Merchant Card Payment Costs and Surcharging – Consultation Paper –
July 2025 2. Surcharging

The RBA’s surcharging framework was first introduced in 2003. The framework requires the card networks to remove their ‘no-surcharge’ rules, thereby allowing merchants to apply a surcharge to card transactions.¹ Prior to the introduction of the framework, these card network rules generally prevented Australian merchants from applying a surcharge to card transactions.² The framework was intended to promote the efficiency of the payments system by encouraging consumers to use lower-cost payment methods at a time of high growth in the higher-cost credit card market, and to increase the competitive pressure on card networks. The framework has been amended over time reflecting changes in the payments landscape, including in 2013 and 2016 to define the costs that merchants are permitted to recover through a surcharge. The ACCC was also given powers in 2016 under the Competition and Consumer Act 2010 to take action against merchant surcharging that exceeds the merchant’s cost of card acceptance. However, as the payments landscape has continued to evolve, it has become apparent that the current surcharging framework is no longer best supporting competition and efficiency in the payments system.

Submissions in response to the Issues Paper broadly agreed that the surcharging framework has become less effective in achieving the public interest in recent years:

• The price signal to consumers has become less effective because:
  • consumers are less able to avoid surcharges as cash use has fallen. The 2022 Consumer Payments Survey found that the share of transactions paid with cash fell from 69 per cent in 2007 to 13 per cent in 2022 (Nguyen and Watson 2023). The survey also found that 29 per cent of consumers had no cash in their wallet at the time; these consumers would not be able to pay in cash to avoid a surcharge.
  • merchants, especially small merchants, are increasingly taking up single-rate or ‘simple’ plans that charge the same percentage fee for all card types. Some of these merchants also impose a surcharge on consumers at the same rate for all card transactions. This is despite different card types having different underlying costs, such as lower-cost debit cards compared with higher-cost credit cards or charge cards. Around 39 per cent of merchants were on single-rate plans in 2024.
  • inadequate disclosure of surcharges by some merchants reduces the ability of consumers to understand the relative costs of card payments and make informed choices about which payment method to use. In the 18 months to June 2024, the ACCC received around 2,500 reports about payment surcharging and disclosure of add-on costs, which included consumer complaints and queries, as well as merchants seeking to better understand their obligations.
• The cost of accepting card payments may now be lower than the cost of accepting cash, which has risen as consumer cash use has declined since the RBA’s surcharging framework was introduced. A recent report from the Boston Consulting Group (commissioned by Mastercard) found cash to be more than twice as expensive for merchants to accept than card payments due to much higher back-office and labour costs (Mastercard 2025a). Submissions from consumers generally argued that, as with cash, merchants should absorb card payment costs as a general cost of doing business. Surcharging card payments might now be discouraging the use of more efficient electronic payment methods.
• Some merchants may be surcharging above their cost of acceptance, and it is challenging for the ACCC to enforce compliance. The enforcement challenges generally arise from:
  • the large number of merchants that surcharge across the economy (even though the share of merchants that surcharge is small)
  • the substantial number of these that are smaller merchants, which presents challenges for proportionate enforcement action
  • the complexities of calculating the cost of acceptance for each merchant.
• Some PSPs have gone beyond the spirit of the regulations. For example:
  • PSPs bundling non-payments services into the cost of acceptance, which some merchants pass through to consumers via payments surcharges. In recent years, more ancillary services have been offered to merchants by PSPs, such as data analytics, invoicing services and inventory management. These services are designed to support the general business operations of the merchant and are not related to the merchant’s cost of acceptance of a given payment method.
  • PSPs marketing their payment services as ‘free’ for merchants, with the full cost of payments being ‘automatically’ passed on to the consumer. This can reduce the incentive for merchants to shop around and seek lower-cost payments services.
  • PSPs offering merchants incentives, such as frequent flyer points, for their customers’ card transactions, with a higher cost of acceptance that the merchant can pass on to the consumer via a surcharge.

2.1 Policy options

The PSB recognises that action to address these issues is in the public interest and has considered the following options:

Option 1: Retain the current surcharging framework and narrow the definition of a permitted surcharge to include only wholesale fees

Merchants would continue to be allowed to surcharge costs related to providing payment services, but the definition of the costs that can be included in the permitted surcharge would be narrowed.

