Merchant Card Payment Costs and Surcharging – Consultation Paper –
July 2025 Policy Options for Consultation

The preceding chapters identified several areas where there is a case for changing the existing regulatory arrangements for card payments.

8.1 Preferred package of policy options

The PSB’s preliminary view is that competition and efficiency in the payments system would be best enhanced by implementing the following policies. Together, these policies form the PSB’s ‘preferred package’.

8.1 Alternative package of policy options

The PSB has also considered other policy options including:

• Retaining the status quo.
• An alternate package of policies that includes:
  • removing the RBA’s prohibition on ‘no-surcharge’ rules for debit (and prepaid) cards only
  • lowering the interchange cap on credit card transactions to 0.5 per cent of transaction value and lowering the benchmark to 0.3 per cent of transaction value
  • the same changes as listed in Policies 3–11 in the PSB’s preferred policy options above.

In calibrating the alternate option, the PSB took the view that the case for lowering credit interchange would not be as strong if merchants retained the right to surcharge credit transactions, since surcharging would enable merchants to directly pass on the higher cost of credit cards to consumers and might keep downward pressure on card networks’ wholesale fees.

8.2 Assessment of packages of policy options

The PSB’s preliminary assessment is that the preferred package would best meet its objectives for competition and efficiency in the payments system (Table 8) given this set of changes would:

• make card payments simpler and more transparent for consumers and merchants. Fully removing surcharges on all designated card networks would be easier and cheaper for consumers, merchants and PSPs to understand and implement than just removing surcharges on debit cards or retaining the current surcharging framework. This would reduce broader economic inefficiencies associated with the difficulty of avoiding a surcharge, inadequate merchant disclosure such as drip pricing and the complexity of surcharging rules.
• lower wholesale card payment costs for merchants by around $1.2 billion per year through reducing interchange caps on domestic card transactions and introducing interchange caps on foreign-issued cards. The PSB expects PSPs to pass on these reductions in wholesale costs to merchants in full.
• reduce the disparity in card payment costs faced by small and large merchants. Small merchants tend to pay high interchange fees, at or near the current regulatory caps. Lowering these caps would benefit small merchants the most, improving the efficiency of the payments system for the broader economy.
• provide merchants with more useful and consistent information on the fees charged by PSPs by increasing the transparency of acquirer pricing and requiring acquirers to provide more information to merchants about their card payment costs. The removal of surcharging would incentivise merchants to shop around for a better deal, and the additional information should help merchants find better value payment plans.
• increase competitive pressure among the card networks by requiring each network to publish their interchange and scheme fees, reduce the complexity of their scheme fees and justify any increases in scheme fees in disclosures to PSPs. PSPs would be able to use the published information to negotiate better deals from the card networks and pass on the savings to merchants and consumers. These measures would help offset any reduction in competitive pressure on card networks’ wholesale fees due to the removal of surcharging.
• reduce the cross-subsidisation of credit cardholders by debit cardholders. Reducing the difference between the interchange caps on debit and credit would reduce payment costs for merchants and result in a more efficient distribution of those costs between credit cardholders and merchants.
• reduce regulatory complexity and maintain a level playing field between regulated card networks and payment methods not subject to price regulation. By removing surcharging for card networks that are already subject to interchange regulation, networks will be able to compete on a more level playing field with higher-cost payment methods that do not allow surcharging, such as some ‘buy-now pay-later’ products.
• lower the enforcement and compliance burden for merchants and the ACCC by removing surcharging. Given the large number of merchants and the inability for consumers to know merchants’ cost of acceptance, comprehensive enforcement of surcharging rules has not been feasible.
• cost significantly less to implement than the alternate option. Change and implementation costs for PSPs would be around $20 million higher if surcharging was removed for debit cards only, compared with a full removal of surcharging. These costs could be passed on to merchants (and consumers indirectly) via higher prices or reduced service offerings.

Distributional impacts

The PSB has also considered how policy reforms could impact the various users and providers in the card payments ecosystem. Table 9 provides a summary of the estimated direct cash flow effects of the proposed measures, including the implementation costs.

