Review of Retail Payments Regulation Summary of Submissions to the Review of Merchant Card Payment Costs and Surcharging Consultation Paper

Surcharging

Most submissions supported a removal of surcharging on designated debit and credit card networks as their first preference. Some submissions supported retaining the current surcharging framework.

A small share of submissions supported the removal of surcharging on debit cards as their first preference. Some merchants, payment service providers (PSPs) and financial institutions supported this option as their second preference in submissions or follow-up engagements. These submissions noted this option would allow merchants to recover some card payment costs via surcharges and would retain the price signal on credit. PSPs that only offer blended pricing and their industry representatives strongly opposed a debit-only ban as it would be disruptive to their business models.

Retain the surcharging framework

Many merchants, some PSPs (whose business model or merchant base relies on surcharging) and some consumers opposed removing surcharging, stating that this would:

• Result in increased use of high-cost credit cards, which would reduce efficiency. These submissions stated that consumers would be incentivised to use higher-cost cards such as premium credit cards to earn rewards because they would no longer face the true cost of their payment choices.
• Be counter to the ‘user pays’ principle. Merchants would be forced to bear the additional cost associated with consumers choosing to increase their use of credit.
• Remove a key bargaining tool for merchants to negotiate lower merchant service fees. This was shared by some merchant groups.
• Result in some merchants reconsidering whether to accept card payments if the cost of accepting cards remains substantially higher than alternatives.
• Disincentivise the adoption of lower-cost payment technologies and entrench cards as the dominant payment method because consumers would have no financial incentive to switch payment methods. Views were mixed on whether providing discounts for lower-cost payment methods would achieve a similar purpose.
• Reduce innovation and competition in the acquiring market. A group representing the technology industry stated that surcharging allows new entrants to gain revenue and market share at no cost to merchants. However, the group also noted that surcharging is not the only lever for innovation.
• Not result in additional merchant switching between PSPs because switching costs for merchants are high (see Transparency of merchant fees section).
• Increase consumer prices if merchants incorporate the cost of accepting card payments into their advertised prices rather than passing them on as a surcharge. Around half of 187 small merchants surveyed by a small merchant group indicated that they would raise prices if they were no longer allowed to surcharge.
• Increase costs for cash users if the price of goods and services increases for all consumers regardless of how they pay. Several merchants stated they would consider offering discounts to cash users because they perceived cash to be cheaper to accept than cards. This view was challenged by other merchants who argued that card surcharges disincentivised the use of lower-cost payment methods.
• Threaten the viability of some merchants or of some business models:
  • Several submissions noted that pharmacies and sellers of lottery tickets cannot adjust their prices to incorporate the cost of accepting card payments because pricing on those items is regulated. However, the Government already prevents pharmacies from surcharging PBS medications and many pharmacies do not surcharge at all according to another stakeholder. A group representing lotto and newspaper agencies noted that most of these agencies do not surcharge and they retained the flexibility to raise prices on other items.
  • A travel industry association stated that travel agents would be less profitable as a result of having to absorb chargeback liabilities (through which they guarantee refunds to card-paying consumers if the end-service is not delivered).

Several submissions advocated for tighter enforcement of surcharging rules, which they believed would be sufficient to address issues of excessive surcharging, poor disclosure and merchants not offering surcharge-free options.

A submission supported keeping surcharging but narrowing the definition of a permitted surcharge.

Remove surcharging on designated debit (and prepaid) cards

Some large merchants and issuers supported removing surcharging on debit cards only. In addition, of the submissions that supported retaining surcharging, some supported a debit-only surcharging ban as a second preference. Supporters of this option stated that it would:

• Reduce merchant payment costs by more than alternative options. By retaining the price signal on credit, consumers would be incentivised to pay more often with debit cards which tend to be the cheapest payment method for merchants to accept. Several submissions stated that this would reduce total merchant payment costs and be more efficient than removing surcharging on both debit and credit.
• Reduce the cross-subsidisation of higher-cost payment methods by debit cardholders. Currently, consumers that choose to pay with debit cards and credit cards are typically charged the same price (most of the merchants that surcharge apply the same surcharge rate to debit and credit). Under this option, debit cardholders would no longer face surcharges that cross-subsidise the rewards and other benefits accruing to credit cardholders. Consumers that pay with debit cards would also no longer pay more than cash users (unless merchants choose to offer a discount for cash use) despite cash now being more expensive for many merchants to accept.
• Maintain downward pressure on payment costs for credit cards. Several submissions highlighted that merchants use surcharging (or the threat of surcharging) to negotiate lower fees on credit card transactions. They noted this was a particularly important bargaining tool in the credit market in the absence of least-cost routing.
• Retain competitive pressure on the fees charged by three-party schemes such as American Express. Some submissions noted that American Express might continue to allow surcharging on their cards if surcharging were retained on Mastercard and Visa credit cards.
• Be cheaper to implement than estimated in the Consultation Paper because several providers already offer differential surcharging:
  • A travel industry association noted that differential surcharging is already widespread in the airline industry.
  • A few submissions stated that the costs for PSPs to develop this capability would only reflect a historical lack of investment by those PSPs.
  • Several PSPs and a group representing the tech industry stated that a partial removal of surcharging would introduce significant complexity and compliance burdens and may require new terminals.

• Disrupt blended pricing models, which could improve efficiency. Many submissions noted that blended pricing obscures the differential costs between card types and reduces the effectiveness of the price signal.
• Be unlikely to result in cards being erroneously surcharged because surcharging is generally automated according to an issuer.

Only one submission supported introducing a cap on credit surcharging.

Remove surcharging on designated, debit, prepaid and credit card networks

Removing surcharging on designated debit and credit card systems was supported by most consumers, most issuers, the card networks as well as a minority of merchants and PSPs, since it would:

• Simplify payments, make pricing more transparent and reduce drip pricing. This was supported by many submissions including from the card schemes and large issuers. Many consumer submissions reported that merchant disclosure was often inadequate, resulting in confusion and unexpected surcharges at the point of sale. Many consumers reported that they value the certainty of knowing the end price when making a purchase decision and acknowledged that some merchants might build the card surcharge into the price of goods and services.
• Increase efficiency by incentivising the use of cards, which tend to be cheaper for merchants to accept than cash. However, submissions against a removal of surcharging stated that the removal of an efficient price signal could lead to greater costs in the payments system if more consumers chose to pay with credit cards (or with American Express cards).
• Increase competition in the acquiring market by incentivising merchants to shop around for a better payment plan.
• Be less disruptive than removing surcharging only on debit cards for most participants in the payments industry. Groups representing payments industry reported that most of their members supported a full removal over a removal on debit only. A group stated that removing surcharges would hurt the business models of PSPs that rely on surcharging and could result in some exits or fewer entrants. A PSP provided evidence that the number of acquirers remained stable in Europe following the introduction of a surcharge ban and that non-bank and fintech acquirers continued to enter the United Kingdom acquiring market following the surcharge ban.
• Eliminate some practices that are counter to the policy intent of the surcharging regulations. A few submissions noted that some PSPs have gained market share by encouraging merchants to surcharge above their cost of acceptance.
• Reduce the compliance and enforcement burden. It was difficult for consumers to know whether merchants are excessively surcharging because they could not see merchants’ true costs of acceptance. This lack of visibility has also made enforcement of the existing surcharging framework difficult. Merchants would also have less need to calculate their cost of acceptance to ensure they are not excessively surcharging.
• Bring payments in line with other cost items for merchants by incorporating their costs in the base price of goods and services.
• Bring Australia in line with international peers, which would increase efficiency by improving the ease of doing business in Australia.

Alternative options

Some submissions suggested that the RBA should consider policies that were not covered in the Consultation Paper including:

• Removing surcharges on card-present transactions only, similar to what is being proposed in New Zealand. These submissions suggested that for online payments cash is not an alternative, disclosure of surcharging is generally not an issue and transaction values tend to be higher than in the in-person environment.
• Exempting certain sectors or payments from any change in surcharging policy, such as:
  • transitional or permanent exemptions for small retailers
  • the travel industry
  • regulated-price products
  • business-to-business wholesale payments
  • rental payments or strata fee levies
  • low-margin industries
  • stored-value facilities
  • taxi fares. A few stakeholders stated that the taxi exemption should remain because payment surcharges are different from taxi surcharges under state regulations.

Other feedback

• The card schemes generally reported that they would impose no-surcharge rules if the RBA removed its prohibition on such rules, although the application of these rules could differ across schemes.¹
• Several submissions stated that the Government should legislate a ban on surcharging to ensure consistency across all card networks and merchants, and give the Australian Competition and Consumer Commission (ACCC) powers to enforce the legislated ban.
• A banking industry group and some card schemes stated that removing surcharging should not be conditioned on reductions in interchange.