Review of Card Surcharging: A Consultation Document – June 2011 4. Policy Options and Discussion
Since the 2007/08 Review, there has been increased evidence of adverse surcharging practices. The Board, therefore, believes there may be a case for varying the no-surcharge Standards. The Board has identified two potential modifications to the Standards: allowing scheme rules to impose caps on surcharges; and providing clarification on differential surcharging. These suggested modifications are set out below. The possible need for disclosure of merchant service fees is also discussed.
Capping of Surcharges
The Board believes that allowing some limit to be placed on the level of surcharges could improve the effectiveness of the reforms at relatively little cost, particularly given that the practice of surcharging is now well established. There are two possible options the Board could take to implement such a change: determine a specific permissible cap that the schemes could impose; or allow scheme rules to limit surcharges to an amount that is either reasonably related, or equal, to the merchant's cost of card acceptance. Given that the Bank has no direct influence over merchant pricing, either approach would best be implemented by allowing schemes to alter their rules to incorporate the cap.
Under the first option, the Board could determine a specific permissible cap, possibly expressed as a percentage of the transaction value, for the designated MasterCard and Visa credit card systems, and the Visa Debit system.[1] This would be the lowest cap that schemes rules could choose to impose. That is, scheme rules may choose to impose a cap at a higher level than that specified in the Standards, or to not impose caps at all, but any cap below the level specified would not be permitted.
This option has the appeal of being transparent and easy for schemes and consumers to monitor compliance. There is, however, the practical difficulty of determining the appropriate level for the cap. If the cap is set too high, merchants with market power would be encouraged to set surcharges at the level of the cap. If the cap is set too low, the ability of merchants to put downward pressure on merchant service fees and interchange fees would be limited. A permissible cap that is specified in the Standards would also be unresponsive to competitive pressures that might influence merchant service fees over time.
The second and more flexible option is to modify the no-surcharge Standards to allow scheme rules to limit surcharges to an amount that is either reasonably related, or equal, to the merchant's cost of card acceptance. Under the current Standards, acquirers and merchants may come to an agreement that the amount of the surcharge will be limited to the costs of card acceptance. However, it is not clear that this has been used in practice, as acquirers for the four-party schemes have little incentive to impose restrictions on their merchant clients in exchange for reducing merchant service fees. Hence, this limit may be more effectively implemented through scheme rules.
Under this second option, the Standards might need to define the cost of card acceptance. The widest definition of the cost of acceptance would be the merchant service fee plus ‘other’ costs, such as annual fees, terminal rentals or other transaction fees. Determining what other costs should be included, though, is not straightforward because of the complexities of merchant pricing. One way to limit the scope of the costs that can be included is to only allow costs charged by the acquirer. However, there are legitimate costs for processing card transactions that are not necessarily charged by the acquirer. For example, while some merchants rent their terminals and incur terminal rental fees, others invest directly in terminals themselves; if only costs imposed by acquirers could be passed through, merchants that rent their terminals from acquirers could impose a higher surcharge. Also, in the case of online payments, some merchants have their card transactions processed by a payment gateway, which is not necessarily the same as the merchant acquirer. Therefore, any fee associated with transaction processing by the third-party gateway could not be passed through as a surcharge under such arrangements. Another consideration is that other costs cannot always be entirely attributed to a particular card's acceptance. For example, terminals are used to process many types of payments and so these costs would need to be apportioned across payment methods appropriately.
Given the difficulties involved in determining the appropriate scope for other costs, a more transparent and consistent alternative is to define the cost of acceptance as, simply, the merchant service fee. While it may be somewhat restrictive for some merchants, it may be the most straightforward way to address the concerns of excessive surcharging while still providing appropriate price signals to consumers.
Another consideration under this more flexible option is whether surcharges should be capped at a level equal to the defined cost of acceptance, or whether they need only be ‘reasonably related’ to that cost. Allowing for a reasonable relationship between surcharges and the cost of acceptance implies some level of tolerance around any surcharging cap. What constitutes ‘reasonable’ in this case could be left unspecified. Alternatively, a level of tolerance could be defined more precisely, for instance in terms of basis points for credit cards.
Clarification on Differential Surcharging
The second proposed modification to the no-surcharge Standards is to provide clarification on the ability of merchants to surcharge differentially across card types within a particular card scheme. However, consideration needs to be given to the different models of merchant pricing.
As mentioned in Section 3, the majority of merchants receive a blended merchant service fee across all cards of a particular scheme and most prefer this simple fee structure. This blended merchant service fee, in part, reflects the merchant's expected mix of card transactions as indicated by recent experience or industry norms. Therefore, premium/platinum card transactions, for example, do not explicitly cost more than standard card transactions for a merchant on a blended merchant service fee, but a sustained increase in the proportion of premium/platinum card transactions is likely to flow through to a higher blended rate over time. Blended merchant service fees, therefore, make it difficult for merchants to assess the cost of accepting a particular card type and to surcharge accordingly.
By contrast, some larger merchants receive ‘interchange-plus’ merchant pricing, where for each transaction the merchant is charged the interchange fee applying to that card or transaction type plus the acquirer's margin. A transaction made with a premium/platinum card will, therefore, at many merchants incur a higher merchant service fee than a transaction on a standard card because premium/ platinum cards attract a higher interchange fee. Reflecting this, the merchant may choose to signal the different costs of acceptance for different card types by imposing card-specific surcharges. Alternatively, they may choose to surcharge one rate across all cards of a particular scheme. If surcharging were tied to acceptance costs, such merchants would need to calculate (or be provided with) their own weighted-average (blended) merchant service fee for each card scheme they accept.
Considering these different models of merchant pricing, for efficiency reasons revised Standards should ensure that scheme rules capping surcharges are not imposed in a way that prevents a merchant from surcharging differentially across cards within a card scheme if they have the capacity to do so. The Board is seeking views on the ways merchants may retain the flexibility to apply differential surcharging in conjunction with a possible surcharging cap. For example, one option might be to clarify in the no-surcharge Standards that scheme rules capping surcharging cannot prohibit merchants applying a surcharge that is either:
- a blended rate for each particular card scheme; or
- the cost of accepting each card within a card scheme.
In order to enable merchants to differentially surcharge, revisions to the Standards could also require acquirers to pass on information about the merchant's cost of acceptance for each different card type if it is requested by the merchant. At the same time, the Standards could require acquirers to pass on information about the weighted-average merchant service fee for those merchants on ‘interchange-plus ’ arrangements.
Disclosure
The Board has also considered whether there is a case to promote the disclosure of merchant service fees. The disclosure of surcharges by merchants has been addressed in a guide on Merchant Pricing for Credit Card Payments produced jointly by the Australian Competition and Consumer Commission, and the Australian Securities and Investments Commission.[2] The additional disclosure of merchant service fees by merchants would provide consumers with information about the cost of card acceptance, against which the reasonableness of any surcharge could be assessed. Alternatively, the Bank could collect and publish more detailed data on merchant service fees, such as the range and average of these fees across merchant categories for each card scheme. The Board is seeking the views of interested parties on the merits of these approaches to disclosure.