Review of Card Payments Regulation 5. Excessive Surcharging

5.1 Issues for the Review

The Bank's reforms that took effect in 2003 required schemes to remove no-surcharge rules and rules that prevented merchants from steering consumers to lower-cost payment methods. The ability of merchants to levy surcharges on different types of payment instruments is an important mechanism for promoting the efficient allocation of resources in the payments system. It allows merchants to signal the costs of different payment choices and to pass on these costs to users, aligning end users' private costs more closely to social costs and thereby contributing to a more efficient payments system. The outcome is that merchants are able to set prices for goods and services lower than would be the case if surcharging was prohibited, and the extent to which users of lower-cost payment methods subsidise users of higher-cost methods is reduced. The ability to surcharge also potentially improves merchants' bargaining position in relation to different payment methods, which can help keep downward pressure on merchant service fees and interchange fees.

The ability to surcharge has been a valuable reform, but practices have emerged in some industries where surcharge levels on some transactions appear to be well in excess of merchants' likely acceptance costs. The Bank sought to address these cases with changes to its standard, effective from March 2013, that enabled schemes to limit surcharges to the reasonable cost of acceptance. However, there is wide agreement that the enforcement of this framework has been ineffective. This was highlighted during the recent FSI, which received over 5,000 submissions on the topic as part of a public campaign. Concerns were largely focused on surcharging in the airline and taxi industries. The FSI Final Report cited the complexity of calculating merchants' reasonable cost of acceptance and the associated lack of transparency as factors that have contributed to the limited enforcement of the current regime by schemes and acquirers.

The Bank's March 2015 Issues Paper discussed the issue of excessive surcharging and invited stakeholder views on how to deal with the issue, including on the feasibility of a three-tiered model suggested in the FSI Report. In October 2015, the Government released its response to the FSI, indicating that it would phase in a legislated ban on excessive surcharges, with enforcement to be undertaken by the ACCC. It also indicated its expectations that the Board – through this Review – would provide clarity around what constitutes excessive customer surcharging on card payments. Amendments to the Competition and Consumer Act 2010 were passed by Parliament on 22 February to give the ACCC enforcement power over surcharges which are above the ‘permitted surcharge’ defined in a Reserve Bank standard or in a regulation. Accordingly, the implementation of the new legislation, as it relates to card payments, depends on the Bank adopting an amended standard that addresses this definition.

5.2 Options presented in consultation

The December 2015 Consultation Paper canvassed three broad options. The first was to leave the current standard unchanged, an approach which the Paper noted would add considerable complexity to the ACCC's enforcement of a Government ban on excessive surcharges, given the nature of the draft legislation. A second option would involve removal of regulation, such that schemes would be able to reintroduce the type of no-surcharge rules that were in place prior to the Bank mandating the removal of such rules in 2003. This option would most likely eliminate any instances of excessive surcharging in that it would most likely result in the elimination of all surcharging, an outcome which would not be consistent with either the Board's efficiency mandate or the intent of the Government's response to the FSI.

The third option was reflected in the draft standard published in the Consultation Paper. It would entail modifications to the cost of acceptance framework, aimed at preserving the right of merchants to surcharge for high-cost payment methods while ensuring that merchants do not abuse this right by surcharging in excess of their acceptance costs. It would retain the cost of acceptance as the ceiling for surcharges, but would define acceptance costs explicitly and more narrowly. The approach would involve a definition of cost of acceptance focusing on explicit information from acquirers and payment facilitators. The option would require that information on these costs is provided to merchants to enable them to easily calculate their cost of acceptance and thus their permitted surcharge. It would also restate existing obligations for schemes and issuers to make debit and credit cards identifiable visually and electronically, and for schemes and acquirers to make lists of credit and debit Bank Identification Numbers (BINs) available to merchants on request.

5.3 Stakeholder views

While schemes and some financial institutions would prefer to reintroduce no-surcharge rules, the objectives of the proposed changes to the regulation of surcharging received widespread support in submissions, including from consumer groups.[23] However, a number of parties raised concerns about particular elements and a few industries have argued that they may be potentially significantly disadvantaged by the proposed approach.