This option would allow merchants to pass on only the wholesale fees (interchange and scheme fees) of each designated network to consumers via payment surcharges. This approach could require merchants either to surcharge each of the networks separately, or to surcharge the lowest blended rate of the networks.³

The ACCC would continue to enforce the excessive surcharging laws, but under the narrowed permitted surcharge definition. The RBA would require PSPs to report wholesale fees separately from other fees in merchant reports.

Option 2: Remove surcharging on designated debit (and prepaid) cards

The RBA would lift its prohibition of ‘no-surcharge’ rules for the designated debit (and prepaid) card systems. Based on historical experience and arrangements in other jurisdictions, the RBA considers that this would likely be followed by the designated debit and prepaid card networks reimposing ‘no-surcharge’ rules. It is unlikely that the RBA could directly impose an effective ban on surcharging for debit and prepaid cards by merchants, as merchants are generally not considered ‘participants’ in the designated card systems under the PSRA. If surcharging on these cards continued after the prohibition of ‘no-surcharge’ rules under the RBA’s standard was lifted, which would be counter to the spirit of the proposed policy reforms, the RBA could recommend that the Government legislate a ban on the surcharging of cards of the designated debit and prepaid card systems.

One addition to this option could be a cap on credit card surcharge rates alongside a removal of debit (and prepaid) card surcharging. For credit card transactions, the permitted surcharge definition would be retained, and merchants would be required to surcharge at the lower of their cost of acceptance or the cap. This would mitigate the risk of PSPs lowering their fees on debit transactions, and increasing their fees on credit transactions, to help merchants recoup more of their total card payment costs through credit card surcharges.

Option 3: Remove surcharging on designated debit, prepaid and credit card networks

The RBA would lift the prohibition on ‘no-surcharge’ rules for the designated debit, prepaid and credit card systems (eftpos, Mastercard and Visa). Based on historical experience and arrangements in other jurisdictions, the RBA considers that this would likely be followed by the designated card networks reimposing ‘no-surcharge’ rules. It is unlikely that the RBA could directly impose an effective ban on surcharging for debit, prepaid and credit cards by merchants, as merchants are generally not considered ‘participants’ in the designated card systems under the PSRA. If surcharging continued after the prohibition on ‘no-surcharge’ rules under the RBA’s standard was lifted, which would be counter to the spirit of the proposed policy reforms, the RBA could recommend that the Government legislate a ban on the surcharging of cards of the designated systems.

Other options raised in submissions

Some submissions to the Issues Paper supported retaining surcharging – particularly submissions from merchants and merchant representatives – with some amendments to the existing framework. Some submissions proposed improving enforcement by the regulator, which is not within the RBA’s powers. Other submissions proposed setting a requirement for acquirers to separate the pricing of debit and credit card transactions. This would involve regulating acquirer pricing and would be a significant step beyond the RBA’s existing regulation of wholesale costs in the card payments system.

Some submissions supported narrowing the definition of an acceptable surcharge, but less than under Option 1, to allow merchants to pass on only wholesale fees plus the acquirer margin. However, there is a risk that PSPs could circumvent these restrictions by raising the ‘acquirer margin’ and notionally providing non-payment-related services for free. The definition and enforcement of what costs would be included in the acquirer margin would be challenging for regulators.

Some submissions argued that ‘interchange plus plus’ pricing should be mandated to reduce cross-subsidisation of credit card transactions by debit card holders.⁴ However, PSPs that offered simple plans were strongly opposed to this, arguing that it could result in some PSPs leaving the market, reduce competition and result in greater market concentration.

Some submissions suggested mandating that merchants must offer a fee-free digital payment method (which could, for example, be an account-to-account payment method). However, such an approach is less feasible at this stage, since alternative digital payment methods to debit and credit cards are not yet widely available for consumer payments.

