RDP 2014-05: The Changing Way We Pay: Trends in Consumer Payments 8. Evidence on Policy Reforms

In addition to providing information on trends in retail payments, the study provides further insight into the effects of some of the reforms to the payments system implemented over the past decade. In particular, information was collected on merchants' surcharging of card payments and on the payment of direct charges at ATMs.

8.1 Surcharges Paid on Card Payments

Card surcharges are a charge that merchants may levy on cardholders for using a card to make a payment. In 2003, as part of a wider reform program, the Bank introduced reforms that removed restrictions imposed by the international card schemes that had prevented merchants from surcharging for credit card payments.[24] This reform allows merchants to recoup the reasonable cost of accepting a card payment, which mainly consists of merchant service fees and other costs paid to financial institutions. These costs can vary across merchants considerably and are likely to influence a merchant's decision to surcharge and at what level. The ability to surcharge allows merchants to provide a price signal to consumers about the cost to the merchant of the various payment methods.

The payment diary provides information about the frequency and (for the first time in 2013) the value of card surcharges paid by consumers. A surcharge was recorded in the diary if the respondent completed a payment where a surcharge applied. This required that the respondent both encountered a prospective surcharge and continued with the card payment. Accordingly, the survey provides no information about situations where a consumer switched away from a card payment (or purchased from an alternative vendor) due to a surcharge, nor if they switched between types of cards as a result of different levels of surcharging for different cards. Keeping this in mind, the most recent data for 2013 show that a surcharge was paid on around 4 per cent of all card payments (Table 11) – a similar level to that recorded by the first two studies. The median value of surcharges paid was 1.8 per cent of the value of the payment.

The channel through which a card payment is made – namely, whether at the point of sale or remotely – plays an important role in the incidence of card surcharges.[25] While 2 per cent of card payments at the point of sale involved a surcharge, 13 per cent of remote card payments involved a card surcharge. Several factors may contribute to this finding. First, alternatives to cards for remote payments may have been more limited or more difficult to use compared to at the point of sale, where cash is typically a surcharge-free alternative. Further, merchant acceptance costs may have been higher in the case of merchants that receive online payments, reflecting higher interchange rates on average and the higher risks that may arise from card-not-present fraud.[26] In addition, the nature of internet-based payments may have made surcharging more likely, including the lack of person-to-person interaction and the possibility that consumers' use of headline price comparisons across merchant websites encourages internet merchants to keep base prices down, but then apply payment surcharges.

Table 11: Distribution of Card Surcharges – 2013
Payment type Share of payments where a surcharge was paid (%) Median value of payment Median level of surcharge paid
Not incurring surcharge ($) Incurring surcharge ($) Per cent of payment value(a)
All card payments 4.1 37 70 1.8
By network used for card payment eftpos 1.5 32 42 $2.00(b)
MasterCard and Visa debit 3.1 30 70 1.5
MasterCard and Visa credit 6.9 45 85 1.5
American Express and Diners Club 4.8 46 50 2.0

(a) Respondents were given the option of reporting the value of surcharges paid as a dollar amount or as a percentage of the payment value; dollar surcharges paid have been converted to percentage value for reporting
(b) Nearly all surcharges paid on eftpos payments were reported as a dollar surcharge and so the dollar value is shown here

Source: Colmar Brunton

Surcharges were more often paid on credit card payments (7 per cent) than debit card payments (2 per cent). The difference is likely to reflect two things. First, merchants may be more likely to surcharge credit card payments (as typically credit card payments have higher merchant service fees than debit card payments). Second, individuals may be more willing to pay credit card surcharges as credit cards often offer reward points (which contributes to their higher cost to merchants). Regardless of the type of card, the median value of surcharged payments was larger than the median for payments that did not incur a surcharge.

A surcharge was paid on 6.9 per cent of MasterCard and Visa credit card payments (Table 11). The survey indicated a somewhat lower frequency of surcharges paid on American Express and Diners Club card payments of 4.8 per cent, despite the comparatively higher merchant service fees on these cards (which would imply that merchants are more likely to surcharge payments using these cards, and to do so at higher rates).[27] This result would be consistent with American Express and Diners Club cardholders finding it relatively easy to switch to an alternative payment method when faced with a surcharge; the survey indicates that over 90 per cent of American Express and Diners Club cardholders also held a credit card from another network.

There was a wide range in the incidence of surcharging across different types of merchants (Figure 16). Surcharges were more often paid for card payments at merchants where credit cards were more likely to be used than debit cards. These included payments for holidays (where payments were likely to have been large or may have involved a deposit) or leisure and purchases at pubs and bars. The fact that many card payments made for holidays and leisure were made remotely also increased the probability of paying a surcharge for these card payments. In contrast, surcharging on card payments was infrequent at supermarkets. This is not surprising given that the larger supermarket chains face lower card acceptance costs, in part reflecting the benefits of favourable lower (or ‘strategic’) interchange rates set by card schemes.

Figure 16: Incidence of Card Surcharges Paid at Merchants – 2013

Around one-quarter of all card surcharges were in relation to bill payments (15 per cent of card payments for household bills incurred a surcharge). While this was relatively high compared to other merchant categories, card payments were not the main means of payment of bills. As a share of all bill payments, the incidence of surcharges paid was around 5 per cent.

In general, demographic characteristics did not appear to play a significant role in the likelihood of paying a card surcharge. However, respondents aged over 65 years paid surcharges on a slightly smaller share (2.8 per cent) of their card payments than for other age groups. This age group's preference for cash and debit cards over credit cards may mean that these respondents were less likely to encounter, and pay, card surcharges.