A number of banks with acquiring businesses expressed concern about the burden that would be placed on them to provide statements to merchants with specific (and easily understood) information on their acceptance costs; this was less of an issue, however, for some other payment service providers with systems that were more conducive to change. Some banks noted that the billing process drew on multiple systems within their organisations (and sometimes from third parties), so that it was not straightforward to provide the scheme-level average cost information proposed by the Bank. Some indicated that they do not currently provide annual statements to merchants, so this would be a significant change. Some suggested that it would be hard to get the internal resources to work on a project to change merchant statements given many other projects that are underway. Given these difficulties, one bank suggested that merchants who wanted information on the cost of different systems should choose an ‘interchange-plus’ merchant pricing model, which would make the costs fairly explicit. There were different views on the amount of time that acquirers would need to introduce merchant statements with the desired transparency of costs, with some banks suggesting it would take more than 12 months. A number of submissions called for the Bank to work closely with industry on the issue of merchant statements.

Two particular industries – travel agents and event ticketing companies – submitted that they might be significantly disadvantaged by the proposed approach to surcharging. Both are subject to potentially large chargeback risk on cards: this is where a card transaction is reversed, with the cost falling on the merchant, following a complaint to the issuer by the cardholder. Chargeback risk is of particular concern to firms in these two industries because the firm is acting as an agent for the principal (for example, a promoter or venue in the case of the event ticketing industry or an airline or hotel in the case of travel agents). In the event of a chargeback due to fraud by the purchaser or some failure by the principal, the agent may have to refund the total amount of the purchase, even though the booking fee that accrues to the agent is only a small fraction of the total purchase amount.

In the case of the event ticketing industry, other concerns raised included:

  • the significant costs to the industry of fraud prevention measures
  • the fact that the draft standard would not allow the imposition of a single blended surcharge across several schemes at the average acceptance cost of those different schemes
  • the existence of long-term contracts between ticketing firms and venues which included terms relating to the distribution of ticketing revenues, including from payment processing fees
  • a more general desire for a significant period of time to implement any required changes to surcharging arrangements.

Submissions from airlines argued for the inclusion of more cost categories – including fraud mitigation costs – associated with card payments, in addition to the merchant service fee, within the definition of allowable costs. One airline also argued that the proposed approach would not achieve a level playing field given that only schemes subject to the Bank's standard would explicitly be covered in the surcharging framework – the concern here was that an airline might use a foreign acquirer which would not be subject to the Bank's standard. Airlines also noted the complexity of their booking systems and argued that responding to changes to the surcharging standard would require an extended implementation period.

There was no significant opposition to the proposed treatment of taxis from submissions to the Consultation Paper, namely that surcharging in the taxi industry will largely remain an issue for state taxi regulators.

5.4 The Board's assessment and conclusions

5.4.1 The importance of the right to surcharge to reflect the cost of payment methods

While the submissions from the international payment schemes have restated their views that surcharging of payment cards should not be allowed, the current review has not changed the Board's view that the efficiency of the payments system is enhanced by ensuring that merchants have the right to surcharge for more expensive means of payment.

The Board considers that providing merchants with the ability to surcharge payment cards – just as they have the right to surcharge other payment options – has been a valuable reform. It has helped lower the cost of payments by both allowing merchants to encourage cardholders to switch to lower-cost payment methods and enhancing the ability of merchants to negotiate lower card acceptance costs. The Board notes that the option to surcharge is just that – an option – and not necessarily one that many merchants will consider that they need to exercise. Indeed, it might be a good outcome if the combined effects of competitive forces and the regulatory framework are such that there is sufficient downward pressure on payment costs so that most merchants see little need to surcharge for particular payment methods.