2.2 Considerations

Option 1: Retain the current surcharging framework and narrow the definition of a permitted surcharge to include only wholesale fees

The expected benefits of this option would be:

• lower surcharges paid by consumers. Surcharges are estimated to decline by over one-third on average if merchants can only pass on current wholesale fees to consumers.
• continued price signalling effects of surcharging. RBA analysis has found that when faced with a surcharge, consumers are less likely to use credit cards and more likely to use debit cards or cash.⁵ Allowing merchants to surcharge the wholesale costs of debit and credit card payments would retain this price signalling effect. However, given that the cost of accepting cash may no longer be lower than the cost of accepting cards, it is not clear that this price signal would still be incentivising consumers to make efficient payment choices.
• continued recovery of wholesale payment costs by merchants. Merchants would need to absorb, or recover through an increase in base prices, a smaller proportion of payment costs than under the options that would remove surcharging.
• retained bargaining power for large (strategic) merchants in negotiations with card networks. Large merchants that can negotiate strategic merchant agreements with card networks could continue to use the threat of surcharging to bargain for lower wholesale payment fees.
• prevention of non-payment costs being included in surcharges. This approach would prevent PSPs from bundling in fees for ancillary or non-payment-related services into the cost of acceptance. Merchants would absorb these non-payment costs, or build them into base prices, like other costs of doing business, rather than passing them on as a surcharge. This would result in price signals to consumers that better reflect the cost of different payment methods.
• increased incentives for merchants to shop around, providing an incentive for PSPs to compete to offer more efficient payment methods. If merchants were required to absorb the cost of the acquirer margin, or build it into their base prices, they may be more incentivised to switch to a lower-cost payments plan. This would also encourage PSPs to offer cheaper plans.

The expected drawbacks of this option would be:

• greater costs for merchants to absorb relative to the status quo. In submissions, merchant groups noted that some merchants rely on the ability to pass on payment costs as a surcharge, particularly those operating on low margins. However, some merchants will be able to increase their base prices to recover the cost of the acquirer margin.
• significant implementation costs for merchants and PSPs to enable the separate surcharging of the cost of debit and credit card transactions. Merchants would be required to either: surcharge each debit and credit card network separately; or, if preferring to surcharge a single blended rate across multiple designated networks, to surcharge at a rate equal to the lowest wholesale fees of the networks being blended).⁶
• increased complexity of merchant pricing if PSPs that currently offer single-rate (or ‘simple’) plans choose to price debit and credit transactions differently. While this would improve price signalling, submissions from some PSPs and merchant advocates noted that single-rate plans are valued by merchants for their simplicity and certainty.
• potentially increased compliance and enforcement challenges, which could increase incidences of excessive surcharging. This option does not reduce the complexity of the framework and may be more confusing for merchants to understand and implement than the current framework. In turn, consumers may be faced with inconsistent or erroneous price signals. The existing enforcement challenges would persist.

The PSB’s preliminary view is that, on balance, this option is unlikely to substantially improve the efficiency and competitiveness of the card payments system because it does not address many of the deficiencies of the current surcharging framework. The price signal provided by surcharging is unlikely to steer consumers towards using more efficient payment methods because:

• most merchants do not surcharge, and most of those that do surcharge set the same surcharge for debit and credit
• fewer consumers are able to avoid surcharges as cash use has declined
• concerns around merchants’ disclosure of surcharges would remain, which would continue to hinder the ability of consumers to make efficient payment choices.

While merchants would be more incentivised to shop around for a better payment plan due to having to absorb acquirer margins under this option, these small benefits are likely to be offset by the increased complexity of the framework, as well as costs related to implementation and ongoing compliance and enforcement.

Option 2: Remove surcharging on designated debit (and prepaid) cards

The expected benefits of removing surcharging on debit (and prepaid) cards would be:

• a widely available surcharge-free and efficient payment method for consumers. Some submissions from consumers and consumer groups highlighted that declines in the use of cash have made it difficult for consumers to avoid a surcharge as cash is often the only non-surcharged method of payment. Debit cards are much more widely used by consumers and accepted by merchants.⁷ Removing surcharging on debit card transactions and retaining surcharges on credit card transactions would enable consumers to use debit cards at virtually all merchants to avoid payments surcharges. Around $650 million in surcharges paid by consumers each year would be eliminated. As debit cards may also be cheaper to accept than cash for many merchants, this option could lower costs in the payment system overall and incentivise consumers to choose the most efficient payment method at the checkout.
• strengthened price signal between credit and debit cards. This option would incentivise consumers to switch from using higher-cost credit cards to using debit cards more often. As debit cards often have lower merchant fees than credit cards, this would reduce total merchant fees. The price signal between credit and debit cards would also help retain downward pressure on wholesale fees for credit card transactions set by the card networks. This option could also promote efficiency by preventing the cross-subsidisation of higher-cost credit cards by debit card users, which often benefits higher-income and higher-wealth individuals.
• continued recovery of some payment costs by merchants. Merchants would retain the ability to pass on the costs of credit card transactions to consumers. This would reduce the amount of costs that merchants would need to absorb in their margins or pass on through increased consumer prices, relative to the option of removing surcharging on both credit and debit card transactions. RBA analysis shows that if the cost of debit transactions was passed through to consumers, the effect on aggregate consumer prices is likely to be small. This is due to the low share of merchants surcharging in aggregate and the low costs of debit compared with other payment methods.⁸
• increased incentives for merchants to shop around. Merchants would be required to absorb the cost of accepting debit payments or increase their prices. However, removing surcharging on debit cards could increase the incentive for merchants to find a cheaper payment plan, which would also encourage PSPs to offer cheaper plans to attract and retain merchants.
• increased simplicity in compliance and enforcement compared with the status quo, resulting in more accurate price signals to consumers more often. Although submissions were mixed on whether removing debit card surcharging would improve compliance and enforcement overall, it is much easier to identify whether a debit card surcharge exists, than to assess whether the surcharge is excessive relative to a merchant’s cost of acceptance. It is also much easier for consumers to understand the rule that they should never be surcharged on debit transactions.

The expected drawbacks of this option are:

• greater costs for merchants to absorb or pass on through higher consumer prices. Merchants that surcharge debit card payments would be faced with the choice of increasing their prices or absorbing their debit payments costs through reduced margins. However, merchants would retain the right to surcharge credit card payments. Some submissions argued that this would put pressure on merchant profitability in the absence of other policies to reduce merchant fees. This may particularly affect small merchants that often have higher payment costs, merchants in low-margin industries such as hospitality that have higher instances of surcharging, and merchants in sectors where pricing is regulated (such as newsagencies selling lottery tickets). However, stricter interchange regulation, as proposed in the package of reforms put forward in this paper, would be expected to lower payment costs and therefore reduce the impact on merchants’ margins and/or prices.
• increased complexity of the surcharging framework. Although instances of surcharging on debit cards would be easier to identify, some submissions argued that the added complexity to the surcharging framework may increase implementation and enforcement challenges overall. Some merchants and consumers may find it difficult to distinguish between debit and credit cards, especially when consumers ‘tap and pay’ a card or mobile wallet, or use a combination card (which has both credit and debit functionality); there are currently almost 8 million combination cards on issue in Australia. This confusion could lead some merchants to unintentionally surcharge debit cards, or lead consumers to believe they have been wrongly surcharged. Removing debit card surcharging also does not improve existing enforcement challenges with credit card surcharging.
• increased complexity of merchant pricing. If debit card surcharging were removed, some PSPs that currently offer single-rate (or ‘simple’) plans may choose to price debit and credit transactions differently. While this would improve price signalling, submissions from some PSPs and merchant advocates noted that single-rate plans are valued by merchants for their simplicity and certainty.⁹
• adverse effects on credit card networks and users. Credit card networks could see their volumes shift to debit if merchants continue to surcharge credit, particularly if PSPs responded to the debit surcharging removal by lowering their pricing on debit (which cannot be passed on by merchants via a surcharge) and increasing pricing on credit transactions (which can be passed on via a surcharge) to compensate.
• less innovation and competition from potentially cheaper payment methods, such as account-to-account payments, since merchants would no longer be able to set lower surcharge rates on alternative payment methods than on debit to incentivise consumers to choose the alternative method. However, merchants could still provide discounts on alternative payment methods relative to debit card payments if they so choose.¹⁰
• higher costs for PSPs to implement than removing both debit and credit card surcharging. In response to an information request, most PSPs estimated the cost and time required to implement the removal of only debit surcharging to be the same or substantially higher than removing surcharging from both debit and credit cards. PSPs estimated a wide range of costs and time, ranging from almost no cost to over $10 million and up to 20 months to ensure compliance. The total cost to industry is estimated to be around $45 million. The higher cost estimates were provided by PSPs that use terminals that currently cannot distinguish between card types, which would therefore need to be replaced. Merchants would also face upfront costs of retraining staff and updating their pricing.

