Questions & Answers Card Payments Regulation

Surcharging – General

Why are merchants allowed to apply payment surcharges?

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. For example, some merchants face fees of around 3 per cent on American Express transactions, while transactions on some types of premium MasterCard and Visa cards can cost many merchants more than 2 per cent. 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.

What changes have been introduced?

Merchants will retain 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 elements to the new framework:

  1. The definition of card acceptance costs has been narrowed. 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 will be expressed in percentage terms. It is expected that merchants who wish to surcharge – including in the airline industry – will typically do so in percentage terms rather than as a fixed dollar amount, which should mean that surcharges on some lower-value transactions will be reduced significantly.
  3. The Government has given the Australian Competition and Consumer Commission (ACCC) investigation and enforcement powers over cases of possible excessive surcharging.

Overall, the RBA expects that the narrower definition of the cost of acceptance, the proposed transparency measures and the ACCC's new powers will result in a framework that is clearer for all parties, with more effective enforcement in cases where merchants may be surcharging excessively.

Why are these changes needed?

The goal of the RBA's revised 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 new standard is targeted at eliminating instances of excessive surcharging, through improved transparency and stronger 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.

When did these changes come into effect?

The changes took effect in two stages. Large merchants have been required to comply with the new standard since 1 September 2016. Other merchants have been required to comply with the new standard since 1 September 2017.

Information on the previous surcharging framework can be found in the RBA's surcharging Guidance Note and Surcharging Q&A.

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

Why was there a delay for smaller merchants?

Much of the concern over excessive surcharging involves larger merchants. These merchants should have the ability to analyse and calculate their payment costs and so have been subject to the new framework since 1 September 2016. In contrast, smaller merchants are less likely to surcharge and to surcharge excessively. They often also have a relatively less detailed understanding of their payment costs. Surcharging decisions for these merchants will benefit from improved data on payment costs. By 1 September 2017, all merchants should have received an annual statement from their acquirer or payments facilitator with easy-to-understand information outlining their average cost of acceptance for each of the card schemes subject to the RBA's standard.

How do the changes affect small and medium-sized merchants more generally?

Small and medium-sized merchants who do not benefit from preferred interchange rates currently bear the cost of the high interchange rates on premium MasterCard and Visa cards. Accordingly, they should see a material reduction in merchant service fees from the changes to the RBA's interchange standards. This should improve their competitiveness relative to larger merchants who may benefit from low interchange rates on all their card transactions.

Merchants will also receive easy-to-understand information on the cost of payments for the different types of cards they accept. This should enable them to make more informed decisions about whether to accept higher-cost payment methods and, if they do, whether to surcharge them. This will place downward pressure on payment costs. If merchants decide to surcharge, they will have clear information on the maximum permissible surcharge for each payment method.

Can card schemes, acquiring banks or payment facilitators prohibit merchants from charging a surcharge?

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.

Surcharging – Consumers

Why are merchants allowed to apply payment surcharges?

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. For example, some merchants face fees of more than 3 per cent on American Express transactions, while transactions on some types of premium MasterCard and Visa cards can currently cost many merchants more than 2 per cent.

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.

Is there a limit on the size of a surcharge?

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. This means that surcharges on some lower-priced transactions should be reduced significantly.

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.

How can I avoid paying a surcharge?

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.

How do I know the surcharge imposed by a merchant is reasonable?

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 provides a narrower definition of the cost of acceptance than the previous standard, along with 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. Debit MasterCard and Visa Debit may cost merchants around ½ per cent of the transaction value, though for some merchants the cost of these cards is combined with credit card costs. MasterCard and Visa credit may cost many merchants up to 1–1½ per cent. And it is not unusual for merchants to pay 2–3 per cent for an American Express card payment.

What can I do if I believe I have been asked to pay an excessive surcharge?

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.

Will merchants be able to replace surcharges with other charges?

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 new 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.

Do the new rules affect the taxi industry?

Surcharging in the taxi industry remains the responsibility of state regulators. Until recently, surcharges of 10 per cent were typical in that industry. However, authorities in Victoria, New South Wales, Western Australia, South Australia, the Northern Territory and the Australian Capital Territory have taken or announced decisions to limit surcharges to no more than 5 per cent. Other states and territories are also considering such limits. 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.

Surcharging – Merchants

What is the objective of the new framework?

The new 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 Government's amendment to 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.

How does the new framework benefit merchants?

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 new surcharging standard, merchants will 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 will also enable merchants to make more informed decisions about whether to accept higher-cost payment methods and, if they do, whether to surcharge them.

What cards does it apply to?