While issues of the disclosure of prices and charges are the responsibility of the ACCC and covered by the Australian Consumer Law (ACL) provisions regarding component and ‘drip’ pricing, the Board notes also that it is important that any payments surcharge is properly disclosed to consumers. If a particular charge cannot be avoided, then under the ACL it must be built into the up-front price, not added as a surcharge subsequently. For example, if a ‘payment processing fee’ charged by a ticketing company cannot be avoided in the online environment, the ACL requires that such a fee is already built into the price advertised on an agency's website.[24]

5.4.2 Surcharging should not be excessive

Consultation with stakeholders has reinforced the Board's view that it is in the public interest that consumers are not surcharged excessively when using cards (or other payment methods). In particular, the efficiency of the payments system is improved where surcharges are not excessive. In the same way that a no-surcharge rule can distort price signals to end users, excessive surcharging of card payments also distorts price signals and may mean that users make fewer card transactions than is optimal given their costs and benefits.

One particular element of stakeholder concern about excessive surcharging has been the use of fixed-dollar surcharging in the airline industry. Given that most of the costs of card acceptance for a merchant vary with transaction values, surcharges of $7–8 per booking would appear to be well in excess of the cost of accepting cards for low-value domestic airfares, even though they may be well below the cost of acceptance for a high-value airfare such as a cross-country, return business class ticket. Accordingly, the standard that has been adopted by the Board defines the permitted surcharge in terms of the average percentage cost of acceptance. This will require that any surcharge must be set in percentage terms or, if set as a fixed amount, may not exceed the cost of acceptance for the relevant transaction value.

5.4.3 Blended surcharging

The Board has been concerned for some time by the implications of blended surcharging, and this issue was raised by a number of stakeholders during consultation. Where a merchant applies a single surcharge across two systems with different acceptance costs and sets the surcharge at the average acceptance cost of the two, the lower-cost system will be surcharged excessively (i.e. above its acceptance costs). This dulls price signals and does not support efficient payment choices. The amended surcharging standard will preclude the use of blended surcharging where it applies across payment systems (i.e. American Express companion cards, eftpos, MasterCard credit, Debit MasterCard, Visa credit, Visa Debit) and where one or more systems would be surcharged excessively. Merchants may choose to levy the same surcharge on two or more systems in the interests of simplicity, but they will not be able to do so at a rate that is higher than the lowest acceptance cost of those systems.

The Board has also decided to include an extra provision relative to the draft standard published in December. In particular the new standard makes it clear that a scheme cannot refuse to provide card services to a merchant because they surcharge or plan to surcharge. This is in effect a no-surcharge rule for new contracts with merchants.

5.4.4 Enforceability and the observability of surchargeable costs

A primary concern in this Review has been to ensure greater enforceability of the Bank's standard. An important element of the improved enforceability of the new surcharging standard will be the new role for the ACCC in enforcing a ban on excessive surcharging. A second element will be that the new standard will require that any costs included in the permitted surcharge are easily observable and verifiable in terms of contracts, statements or invoices. The amended standard will require that merchants are provided with easy-to-understand information on their payment costs. While costs for some payment methods may fluctuate from month to month based on the mix of cards presented, the Bank does not consider that it would be appropriate to require merchants to adjust their surcharges frequently. Accordingly, the revised standard will require that merchants are provided with annual statements that they may use in setting their surcharge over the following year.

5.4.5 The definition of the permitted surcharge

As foreshadowed above, a major issue in consultation with stakeholders was the question of the breadth of the acceptance costs that should be included in the definition of the permitted surcharge.

The current standard and guidance note which became effective in 2013 took an approach that sought to identify all reasonable costs of card acceptance, including some internal costs. Experience with this has indicated that there have been problems in enforcement of limits on excessive surcharges.