One risk with removing debit card surcharging is that it could increase merchant surcharges on credit card transactions above efficient levels. Introducing a cap on credit card surcharges, along with retaining the cost of acceptance limit, could help to reduce this risk and simplify enforcement. However, introducing a cap could encourage more merchants to impose surcharges at the cap, potentially resulting in higher credit card surcharges than under the status quo. The appropriate level of the cap would be difficult to determine given the wide range of payments plans offered in the market, and it could disadvantage (typically smaller) merchants with higher payment costs. It would also require regular review.

The PSB’s preliminary view is that this option is likely to improve efficiency in consumers’ choice of payment method but is also likely to come with significant costs and complexity that will offset some of the benefits. This option would steer more consumers towards using cheaper debit card payments and away from credit cards or cash, which are more expensive for merchants to accept. However, the expected benefits of price signalling would be reduced if there was confusion from consumers and merchants or difficulties for payment terminals in correctly distinguishing between debit and credit cards (which may be particularly challenging if a combination card is used). Given only around 10 per cent of merchants surcharge and most consumers do not switch payment methods in response to a surcharge, the expected benefits of retaining this price signal are modest. Removing merchants’ ability to surcharge debit transactions would likely increase their incentive to shop around for a better payment plan. However, retaining the surcharging framework for credit cards may offset this benefit and lead to other costs being bundled into the permitted surcharge for credit cards. There are also significant costs to removing surcharging on debit and prepaid cards only and it would add complexity to the surcharging framework, which would increase compliance and enforcement costs.

Option 3: Remove surcharging on designated debit, prepaid and credit card systems

The expected benefits of removing surcharging on designated debit, prepaid and credit card systems would be:

• substantially reduced payments surcharges for consumers. Around $1.2 billion in surcharges paid by consumers each year would be eliminated. However, some of the consumer benefits from the reduction in surcharges would be offset by higher prices charged by merchants. The aggregate impact on consumer prices from a removal of surcharging is estimated to be very small (around 0.1 percentage points) as only around 10 per cent of merchants currently impose payments surcharges. In any case, this would only be a very small one-off impact on measured inflation; consumers are already paying these costs via payment surcharges (which are not included in the Consumer Price Index) and if these costs are instead fully passed on through higher prices, the final amount paid by the consumer in practice would be similar.
• less confusion about surcharging among merchants and consumers. Removing surcharging for designated card payment systems would reduce confusion for consumers and merchants, and improve efficiency by lowering compliance and investigation costs associated with surcharging. Submissions noted that the current surcharging framework can be challenging to understand due to its complexity.
• elimination of drip pricing involving added card payment surcharges. Drip pricing makes it difficult for consumers to make efficient choices by obscuring the final price of goods and services. An example of drip pricing is adding a payment surcharge after a consumer has decided to purchase a product at the advertised price. Removing card surcharging on designated cards would mean that consumers are able to more easily compare the advertised prices across merchants and not be surprised by additional card surcharges towards the end of the payment process.
• increased merchant incentive to shop around for lower-cost payments services. If merchants are required to absorb payment costs, or increase their base prices, they may be more likely to seek a cheaper payment plan. Data from large PSPs suggest that at least 88 per cent of their merchants did not switch providers in 2023/24. An increase in merchants switching and renegotiating their fees is likely to encourage PSPs to lower prices to retain and attract merchants.
• substantially simplified enforcement. Removing surcharging for all card payments was supported by most consumers and some PSPs due to its simplicity and ease of enforcement. It is much easier for consumers to identify whether a card surcharge exists, than to assess whether the surcharge is excessive relative to a merchant’s cost of acceptance. It would also be much easier for consumers to understand rules that they should never be surcharged on eftpos, Mastercard and Visa card transactions.
• lower implementation costs than a removal of debit surcharging only. PSPs estimated their upfront and ongoing costs of removing surcharging to range from almost zero to around $5 million. The total cost estimated by industry submissions equated to around $25 million, which was $20 million less than the cost of removing only debit surcharging. The time required to implement and ensure compliance was also shorter than if only debit surcharging was removed. These lower costs can largely be attributed to less substantial software and hardware upgrade requirements and more straightforward communication to merchants. Merchants that surcharge would face some upfront costs to update pricing and retrain staff.
• less disruption to PSPs’ business models than only removing debit surcharging. Submissions by some PSPs indicated that removal of all card surcharges would be cheaper to implement and be less likely to disrupt their existing single-plan pricing models, which are typically chosen by smaller merchants. This would support merchant choice and competition in the acquiring market.

