A Variation to the Surcharging Standards: A Consultation Document – December 2011 2. Background

In 2003, the Reserve Bank began implementing reforms to the credit and debit card systems in Australia. These reforms are intended to improve the efficiency of the payments system and to promote competition. As part of these reforms, the Payments System Board imposed standards that required the removal of the schemes' no-surcharge rules that had previously prevented merchants from surcharging for credit card and scheme debit card transactions: Standard No. 2, Merchant Pricing for Credit Card Purchases; and The ‘Honour All Cards’ Rule in the Visa Debit and the Visa Credit Card Systems and the ‘No Surcharge’ Rule in the Visa Debit System. These Standards became effective from 1 January 2003 for the MasterCard and Visa credit card systems and from 1 January 2007 for the Visa Debit system. American Express, Diners Club and MasterCard (for the Debit MasterCard system) provided voluntary undertakings to remove their equivalent rules.

The removal of the no-surcharge rules was expected to have a number of benefits for the efficiency of the payments system. First, it was expected to improve price signals to cardholders about the relative costs of different payment methods. This was clearly stated in the Gazette notice that accompanied the first of the Standards:

…the price signals facing consumers choosing between different payment instruments would lead to a more efficient allocation of resources in the payments system, in the public interest.[1]

Second, the ability to surcharge provides a negotiating tool for merchants who might use the threat of surcharging to negotiate lower fees. Third, with the ability to surcharge, merchants no longer need to build the costs of accepting card payments into the overall prices of their goods and services; hence, customers who choose alternative payment methods are no longer subsidising credit card users. The Payments System Board is satisfied that surcharging has been successful in achieving these benefits and by reviewing the Standards it is seeking to ensure that this continues to be the case.

The Standards

The prohibition on no-surcharge rules is stated in the Standards as:

Neither the rules of the Scheme nor any participant in the Scheme shall prohibit a merchant from charging a credit cardholder any fee or surcharge for a credit card transaction.[2]

This wording is quite open-ended; it provides merchants the freedom to set surcharges without constraint. That is, there is little that the card schemes can do to directly restrain surcharges, even where they are clearly well above acceptance costs.

The Board was of the view that this level of discretion for merchants was appropriate at the time the Standards were first put in place. The environment then was one where surcharging was thought likely to emerge slowly and was, therefore, unlikely to be used to recover more than the cost of card acceptance. In part, this was because there had been a strong expectation by cardholders, built up over many years, that surcharges would not apply.

Nonetheless, paragraph 9 of each of the Standards expressly provides that agreements between merchants and acquirers to limit the size of any surcharge to the fees incurred by the merchant would not be inconsistent with the Standards:

Notwithstanding paragraph 8, an acquirer and a merchant may agree that the amount of any such fee or surcharge charged to a credit cardholder will be limited to the fees incurred by the merchant in respect of a credit card transaction.[3]

The intention was that this provision would provide merchants with a tool to bargain down merchant service fees.

Together, these elements of the Standards imply an expectation that surcharges would generally be in line with acceptance costs, but that it would be open to merchants to apply higher surcharges and equally open to acquirers to attempt to bargain surcharges down to the fees incurred. It has become apparent over time, however, that paragraph 9 – the provision allowing agreement to limit surcharges to the fees incurred – has had limited use, and has therefore been ineffective. This is because acquirers for the four-party card schemes (as opposed to the schemes themselves) do not have an incentive to limit merchant surcharges in exchange for reducing merchant service fees.

The Current Review of the No-surcharge Standards

Despite the Board's view that the surcharging reforms have been successful and have provided significant public benefit, the efficient allocation of resources relies on the effectiveness of the price mechanism – in this case, the extent to which surcharging practices reflect the cost of acceptance of alternative payment methods. Over the past few years the Board has become concerned that in some instances surcharging has developed in a way that potentially compromises price signals and reduces the effectiveness of the reforms. In particular, the Board has been concerned about cases where surcharges appear to be well in excess of acceptance costs (sometimes referred to as ‘excessive’ surcharging) and an apparent increased tendency for surcharges to be ‘blended’ across card schemes (often at a rate above the cost of acceptance of the lower-cost card). These practices are inefficient because they can cause consumers to underutilise a particular payment method. For instance, when the costs of card acceptance differ across card schemes and the merchant applies a blended surcharge, the consumer may have an incentive to use the higher-cost card more intensively than would be the case if the surcharges reflected the cost of acceptance for each card product. This is particularly the case if higher merchant fees are being used to fund more generous reward schemes. If the blended surcharge is at a level above the cost of acceptance of the lower-cost card, the lower-cost card is also likely to be underutilised relative to other payment methods, not just the higher-cost card. A potential flow-on effect from this is that such practices dull the incentive for the card schemes to compete down their effective costs to merchants.

The Board considered some of these issues as part of the 2007/08 review of the card payment reforms. It concluded that the Standards had provided substantial benefits through the improvement of price signals to cardholders, but nonetheless considered whether there was a case to modify the Standards to allow scheme rules to limit the size of any surcharge imposed by merchants. At that time, the Board assessed that cases of merchants imposing high surcharges appeared to be isolated, and the merchants doing so tended to be those with market power. It was considered that the isolated cases provided insufficient grounds to allow the schemes to impose restrictions on all merchants.

As noted in the June 2011 Consultation Document, the Board now believes that these cases are more widespread and has therefore sought views on modification of the Standards.


Gazette notice to Standard No. 2, Merchant Pricing for Credit Card Purchases. [1]

Paragraph 8 of Standard No. 2, Merchant Pricing for Credit Card Purchases. Paragraph 8 of the Standard titled The ‘Honour All Cards’ Rule in the Visa Debit and the Visa Credit Card Systems and the ‘No Surcharge’ Rule in the Visa Debit System is worded similarly. [2]

Standard No. 2, Merchant Pricing for Credit Card Purchases. Paragraph 9 of the Standard titled The ‘Honour All Cards’ Rule in the Visa Debit and the Visa Credit Card Systems and the ‘No Surcharge’ Rule in the Visa Debit System is similarly worded. [3]