Accordingly, the draft standard specified the acceptance costs included in the permitted surcharge for each card system in terms of the merchant service fee for that type of card plus any other card-related fees paid to the merchant's acquirer (or its other main payments provider). These other costs included items such as fees for the rental and maintenance of payment card terminals and scheme fees incurred in processing card payments and passed on by the acquirer. The Board's expectation was that this should be a simple, observable definition that could improve price signals by facilitating enforcement and reducing the scope for merchants to surcharge excessively. The Consultation Paper noted that a comprehensive definition that encompassed a wider range of costs faced by diverse merchants might be conceptually appealing. However, it noted that experience with the current regime suggests that targeting simplicity is likely to lead to an approach to surcharging that is more efficient and enforceable in practice. In particular, costs that are internal to the merchant are not readily observable to a third party and are likely to be difficult to verify in an enforcement context.

Consultation discussions indicated that most stakeholders also place a high priority on a definition for the permissible surcharge that is conducive to effective enforcement where a merchant is surcharging excessively. However, submissions from a few industries highlighted the importance of some additional costs associated with accepting card payments that would not be captured in the cost of acceptance in the draft standard. To a large extent, these costs related to the cost of chargebacks and fraud protection. In particular, as noted above, submissions from the airline industry raised the issue of the costs of fraud prevention. The event ticketing industry also focused on fraud prevention costs, along with the cost of chargebacks resulting from actual fraud, while consultations with travel agents focused on the costs that were incurred due to the chargeback risk that resulted from ‘forward delivery risk’ (namely that an airline, hotel or other travel provider might fail after cardholder funds had been passed on but before the service had been received).[25]

While the Board is wary of changes to the draft standard which would make enforcement more difficult, it sees merit in some of the arguments put forward by merchants responding to consultation. For example, the cost of forward delivery risk to travel agents applies only when payments are made via scheme cards and results from scheme rules that require the provision of chargeback protection. The agent would not face this risk if customers paid with a bank transfer or BPAY, for example; in the event of supplier failure, those customers would become unsecured creditors of the supplier. In turn, acquirers typically require agents to post some form of bond or other protection to ensure that cardholders are protected in the event that the agent is unable to repay cardholders.[26] This would suggest that where agents face the risk of supplier failure on a particular payment method and take out insurance against that risk, the cost of that insurance should form part of the permitted surcharge.[27]

The Board also notes that instances of attempted fraud are far more common when customers pay with cards than when they pay with other means such as BPAY or POLi, so merchants often contract for fraud prevention services for card payments. Given that this is a cost associated with card payments, there are good arguments for the inclusion of externally invoiced fraud prevention costs in the permitted surcharge. The Board is wary, however, of allowing the inclusion of all the costs associated with fraud or other chargebacks into card surcharges. It considers that allowing the cost of fraud prevention services and the cost of fraud-related chargeback fees charged by acquirers, but not the actual ex post cost of fraud, within the permissible surcharge is appropriate in providing merchants and schemes with incentives to reduce fraud. More generally, the Board encourages the industry to work on reducing fraud in card payments and the development of other payment methods that are less subject to fraud.

Accordingly, following consultations the Board considers it appropriate to make some small changes to the draft standard. These will allow a modest broadening in the costs of acceptance in addition to the average cost of acceptance in annual statements from the merchant's acquirer or payment facilitator. The five specific items that a merchant could add if they were relevant are: (i) fraud-related chargeback fees paid to the merchant's acquirer or payment facilitator; fees paid to any other payment services provider for (ii) terminal rental and servicing, (iii) gateway services and (iv) fraud prevention services; as well as (v) any cost of insurance for forward delivery risk on accepting cards. These changes would, for example, allow the inclusion of the cost of purchasing a fraud prevention service from an external provider. They would also allow for cases where merchants choose to source some elements of their card acceptance services (e.g. terminal rental or gateway services) from other parties rather than from their acquirer or payment facilitator. However, for all five of these elements, the costs must be verified by statements, accounts or invoices from an external provider. Furthermore, they must be costs that apply to cards but not to other payment methods.

One further change from the draft standard is to clarify that the calculation of a merchant's cost of acceptance must take into account any discount or rebate received by the merchant. This will reduce the potential for circumvention of the intent of the surcharging provisions.