The expected drawbacks of this option are:

• greater costs for merchants to absorb, or pass on through higher consumer prices, than under the other options. Merchants that surcharge would be faced with the choice of absorbing their payments costs through reduced margins or increasing their prices. Some submissions argued that this would put pressure on merchant profitability. This may particularly affect small merchants that often have higher payment costs, merchants in low-margin industries such as hospitality that have higher instances of surcharging, and merchants in sectors where pricing is regulated. However, the reductions in interchange caps proposed in this paper (see Chapter 3: Interchange Fees) would be expected to lower merchant payment costs and therefore reduce the impact on merchant margins and/or prices.
• reduced ability of merchants to use payments surcharges to provide consumers with a price signal differentiating the cost of cash, debit cards and credit cards. However, changes in the payments landscape, such as the decline in cash use and increased prevalence of single-rate plans, mean that the efficacy of the current surcharging framework in providing appropriate price signals has diminished. RBA analysis using merchant-level data found that changes in consumer payment patterns are unlikely to substantially increase payment costs if surcharges are removed.¹¹ Merchants would also retain the ability to offer discounts to steer consumers towards cheaper payment methods.
• reintroduction of some cross-subsidisation of credit card costs by users of lower-cost payment methods, such as debit cards. However, the reductions in credit card interchange caps proposed in this paper (see Chapter 3: Interchange Fees) would significantly narrow the difference between interchange fees on debit and credit cards and reduce the extent of any cross-subsidisation.
• removal of the downward pressure on fees that surcharging may provide. Merchants, particularly large (strategic) merchants, can bargain for lower payment fees by agreeing not to apply surcharges. Without surcharging, some downward pressure on payment costs could be lost, particularly for these large merchants. Surcharging may have also helped to put downward pressure on merchant service fees for charge cards such as American Express that are not subject to interchange regulation. Removing surcharging may also reduce competitive pressure on credit card scheme fees, though RBA analysis has not found any evidence of scheme fees being higher in foreign jurisdictions where surcharging is banned.

The PSB’s preliminary view is that removing surcharging on designated card networks would increase competition and efficiency in the card payments system by focusing the incentive to make efficient payment choices on merchants via their choice of payment plan rather than consumers. As discussed above, the surcharging framework is no longer effectively steering consumers towards choosing lower-cost payment methods. Instead, the ability to pass on payment costs via a surcharge is at times being used by merchants to also pass on the cost of non-payment-related services to consumers and disincentivises merchants to choose lower-cost payment providers. Merchants would also retain the option of choosing simple plans, and PSPs that offer this plan type could still compete against traditional acquirers. Merchants that wish to continue using PSPs’ non-payment-related services could pay for these services under a ‘user-pays’ approach rather than passing them onto consumers via a surcharge. Removing surcharging on debit and credit cards will reduce the costs of compliance, investigation, implementation and enforcement within the card payments system for consumers, merchants, PSPs and regulators.

While there are potential drawbacks with removing surcharging, the PSB considers that there are likely to be sufficient mitigating factors to limit these negative effects. Although merchants would be unable to surcharge payments, they would still retain the ability to offer discounts to steer consumers towards cheaper payment methods. Proposed transparency initiatives (see Chapter 6: Transparency of Merchant Fees) could help merchants search for and switch to a cheaper PSP or plan to manage their payment costs. The cross-subsidisation of credit card costs by debit card users would be substantially mitigated by reducing the differential in wholesale costs for credit and debit cards via proposed interchange reductions that would significantly lower the cost of credit cards (see Chapter 3: Interchange Fees). Any rise in credit card scheme fees could also be monitored via proposed transparency initiatives (see Chapter 4: Transparency of Wholesale Fees).