The RBA standard and the ACCC's enforcement powers currently apply to payment surcharges in six card systems – eftpos, Debit MasterCard, MasterCard Credit, Visa Debit and Visa Credit and the American Express companion card system.[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.

Endnote

The RBA's standard (and the ACCC's enforcement powers) apply specifically to American Express companion cards issued by banks. However, American Express may decide to change its merchant agreements to make all transactions (including on its proprietary cards) subject to rules on permitted surcharges that are similar to those in the RBA's standard. Also, it should be noted that the prepaid card systems of eftpos, MasterCard and Visa are all subject to similar rules as for the debit cards of those systems. Merchants will receive statements of acceptance costs for debit and prepaid cards combined and so the maximum permitted surcharge for the two types of cards will be the same. [1]

What surcharge can a merchant impose when they accept a card payment?

Merchants are permitted to surcharge, but are not required to do so. Under the new 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.

What information is available for merchants?

Effective mid-2017, merchants will 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 will be 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.

What costs in addition to the merchant service fee can a merchant include in their surcharge on a particular type of card?

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.

How should a merchant calculate their permitted surcharge if they have costs in addition to those paid to their acquirer or payment facilitator?

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.

Box 1. Example: Calculating acceptance costs for costs in addition to the merchant service fee

Suppose that

  • A merchant paid $5000 annually for fraud prevention to protect its transactions through Card Systems X, Y and Z
  • A merchant wishes to surcharge transactions on Card System X to cover the cost of its fraud prevention service
  • Transactions in Card System X over the past year are $2 million and total transactions through Card Systems X, Y and Z are $10 million
  • The statement from the merchant's acquirer indicates that the average cost of transactions through Card System X over the prior year was 0.85 per cent.

Therefore

  • Of the $5000 paid in total for fraud prevention, 20 per cent (i.e. $2 million divided by $10 million) or $1000 is attributable to Card System X
  • The cost of fraud prevention attributable to Card System X represents 0.05 per cent of the total value of transactions in Card System X (i.e. $1000 divided by $2 million multiplied by 100)
  • The merchant could therefore surcharge Card System X at a rate no higher than 0.90 per cent (the 0.85 per cent average cost of acceptance paid to the acquirer plus the 0.05 per cent cost of fraud prevention).

Additional costs (such as gateway fees, fraud-related chargebacks, insurance for forward delivery risk or terminal fees paid to a payment service provider) should be dealt with in a similar way, that is by determining what proportion of these costs applies to each card system and calculating the percentage cost relative to the value of transactions through each system.

What if a merchant uses more than one acquirer or payment facilitator?

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 will be 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.

How often do merchants have to review their surcharge?

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.

Can merchants set a common or blended surcharge which applies to different cards?

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.

When did the rules take effect?

Large merchants became subject to the new rules on excessive surcharging effective 1 September 2016. All other merchants became subject to the rules from 1 September 2017.

What is the definition of a large merchant?

Large merchants are defined as those that meet at least two of the following tests: consolidated turnover (including that of any related companies) of more than $25 million in the most recent financial year; consolidated gross assets at 30 June 2015 of $12.5 million or more; or 50 or more employees as at 30 June 2015.

What if a merchant does not have an annual statement from their acquirer or payment facilitator?

Effective 1 June 2017 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.

Box 1. Example: Calculating acceptance costs for costs in addition to the merchant service fee

Suppose that

  • A merchant paid $5000 annually for fraud prevention to protect its transactions through Card Systems X, Y and Z
  • A merchant wishes to surcharge transactions on Card System X to cover the cost of its fraud prevention service
  • Transactions in Card System X over the past year are $2 million and total transactions through Card Systems X, Y and Z are $10 million
  • The statement from the merchant's acquirer indicates that the average cost of transactions through Card System X over the prior year was 0.85 per cent.

Therefore

  • Of the $5000 paid in total for fraud prevention, 20 per cent (i.e. $2 million divided by $10 million) or $1000 is attributable to Card System X
  • The cost of fraud prevention attributable to Card System X represents 0.05 per cent of the total value of transactions in Card System X (i.e. $1000 divided by $2 million multiplied by 100)
  • The merchant could therefore surcharge Card System X at a rate no higher than 0.90 per cent (the 0.85 per cent average cost of acceptance paid to the acquirer plus the 0.05 per cent cost of fraud prevention).

Additional costs (such as gateway fees, fraud-related chargebacks, insurance for forward delivery risk or terminal fees paid to a payment service provider) should be dealt with in a similar way, that is by determining what proportion of these costs applies to each card system and calculating the percentage cost relative to the value of transactions through each system.