5.4.6 Transparency of payments costs

As part of the Review, the Bank has considered whether competition and efficiency in the payments system could be enhanced by improving the transparency of payments cost to merchants. One element is in terms of the information that merchants have about the cost of different payment methods, so as to allow them to make more informed decisions about acceptance and surcharging. This information would also be important for the ACCC in enforcement in cases where merchants may be surcharging excessively. Another element is in terms of whether merchants have visibility of what payment method is being presented – in particular whether a consumer is presenting a debit card or a (typically more costly) credit card.

While a range of stakeholders were supportive of greater transparency about payment costs, the larger acquirers expressed concern about the systems changes that would be needed for them to provide the type of information on monthly and annual costs that would be required under the draft standard. However, the Board continues to take the view that, given the significant differences in the cost of different systems, it is important that merchants receive easily understood information on these costs, including an annual statement that will allow them to make periodic, informed decisions on surcharging. The calculation of this information should in most cases be fairly straightforward for acquirers and payment facilitators – in most cases this would imply providing average costs of acceptance for eftpos, MasterCard credit, Debit MasterCard, Visa credit and Visa Debit.[28] However, the Bank notes that systems changes within large financial institutions can take time and is proposing to accommodate the concerns of some respondents in the way it sets implementation dates for the various parts of the reforms (see section 5.4.8).

The Bank is also requiring that the schemes offering both debit and credit cards publish information that allows merchants, acquirers and payment facilitators to distinguish between debit and credit cards. This replaces an existing requirement that this information should be provided on request, with merchants reporting that the current requirement for acquirers to make BINs available on request has not generally been observed. This should enable merchants to surcharge the two types of cards differentially in the online environment if they wish to do so. It may also allow merchants greater flexibility in acceptance decisions in the point-of-sale environment.

As noted in the Consultation Paper, the Bank will not require schemes and acquirers to provide merchants with real-time data on the interchange category and payment cost applying to different cards. The Board notes, however, that the growth of contactless transactions (including the likely growth of transactions using mobile and wearable devices) reduces the ability of merchants to distinguish between debit and (more costly) credit transactions. As this shift occurs, there may be a case for bringing interchange payments on credit transactions closer to interchange payments on debit cards.

5.4.7 The taxi industry

The Consultation Paper noted that surcharging in the taxi industry raised difficult issues. Given the greater complexity of the card payments process in the taxi industry and the fact that most aspects of the industry – including taxi fares – are heavily regulated, it suggested that it may be appropriate, for the time being, to leave regulation of surcharging in that industry to state regulators, who may be best placed to assess issues such as the actual cost of providing payment services in taxis and the appropriate rate of return for taxi payment providers.

The Board notes that authorities in five jurisdictions – Victoria, New South Wales, Western Australia, the Australian Capital Territory and South Australia – have now taken decisions to cap surcharges at 5 per cent, which is likely to be closer to the actual cost of providing payments services in taxis than the surcharges of 10 per cent that have previously been typical.[29] Accordingly, and consistent with views expressed by a number of parties in consultation, the Board has decided to include a specific provision in the new standard that will have the effect of leaving taxi payments outside of the Bank and ACCC's framework.

5.4.8 Implementation of regulatory changes

Consultation has indicated that a range of stakeholders, most notably consumers, would like to see quick implementation of the new surcharging framework to eliminate excessive surcharging. This would also be consistent with views expressed in Parliament when the Competition and Consumer Amendment (Payment Surcharges) Bill was introduced and enacted. At the same time, the large acquirers have argued that the Bank should provide significant time for the implementation of any requirements for the provision of new statements about payment costs to merchants; in some cases acquirers may provide services to more than 100,000 merchant customers. These two positions present a challenge given that the availability of easy-to-understand statements on payment costs to merchants is a key element of the new RBA/ACCC surcharging framework.