Exemptions for commercial credit cards, foreign cards and small merchants

As part of this option, the PSB is considering whether, as a policy matter, it is appropriate to allow some types of merchants to continue surcharging for some card types (potentially combined with differential treatment for interchange regulation – see Chapter 3: Interchange Fees). Some submissions claimed that there should be an exemption for commercial cards, given concerns around regulated four-party networks being less able to compete with unregulated three-party networks in the commercial card market. However, if surcharging for commercial credit cards were allowed, the potential reduction in complexity and enforcement burden from removing surcharging on debit and credit cards would not be fully realised.

Some participants submitted that a variation of this option could include exemptions or carve-outs to continue to allow surcharging for small merchants and/or for foreign card transactions. An exemption for small merchants that typically pay higher interchange fees than large merchants, or for foreign card transactions that typically attract higher overall fees, would allow merchants to pass on the associated higher costs, but would significantly raise the complexity of the surcharging framework.

The PSB considers that simplicity and ease of enforcement for consumers, merchants, payments service providers and the ACCC outweigh the potential benefits of exceptions to removing surcharging.

2.3 Preliminary assessment

The PSB recognises that the existing surcharging framework has deficiencies and is no longer achieving its intended purpose, and that the payments landscape has evolved sufficiently to warrant change.

The RBA’s preliminary view is that removing surcharging for credit, debit and prepaid cards (Option 3), when implemented alongside the proposed reduction in interchange fees and increased transparency initiatives in this paper, would best promote the public interest by enhancing competition and efficiency in the card payments system.

The RBA proposes to lift its prohibition of ‘no-surcharge’ rules for the designated debit, prepaid and credit card systems. It is unlikely that the RBA could directly impose an effective ban on surcharging by merchants, as merchants are generally not considered ‘participants’ in the designated card systems under the PSRA. If surcharging continued after the prohibition of ‘no-surcharge’ rules under the RBA’s standard was lifted, the RBA could recommend that the Government legislate a ban on the surcharging of cards of the designated card systems.

A removal of surcharging on designated credit, debit and prepaid cards would be expected to enhance competition and efficiency in the card payments system. Surcharging is no longer effectively steering consumers towards making efficient payment choices due to: consumers not carrying cash; some merchants not accepting cash; many merchants surcharging all card types at the same rate; excessive surcharging (and consumers being unable to know if a surcharge is excessive without knowledge of merchants’ cost of acceptance); and deficiencies in merchant disclosure of surcharges, which amounts to drip pricing via card payments surcharges. A removal of surcharging would instead shift the incentive onto merchants to make more efficient choices in regard to their payments provider. Merchants would be incentivised to seek lower-cost payment providers or plans, particularly if they could no longer bundle additional services into a payment surcharge and pass on the cost to consumers; this would also promote competition among PSPs to offer lower-cost payment services. This would be expected to lower overall card payment costs in the system.

Option 3 would also reduce costs and improve efficiency in the card payments system in other ways:

• Non-payment-related costs would be paid for by merchants that are using the services rather than being passed onto consumers via a surcharge. This may incentivise merchants to reconsider and reduce services they no longer require. In comparison, this benefit would only be partially realised under Options 1 and 2.
• Removing surcharging would substantially simplify enforcement and lessen the cost of compliance in the card payments system as merchants would not need to engage with the potential complexities of calculating their costs of acceptance. Identifying the presence of surcharges would be much easier than assessing excessive surcharging under the current surcharging framework that requires knowledge of each merchant’s cost of acceptance. By contrast, retaining the surcharging framework in some form via Options 1 or 2 would require higher costs of compliance and enforcement of the framework.
• Removing surcharging would be less costly for PSPs to implement and less disruptive to existing business models than only removing debit surcharges, which would otherwise increase costs in the card payments system.
• Removing surcharging would likely increase consumers’ use of card payments relative to cash. Consumers would no longer need to expend effort attempting to avoid card payments surcharges by paying in cash. Since the costs for merchants to accept cash have risen as cash use has declined, it is no longer clear that paying in cash is more efficient than paying by card.