Rather, preferences and incentives linked to card features were more important in the payment of card surcharges. Linking payment behaviour in the diary to respondents' answers to end-of-survey questions about preferences shows that card surcharges were paid more often by individuals who stated that reward points were an important factor in choosing their payment method. Similarly, those who claimed a preference to use credit also paid more card surcharges. However, individuals who tend to ‘revolve’ their credit card balances, which may indicate a reliance on credit, were no more likely to pay card surcharges.

The median level of a surcharge paid by respondents was 1.8 per cent, with the median on payments using American Express and Diners Club cards (2.0 per cent) higher than that on MasterCard and Visa cards (1.5 per cent). Based on other information about the range of merchant service fees, surcharges up to around these levels would not seem obviously at odds with the card acceptance costs of many merchants. However, card surcharges were distributed across a relatively wide range, with a small proportion of the reported surcharges being for 10 per cent or more of the payment value (Figure 17). Around one-third of these were 10 per cent surcharges for transportation (with such surcharges prevalent in the taxi industry). The majority of the high-percentage non-transport card surcharges were for payments of $20 or less and were reported as flat dollar surcharges; where the dollar value of purchases is small, the flat dollar surcharge results in a high percentage surcharge relative to the payment value. Consistent with this, the percentage surcharge recorded in the diary tended to decrease with the value of the payment.

Figure 17: Distribution of Value of Card Surcharges Paid – 2013

In the 2013 survey, participants were asked hypothetical questions to measure how large a card surcharge they would be willing to pay if the only alternative was to pay with cash.[28] Around 30 per cent of respondents reported that they would be willing to pay a 1 per cent surcharge to use a credit card if the only alternative were cash, while 20 per cent of respondents would be willing to pay the same surcharge to pay by debit card if the only alternative were cash (Figure 18).[29] In general, for a given surcharge, more respondents were willing to pay to use a credit card then a debit card in the place of cash, possibly because credit cards often offer reward points. The proportion of people who would pay a card surcharge to avoid using cash decreased as the value of the surcharge increased.

Figure 18: Willingness to Pay Card Surcharges – 2013

8.2 Direct Charges at ATMs

Reforms to the ATM system were implemented in March 2009 in order to increase transparency and allow ATM owners to better recover costs. Prior to this time, whenever a cardholder used an ATM not owned by their own financial institution (a ‘foreign’ ATM), they were charged a ‘foreign fee’ (typically of around two dollars) by their own institution, part of which was paid to the ATM owner. The reforms removed these fee flows, allowing ATM owners to charge cardholders directly for the use of the ATM. Cardholders must now be advised of the charge payable prior to completing the withdrawal, in contrast to the previous arrangements where notification of the foreign fee appeared only on the customer's monthly statement. Thus, from the cardholder's perspective, the foreign fee was replaced by a more transparent ‘direct charge’ levied by the owner.

The reforms had the effect of encouraging people to use ATMs provided free of charge by their own financial institution in order to avoid paying the now more transparent fee. The 2010 study found that a year and a half after the reforms, a fee was paid on 23 per cent of ATM withdrawals. The 2013 study indicates a significant decline in this proportion, with only 15 per cent of ATM withdrawals attracting a fee (Table 12).

The number of ATM withdrawals recorded is much smaller than for payments, and so results split by demographic groupings should be viewed with more caution. However, the data suggest that the decline in the payment of fees is driven by respondents aged under 50 years, who appear to have increased their use of cash-out at the point of sale since 2010. (The apparent increase in the proportion of charged ATM withdrawals for respondents aged 50 years and over, who make fewer ATM withdrawals than younger cohorts, is curious and might reflect noise in the data.) Across income groups, the decline in the proportion of charged ATM withdrawals was largest for households in the lowest two quartiles.

Table 12: ATM Withdrawals – 2013
Number of ATM withdrawals
(per person per week)
Share of ATM withdrawals
where a fee was paid (%)
2010 2013 2010 2013
All respondents 0.9 0.7   23 15
Age (years)
18–29 1.1 0.9   30 14
30–49 1.0 0.8   26 13
50+ 0.7 0.6   12 17
Household income
1st quartile 1.0 0.8   27 11
2nd quartile 1.0 0.7   20 10
3rd quartile 0.8 0.7   26 15
4th quartile (highest) 0.8 0.8   21 21

Sources: Colmar Brunton; Roy Morgan Research


Similar reforms were put in place for the Visa debit card system effective January 2007, with MasterCard providing a voluntary undertaking to comply with the Visa Debit standard. Effective March 2013, the standards were varied to allow the card schemes to put in place rules that capped card surcharges at the reasonable cost of card acceptance. [24]

The Commonwealth Consumer Affairs Advisory Council (2013) study reported that many of the submissions that it had received related to surcharges charged by airlines and those charged in an online environment. [25]

Interchange fees are typically a major determinant of the per-transaction merchant service fees charged by financial institutions. Published interchange fees in 2013 ranged from 0.20 or 0.23 per cent for strategic merchants, up to 2.0 per cent. The rates set by Visa and MasterCard are available at http://www.visa.com.au/aboutvisa/interchange/interchange.shtml and http://www.mastercard.com.au/merchant/getting_started/interchange_rates.html. [26]

The average merchant service fee for American Express cards is approximately 1.7 per cent, while the average merchant service fee for MasterCard and Visa debit and credit cards is 0.8 per cent; there is, however, significant variation across merchants. [27]

See Appendix A for details of the hypothetical situation. [28]

This is consistent with the results of the 2010 survey, which asked how the individual would respond to a hypothetical 1 per cent surcharge on a $100 credit card payment. Around 30 per cent said that they would pay the surcharge, another 60 per cent would pay with debit card or cash and 10 per cent said that they would leave the store. [29]