The Board has decided to deal with this challenge by a staged implementation of the new surcharging framework. It notes that concerns about excessive surcharging are most relevant in the case of larger merchants and that these merchants can be presumed to have greater ability to analyse and calculate their payment costs; indeed merchants who are surcharging are likely to already have done such analysis in the current surcharging framework. In contrast, smaller merchants are less likely to surcharge and to surcharge excessively. They often also have a relatively poor understanding of their payment costs, in some cases paradoxically because of the high level of detail on their statements.[30] Surcharging decisions for these merchants will benefit from the existence of easy-to-understand data on payment costs.

Accordingly, the Board has decided that the definition of the permitted surcharge will become effective for large merchants on 1 September 2016. Large merchants will be defined as those with consolidated turnover (including that of any related companies) of more than $25 million in the most recent financial year, or that exceed other thresholds in terms of consolidated assets or number of employees.[31] While these merchants will not initially be able to rely on the required new statements from acquirers and payment facilitators, they can be expected to have kept records of their payment costs over the previous year or to be able to request duplicates of the relevant statements from providers.

The Board recognises the relatively short implementation period that is being proposed for large merchants. For most merchants – that is, those merchants who are not currently surcharging or are surcharging at levels below the new permitted surcharge levels – the new framework will not require any action. However, in the case of the small number of merchants who may be surcharging at levels that are excessive under the new standard, surcharges will have to be reduced and/or converted to percentage terms relatively quickly. The Board notes, however, that there has been stakeholder concern over excessive surcharging for some time, and that staff discussions with some of the affected companies have indicated a clear awareness of the draft standards and of the amendments to the Competition and Consumer Act that were introduced into Parliament in December 2015 and passed in February.[32]

In the case of smaller merchants, the implementation date will be coordinated with the availability of statements from acquirers and payment facilitators on payment costs. The Board has determined an implementation date for the provision of merchant statements of 1 June 2017 which should ensure that all merchants receive statements of their annual average costs for the 2016/17 financial year by July 2017. Accordingly, for merchants with annual turnover of less than $25 million (and who do not meet the assets or employees thresholds), the permitted surcharge and accompanying ACCC enforcement will become effective on 1 September 2017.

5.4.9 Coverage of different payment systems

The changes to the Bank's surcharging standard have been made to be consistent with the recent amendments to the Competition and Consumer Act, which refers to payments covered by a Reserve Bank standard or a regulation under the Act (see Box B). Given that the Government has not made regulations under the Act, ACCC enforcement powers will initially apply only with respect to surcharging on payments made within the designated payment systems that are covered by the Bank's standard.[33]

It would be open to the Board to designate additional payment systems – either card systems or other systems such as the cheque system – and to extend the application of the surcharging standard to those systems if it considered such measures to be in the public interest. While the Board sees no case for doing so at present, it may be useful to give some sense of the Bank's current thinking with respect to surcharging within other systems.

When the Board implemented its initial reforms, it determined that it was not in the public interest for no-surcharge rules to continue to be applied in the three-party schemes (consistent with its conclusions in relation to four-party scheme rules regarding surcharging), and indicated that it was prepared to set a standard in relation to these schemes. However, a formal standard proved unnecessary, as American Express and Diners Club were prepared to provide undertakings in relation to no-surcharge rules. These undertakings were updated with the changes to the Bank's surcharging standard effective March 2013.

While the American Express companion card system is designated and will be subject to the Bank's surcharging standard, there is no equivalent designation of American Express' proprietary card system. However, American Express has previously made a voluntary undertaking to remove its no-surcharge rule and has indicated it will provide an updated undertaking consistent with the new standard on surcharging. In the absence of a Bank standard covering American Express' proprietary card system, there is no role for ACCC enforcement in cases where consumers using a proprietary card believe they have been surcharged at unreasonably high levels. However, the ACCC will have enforcement powers in relation to surcharging on companion cards and in practice merchants are unlikely to distinguish between companion and proprietary American Express cards in any decisions regarding surcharges. As a consequence, transactions on proprietary cards are unlikely to be surcharged at levels above the permitted surcharge in the Bank's standard. In the event that this does not prove to be the case, it is likely that the Board would consider designating the American Express proprietary card system and making it subject to formal regulation on surcharging.

