPal has published information about surcharging PayPal payments.

Interchange fees are wholesale fees set by card schemes such as Mastercard, Visa and eftpos that require payments from the merchant's bank to the cardholder's bank on every transaction.

Interchange fees affect the prices faced by cardholders and merchants in using and accepting payments. Most notably, interchange fees increase payment costs for merchants and fund rewards programs for some cardholders. While there may be a useful role for interchange fees when a card network is first established, the case for significant interchange fees in mature card systems is much less clear.

Where merchants feel unable to decline particular cards (because consumers expect to be able to pay with that card and may take their business elsewhere if they cannot), the incentive is for card schemes to raise interchange rates. Evidence from a range of countries suggests that competition between well-established payment card schemes can lead to the perverse result of increasing the price of payment services to merchants (and therefore to higher retail prices for consumers). As such, interchange regulation is needed to constrain the potential for interchange fees to distort efficient payment choices and underpin a fall in the overall resource cost of payments.

Under the Bank's interchange standards, card schemes must comply with weighted- average benchmarks for interchange fees. Specifically, each scheme's average interchange fee, weighted by the value or volume of transactions in each interchange category, is required to be below a benchmark of 0.50 per cent for credit cards, and 8 cents for debit and prepaid cards.

The standards also specify a ‘sub-benchmark’ for single-network debit cards (SNDCs), which only allow payments to be processed through the one debit network on the card. The ‘sub-benchmark’ specifies that the weighted-average interchange fee on SNDCs from a given scheme must be no more than 8 cents. This was introduced following the RBA's 2019-21 Review of Retail Payments Regulation to limit interchange-based incentives for issuers to issue SNDCs (which reduce competition in the debit card market).

The weighted-average benchmarks are supplemented by caps on any individual interchange fee within a scheme's schedule. This limits the disparity between fees applicable to larger merchants that can benefit from lower ‘strategic’ rates and smaller businesses. These ceilings are currently: 0.80 per cent for credit cards; and 10 cents, or 0.20 per cent if the interchange fee is specified in percentage terms, for debit and prepaid cards.

The average cost of all card payments has fallen significantly since the Bank's initial payment reforms in the early 2000s. These reforms included the imposition of interchange fee benchmarks intended to prevent the significant upward pressure on interchange rates seen in many markets. A reduction in the Bank's interchange fee benchmark for debit cards in 2017 has also contributed to a further decline in average fees in the Visa and Mastercard debit schemes in recent years. Australia now has a relatively low-cost payment system by international standards.

Contrary to some claims at the time of the initial reforms that limiting interchange fees would affect the viability of card systems, the Australian cards market has continued to grow strongly and innovation has thrived. Following the reforms, a number of other jurisdictions, such as the European Union, also regulated interchange fees.

All prepaid cards that are issued by participants in the designated eftpos, Mastercard and Visa schemes that are capable of being visually identified as prepaid cards must be so identified. Where a prepaid card is clearly identified as a gift card, it does not also need to be separately labelled as a prepaid card.