Note these estimates only capture the immediate redistributive effects of the measures and do not account for secondary effects, which could shift the long-run distribution of cash flows. These second-order effects can be uncertain and difficult to quantify, and may include:

• imperfect pass-through of interchange savings to merchants by PSPs (despite the PSB’s stated expectation of full pass-through)
• merchants switching their PSP or payment plan to lower their payment costs or varying their consumer prices
• greater use of cards by consumers as a result of card payment surcharging being removed
• a reduction in credit card benefits or an increase in credit cardholding fees, if issuers seek to make up lost interchange revenue through other means.

The rest of this section considers the effects of a removal of surcharging alongside the RBA’s other proposed measures on different users and providers in the card payments ecosystem.

Consumers would benefit from no longer facing surcharges on card payments through regulated networks. A simpler payments experience would help them to make more efficient payment decisions. Consumers would be less likely to be surprised by surcharges late in the payments process and would not need to raise instances of suspected excessive surcharging with the ACCC. Cardholders would no longer need to switch to alternate payment methods to avoid surcharges. Preliminary estimates indicate that consumers would pay around $1.2 billion less in surcharges per year, equivalent to around $60 per card-using adult per year. Lower interchange fees would reduce the need for merchants to raise their consumer prices to compensate for no longer being able to surcharge.

Small merchants would be better off by around $185 million under the proposed measures than under the current framework, with around 90 per cent of small merchants benefiting from the measures in net terms. That is because most small merchants currently pay interchange fees above the proposed interchange caps, and 90 per cent of small merchants do not currently surcharge and instead choose to include their payment costs in the price of their goods and services. As a result, the proposed reductions in interchange would outweigh any loss in surcharging revenue for most small merchants. The 10 per cent of small merchants that currently surcharge would need to either absorb their payment costs in their margins or incorporate these costs in their advertised prices. The proposed transparency measures for payment costs, with specific breakdowns for smaller merchants and additional information on merchants’ cost of acceptance, should help small merchants to search and switch to more cost-effective payments plans.

Larger merchants already face lower interchange fees on domestic transactions via strategic rates. They stand to benefit from the proposed caps on interchange fees on foreign-issued card transactions. Some of the strategic rates also appear to be below issuers’ costs, which has arguably resulted in a cross-subsidisation of larger merchants by smaller merchants. While some larger merchants may raise their prices to incorporate payment-related costs if the ability to surcharge were removed, only around 12 per cent of large merchants currently choose to surcharge. Under both the preferred and alternate packages, merchants that currently surcharge would face the costs of retraining staff and updating pricing (though this would likely be more difficult if surcharging was removed for debit cards only).

Under the preferred package, it is estimated that acquirers and other PSPs would incur around $25 million in costs in total across the industry to remove surcharges and some additional costs to publish their merchants’ average costs of acceptance. This amount would almost double under the alternate package. Acquirers may also have to prepare minor updates to their merchant statements to report further breakdowns for cost of acceptance. This is likely to require minimal changes for some acquirers, while others may need to undergo larger changes. The PSB expects acquirers to fully pass on the proposed reductions in interchange to merchants.

Domestic issuers are expected to experience a reduction in interchange revenue of around $900 million under the preferred package and $800 million under the alternate option. However, the proposed interchange settings are still above issuers’ costs. Some issuers may choose to increase cardholder fees or reduce benefits such as rewards points, particularly on credit cards, to boost their profitability in response to reductions in interchange settings. Issuer revenue may also increase if more consumers choose to use credit cards or substitute away from cash use as a result of surcharges being removed. An increase in issuers’ revenue could also occur if interchange fees that are currently below the proposed caps converge closer to the cap, as happened in Europe after the introduction of the Interchange Fee Regulation.

Card networks would likely benefit in aggregate from higher card usage, including more credit card use. The cost of publishing interchange and scheme fee data would be small given they already produce similar data for the RBA on a regular basis.

8.3 Proposed implementation timeline

The RBA will seek to implement this Review’s final policies as early as practicable. Table 10 lays out a proposed implementation timeline for the PSB’s preferred package, taking into account the need for merchants, PSPs and card networks to have a reasonable amount of time to implement the necessary changes.

The PSB considers that the proposed amendments to surcharging and interchange regulation should come into effect at the same time to maximise the benefits of the proposed package and to balance the interests of consumers and merchants. The PSB also considers that the proposed publication requirements should cover reporting periods slightly ahead of the proposed changes to interchange regulation, to allow the public to monitor the extent to which participants in the relevant payment systems pass through the savings from the PSB’s proposed measures to end users.