Examples of how to calculate average costs of acceptance from information on payment costs under some different types of merchant plans can be found here.

What if a merchant does not wish to surcharge in percentage terms but rather to charge a fixed amount?

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. Indeed, one of the factors behind the Government's amendment to the Competition and Consumer Act and the RBA's new standard was dissatisfaction with the practice in the airline industry of imposing fixed-dollar surcharges that are well above actual cost of card acceptance for low-priced airfares.

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.

Are there any other requirements on surcharges?

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.

What about American Express?

The new rules apply to all American Express companion cards, ie American Express cards issued by banks. The RBA has not designated the American Express proprietary card system, meaning that the ACCC cannot enforce the new rules on excessive surcharging for these cards. However, in the case of these cards, American Express can enforce excessive surcharging against merchants directly as its merchant agreements contractually prohibit merchants from surcharging any American Express transaction above the reasonable cost of acceptance. If excessive surcharging became an issue for proprietary American Express transactions, the RBA could reconsider current regulatory arrangements.

What about other payment cards such as Union Pay, JCB, Diners Club etc?

The RBA has not designated UnionPay, JCB or Diners Club. Accordingly the RBA's new 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

UnionPay provided the RBA with an undertaking on 29 May 2017 indicating it will not enforce no-surcharge rules in Australia and will amend its rules by the end of 2017 to ensure that they are consistent with the RBA’s new standard. Diners Club has also provided the Bank with an undertaking in relation to no-surcharge rules, and American Express has provided a similar undertaking in relation to proprietary card transactions.

What about other systems such as PayPal and BPAY etc?

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.

Endnote

In some cases a consumer's bank may charge the consumer a fee for funding a BPAY payment with a credit card. This fee is not a merchant surcharge. [2]

Interchange Fees

What are interchange fees?

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.

Why does the RBA regulate interchange fees?

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).

The tendency for interchange rates to rise to high levels is most apparent in unregulated jurisdictions like the United States where credit card interchange rates in the MasterCard system are as high as 3.25 per cent plus 10 cents, implying that – after scheme fees and acquirer margin – some merchants may pay over 3½ per cent in merchant service fees for high rewards cards.

The past decade has also seen a decline in transparency for some end users of the card systems, partly because of the increased complexity and the wider range of interchange fee categories. In particular, merchants that do not benefit from ‘strategic’ rates face much higher interchange rates and payment costs than ‘preferred’ merchants and may have no transparency over the cost of particular transactions. A standard Visa or MasterCard credit card will have an interchange cost for ‘non-preferred’ merchants of 0.25–0.30 per cent, while the highest level of premium card will have an interchange cost of up to 2.0 per cent for those merchants, with merchants typically having little ability to distinguish between these cards or to respond in terms of acceptance decisions.

In 2003 the RBA introduced benchmarks intended to prevent the significant upward pressure on interchange rates seen in many markets. Contrary to some claims at the time that limiting interchange fees would affect the viability of card systems, the Australian cards market has continued to grow strongly and innovation has thrived. The RBA's reforms have been supported by the leading Australian consumer and merchant organisations. Following the reforms, a number of other jurisdictions, such as the European Union, have also regulated interchange fees.

What are the RBA's new interchange standards?

The weighted-average benchmarks remain the primary element of interchange regulation. The weighted-average benchmark for credit cards remains at 0.50 per cent. The weighted-average benchmark for debit cards has been lowered from 12 cents to 8 cents, effective 1 July 2017, consistent with the fall in average transaction values since the debit benchmark was introduced.

The weighted-average benchmarks are supplemented by caps on any individual interchange fee within a scheme's schedule. No credit card interchange fee is permitted to exceed 0.80 per cent and no debit interchange fee is permitted to exceed 15 cents if levied as a fixed amount or 0.20 per cent if levied as a percentage amount.

These changes are expected to significantly reduce the extent to which small and medium-sized merchants are disadvantaged relative to preferred merchants in the MasterCard and Visa interchange systems.

The credit card interchange standard has been modified so that issuance of American Express companion cards is subject to the same interchange fee regulation that applies to the MasterCard and Visa systems. In particular, interchange fees are defined to also include the interchange-like ‘issuer fees’ paid by American Express to card-issuing banks as an incentive to issue cards. In addition, both companion card issuance and traditional ‘four-party’ issuance (in the eftpos, MasterCard and Visa systems) are subject to rules on ‘other net payments’ to issuers, so as to prevent any circumvention of the interchange standards.

Additional changes to the system of benchmarks include:

  • a shift from three-yearly benchmark compliance to quarterly compliance to ensure that weighted-average interchange rates are not persistently above the benchmark
  • transactions on prepaid cards are included with debit cards in the observance of the debit benchmark.