Diners Club has also indicated it will provide the Bank with an updated undertaking that will ensure that it will not enforce the no-surcharge rule that it applies in other jurisdictions. The Bank will also be seeking new voluntary undertakings regarding the no-surcharge rule applied – albeit inconsistently – by PayPal and other restrictions applied by UnionPay.

Given that none of these three systems are currently designated and subject to the standard on surcharging, there will be no formal or explicit protection for consumers against surcharges that are unreasonably high. However, the Bank's expectation is that merchants who are subject to a framework that caps surcharges in other systems are likely to also follow the ‘permitted surcharge’ framework in setting any surcharges in these three systems. In addition, in the event that these systems (or any other undesignated systems) were concerned about excessive surcharging on their transactions it would be open to them to include a permitted cost of acceptance in their scheme rules and a requirement that merchants warrant to consumers that any surcharge does not exceed that cost of acceptance. Any excessive surcharge would be both a contractual breach and a misrepresentation on the part of the merchant. Finally, in the event of excessive surcharging on transactions in any of these systems, it will be open to the Bank – if it considers such measures to be in the public interest – to designate the relevant scheme and make it subject to a surcharging standard.

The Bank notes also that its standard, which sets a definition of excessive surcharging for ACCC enforcement, would not facilitate actions in relation to foreign merchants marketing to Australian consumers unless those foreign merchants use Australian acquirers; the Bank's standard applies only to participants in schemes in Australia. To the extent that there were concerns about excessive surcharging by foreign merchants, it would be open to the Government to consider addressing them via regulation. It is also possible that an Australian merchant that wished to surcharge at excessive levels could engage a foreign acquirer, so that its transactions were not subject to the Bank's standard or to ACCC enforcement regarding excessive surcharges. However, this would require engaging an acquirer in a jurisdiction where surcharging was permitted, where there were no regulations against excessive surcharging, and where payment costs were sufficiently low to make it attractive. It could also expose consumers to international card fees imposed by their banks and could be expected to meet considerable customer resistance. Accordingly, while this scenario is possible, the Bank considers it unlikely, especially given that merchant service fees in Australia are lower than in most other markets, where interchange fees are unregulated. However, to the extent it did occur, it would be open to the Government to address it via regulation.

5.4.10 Communication of regulatory changes

The Board considers it important that the surcharging framework is well understood by businesses, consumers and by acquirers and payment facilitators. Businesses should be able to make card acceptance decisions with full information about their payment costs and with confidence about whether their decisions are consistent with the Bank's regulation and the Competition and Consumer Act. Consumers should be able to make purchases with an understanding that any surcharges they face are a reflection of the cost of particular payment instruments. Furthermore, in the event that they believe surcharges may be excessive, they should know the procedures for complaints. It will also be important that acquirers and payment facilitators are aware of the information that must be provided to merchants in statements starting in mid 2017.

Accordingly, the Bank has been working with the ACCC as it prepared drafts of the surcharging standard for consideration by the Board with a focus on ensuring that the new framework will be understandable by stakeholders and enforceable by the ACCC. The Bank has prepared explanatory material for businesses, consumers and the payments industry for release together with this Conclusions Paper and will be available to meet with stakeholders to clarify any issues with the new framework, including on the implementation timeline. The ACCC will engage with consumers and businesses to ensure that the ban is complied with and industry is aware of their obligations under this new framework.

Conclusions: Surcharging

The Bank will introduce a new standard relating to surcharging practices to replace existing standards. The new standard will apply to all designated card schemes. Undertakings by American Express and Diners Club will be updated to reflect the new standard.

Schemes and their participants will continue to be prevented from applying no-surcharge rules.

Consistent with the recent amendments to the Competition and Consumer Act, the standard will define a merchant's ‘permitted surcharge’ for cards of a scheme. This will be in terms of the merchant's average cost of acceptance of cards of that scheme.