The PSB considers that actions can be taken to reduce the negative effects of Option 3:

• Despite losing the ability to surcharge, merchants would retain the ability to steer consumers towards paying with cheaper payment methods by offering discounts. Merchants can also switch to a cheaper PSP or plan, or can choose to incorporate their payment costs in the price of their goods and services. Around 90 per cent of small merchants would be better off under the proposed measures than under the current framework even with no plan switching, since only 10 per cent of small merchants choose to surcharge.
• The cross-subsidisation of credit card costs by debit card users can be partly offset by reducing the differential in credit and debit interchange fees, as proposed in Chapter 3: Interchange Fees. In addition, the cost differential between debit and credit has already decreased partly due to the increased prevalence of single-rate plans, particularly for small merchants.
• While surcharging would no longer be a competitive constraint on scheme fees, RBA analysis has not found any evidence that scheme fees are lower in jurisdictions that allow surcharging. In addition, other initiatives that directly target scheme fees may act to constrain schemes from raising their fees (see Chapter 4: Transparency of Wholesale Fees and Chapter 5: Scheme Fees).

Merchants, particularly large (strategic) merchants, would no longer be able to use the threat of surcharging when negotiating with the card networks on strategic rates. However, this would reduce the competitive disadvantage of small merchants relative to large merchants in the market for payment services, since small merchants do not have the bargaining power to receive strategic merchant rates from the schemes.

Endnotes

The current surcharging regulations prohibit designated card networks from imposing ‘no-surcharge’ rules; however, American Express (a non-designated network) is under a voluntary agreement with the RBA to not impose ‘no-surcharge’ rules. Regulated card networks are also subject to the RBA’s interchange regulation. 1

Some exceptions applied. For example, surcharging of some cards was allowed in taxis (see RBA and ACCC 2000). 2

Blended plans have some transaction types ‘blended together’ at one price, such as one rate for all debit card transactions (including eftpos, Mastercard and Visa debit). Merchants on such plans would be able to set a surcharge using the combined rate for eftpos, Mastercard and Visa debit, even if the wholesale fees for accepting debit card transactions from one network were cheaper than the average rate for debit transactions across all the card networks. 3

‘Interchange plus’ or ‘interchange plus plus’ plans (also called ‘unblended’ plans) charge merchants the wholesale cost of each transaction plus the PSP’s margin, meaning merchants pay a different rate for each transaction, depending on factors such as the card type (e.g. credit or debit), transaction type (e.g. in-person or online) and card network (eftpos, Visa or Mastercard). 4

This analysis used the 2022 Consumer Payments Survey to determine the difference in payment mix between respondents who claimed they changed payment method to avoid a surcharge and respondents who did not avoid a surcharge in the survey week. Of respondents who owned a credit card, those who avoided a surcharge were more likely to use cash than those who did not avoid a surcharge in the survey week. This effect was also observed in merchant-level surcharging data – merchants that apply a surcharge have a lower proportion of credit transactions in aggregate than merchants that choose not to surcharge. 5

For example, if a merchant was charged a blended rate for all debit card transactions, the merchant could set a permitted surcharge using the combined rate for eftpos, Mastercard and Visa debit, even if the wholesale fees for accepting debit card transactions from one network were cheaper than the average rate for debit transactions across all the card networks. 6

In 2022, around 13 per cent of payments were made using cash, compared with 51 per cent that were made using debit cards, according to the 2022 Consumer Payments Survey (Nguyen and Watson 2023). 7

For example, the average cost for merchants to accept debit is 0.5 per cent, compared with 1 per cent for credit (although these costs are higher for small merchants). 8

Some non-bank PSPs that offer simple plans also argued that a ban on debit card surcharging would reduce their attractiveness to merchants relative to more traditional acquirers, and ultimately reduce merchant choice and competition in the acquiring market. The PSB does not place much weight on this argument since some traditional acquirers also offer simple plans, so presumably newer PSPs offer merchants more than just the convenience of a single price. 9

At the time of writing, Amazon Australia was providing a 2 per cent discount for some customers paying with PayTo. 10

A counterfactual analysis using merchant-level data revealed that merchant fees would not increase substantially if consumers at surcharging merchants used credit cards at the same rate as they do at merchants that currently do not surcharge. Although credit card use would increase marginally, a low difference in the cost of acceptance between credit and debit for most merchants means that merchant fees would only increase by a few dollars annually per merchant in the sample on average. Similar analysis using the 2022 Consumer Payments Survey found that consumers would move away from cash and towards credit on net in the case of a surcharging ban. As the cost of accepting cash may no longer be lower than the cost of accepting credit, increases in interchange costs due to higher credit card use could be offset by reductions in cash acceptance costs. 11