The cards market has continued to thrive under regulated interchange fees and Australia is recognised as one of the most innovative markets globally. Based on the experience of the earlier reforms, the RBA is confident that these reforms will contribute to a more competitive and efficient payments system and will not adversely affect the development of the cards market in Australia.

How will the RBA's changes affect my credit card?

There should be little effect on interchange payments on standard consumer cards and therefore only limited changes to other aspects (e.g. interest rates, interest-free periods) of such cards.

However, the new standard is likely to result in some reductions in the generosity of rewards programs on premium and companion cards for consumers. Some adjustment in annual fees on these cards is also possible. Commercial and corporate card products often provide significant benefits free of charge to the company holding the card. It is possible that there will be changes to either the pricing or services provided by these products. These changes are part of the process of improving price signals to cardholders and creating a more efficient and lower-cost payments system.

How will the RBA's changes affect my debit or prepaid card?

The new standard has required schemes to reduce the high interchange rates that applied to some premium and commercial debit and prepaid cards. While it is currently unusual for rewards to be provided on debit and prepaid cards, some adjustments to product offerings for premium and commercial cards is possible. Interchange rates on standard cards are likely to be largely unaffected, so it is unlikely that there will be substantial changes to arrangements for most transaction accounts. More broadly, the changes to the interchange standards, especially on debit cards, should be reflected in lower merchant service fees and some merchants may decide to remove minimum spending requirements on cards, so consumers may find that they can use their cards for a greater range of transactions.

I generally use payment methods other than cards. How will the RBA's changes affect me?

Users of other payment methods are likely to benefit from the changes since the reforms will reduce the extent to which people using lower-cost payment methods cross-subsidise users of higher-cost methods (such as super-premium credit cards). The reforms will place downward pressure on the prices of goods and services faced by all consumers.

Looking ahead, the RBA's interchange reforms will make it more likely that new payment methods are able to emerge. Interchange fees are used by the large card schemes to encourage banks to issue their cards and to encourage consumers to use those cards rather than some other payment method. Reforms that limit the upward pressure on interchange fees will make it easier for new players to compete.

How will the RBA's changes affect credit unions, building societies and other small financial institutions?

Most smaller financial institutions have tended to focus on offering credit card products in the low-fee and low-rate sectors of the market. While a few offer ‘premium’ rewards cards, most typically do not issue cards with extensive rewards that attract very high interchange fees. The smaller institutions do not issue American Express companion cards.

The new interchange standard will have the largest effect on the high interchange categories applying to rewards cards and are likely to result in only small changes to interchange rates on standard cards. Hence, there should be little, if any, effect on interchange revenues of the smaller institutions, so little need for change to their business models.

I am a small merchant. How do the RBA's changes affect me?

Small and medium-sized merchants who do not benefit from preferred interchange rates previously bore the full cost of the high interchange rates on premium and commercial cards issued in the MasterCard and Visa systems. Accordingly, they should see a material reduction in merchant service fees from the RBA's reforms. This should improve their competitiveness relative to larger merchants who benefit from low interchange rates on all their card transactions.

Merchants will also receive easy-to-understand information on the cost of payments for the different types of cards they accept. This should contribute to downward pressure on payment costs and will enable merchants to make more informed decisions about whether to accept higher-cost payment methods and, if so, whether to surcharge them. If merchants do decide to surcharge, they will have clear information on the maximum permissible surcharge for each payment method.

Why are ‘companion cards’ subject to regulation?

The RBA regulated interchange fees (payments from a merchant's bank to a cardholder's bank) in the MasterCard and Visa systems in the early 2000s because it was concerned about their use to drive up payment costs and their effect on payment choices by consumers. The card payment systems operated by American Express and Diners Club did not use interchange fees given that American Express and Diners Club maintained the relationship with both the cardholder and the merchant, without the involvement of banks.

Since then, American Express has implemented a new model under which some cards (companion cards) are issued by banks rather than American Express itself. This model involves payments from American Express to banks to support issuance, along with more generous rewards programs than those typically available for MasterCard and Visa cards. These payments are ultimately funded by merchants and perform a function very similar to that of interchange fees. But to date they have been unregulated while interchange fees have been subject to a regulatory cap. The RBA's new approach of regulating payments to issuers in American Express companion card arrangements will restore competitive neutrality between these cards and the MasterCard and Visa systems, and reduce the effect of payments to issuers on cardholder payment choices.

Prepaid cards

How will the RBA's standards affect the way that prepaid cards, including gift cards, are labelled?

From 1 July 2017, 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.