The definition of the cost of acceptance includes merchant service fees and a limited set of other payment costs paid to acquirers, payment facilitators or payment service providers, taking account of any discounts or rebates. Costs that relate also to other payment methods or to the transactions process more generally are not permitted costs of acceptance.

Any surcharge that a merchant chooses to levy must be specified as a percentage of the transaction value or, if set as a fixed amount, must not be exceed the cost of acceptance for the relevant transaction value.

If merchants set the same ‘blended’ surcharge for more than one scheme, they may not do so at a rate that would imply excessive surcharging of any scheme.

Obligations on merchants will be phased in, with surcharging by larger merchants covered from 1 September 2016, while for other merchants the implementation date will be 1 September 2017.

The standard will provide for greater transparency to merchants of the cost of acceptance, with an obligation on acquirers and other payment facilitators to provide easy-to-understand statements on costs to merchants.

Merchants will be able to set surcharges based information from the annual statement from their acquirers or payment facilitators, plus information on costs of certain specific items in contracts, statement or invoices from other external providers.

Transparency will also be enhanced by requiring the publication of BIN lists to enable merchants and their payment service providers to distinguish electronically between cards of different schemes.

Enforcement of the surcharging standard by an independent government agency (the ACCC) will ensure that consumers are not surcharged excessively. Enhanced enforcement will be underpinned by surchargeable costs being restricted to readily observable and easily verified items.


The Bank also received over 1,000 emails from individuals on surcharging as part of its consultation on the Review. [23]

For example, a consumer purchasing a ‘face value’ $100 concert ticket online may face two additional fees: a $6 booking fee and a 1.95 per cent payment processing fee. The ticket cost is typically presented to the consumer as $101.95 (i.e. including the payment processing fee) and once the number of tickets is selected, the booking fee is added. So a consumer purchasing two tickets will see a price of $203.90 (2 × $101.95) plus $6.00 = $209.90. [24]

Agents in the event ticketing industry also pointed to another form of forward delivery risk, namely from the failure of a promoter before a scheduled event; however, the Live Performance Australia Ticketing Code of Practice states that proceeds should be held in trust and only passed on to the promoter after the event has occurred. [25]

Alternatively, they may charge agents a higher merchant service fee to cover this risk; in this case, a surcharge based on the merchant service fee will allow agents to surcharge to reflect this risk. [26]

Insurance for supplier failure is available to agents, though the market is not well developed and existing products are perceived as being costly for the level of cover provided. Bank staff understand that some other forms of protection against this risk are in development. [27]

Where acquirers or facilitators also provide acceptance services for other systems which are not designated, the Board encourages the provision of similar cost information: this will often include UnionPay and JCB. Acceptance and billing of American Express and Diners Club are normally arranged separately by those schemes. [28]

The draft report of the Taxi Industry Inquiry in Victoria (Taxi Industry Inquiry 2012) suggested regulating service fees so they did not exceed the resource cost of providing electronic payment services – i.e. excluding financial flows between processors, operators and networks – and found no evidence that this should exceed 5 per cent of the transaction value. [29]

It is not uncommon for merchant statements to include several pages of information about the number and value of transactions for each of the many interchange categories of the international schemes, but to not include summary information on the average costs for transactions within each system. [30]

The $25 million threshold is similar to the threshold used by ASIC in distinguishing between large and small proprietary companies: see <>. [31]

The Board notes the existence of long-term contracts in the event ticketing industry which specify the distribution of the various components charged to customers (including the ‘payments processing fee’) between the ticketing agency and the promoter/venue operator. These contracts typically provide for adjustment of the contractual financial terms in the event of changes to taxation (GST) arrangements, so the parties may be also able to reach agreement on changes to the terms in the event that the new RBA/ACCC surcharging arrangements have any implications for the contractual payments between the parties. [32]

The designated systems are the American Express companion card system, the eftpos debit and prepaid systems, and the MasterCard and Visa credit, debit and prepaid systems. [33]