Surcharges in the spotlight – RBA’s regulatory review

In summary

In one of a string of measures designed to lessen cost of living pressures ahead of next year’s election, the Australian Government has announced its proposal to ban debit card surcharges levied by retailers from 1 January 2026, subject to a review of the retail payments framework by the Reserve Bank of Australia (RBA).

The RBA has released an issues paper inviting stakeholders to provide feedback on the current regulatory framework for merchant card payment costs and surcharging by 3 December 2024 (Issues Paper).

Cards have become the most frequently used payment method in Australia over the last two decades, accounting for three-quarters of all consumer payments in 2022. In that time, the average fee paid by merchants to payment service providers (PSPs) for each card payment  has declined (although it remains higher than some advanced economies). However, as card usage has increased this has resulted in overall card payment costs paid by merchants to PSPs increasing to an estimated $6.4 billion in 2022/23.

The Issues Paper considers options for reducing merchant card payment costs by reducing the costs incurred by PSPs. The options considered include regulating the amount paid by PSPs in interchange and scheme fees, requiring PSPs to offer least cost routing and improving transparency in relation to merchant service fees (MSFs) (including through disclosure of the amount and composition of MSFs). A reduction in merchant card payment costs would also have benefits for consumers in the form of lower surcharges (although the paper also considers whether it is appropriate to implement a total or partial ban on surcharges).

As the Issues Paper does not propose regulating the amount of MSFs charged by PSPs, for these options to result in a reduction in merchant card payment costs and consumer surcharges PSPs must voluntarily pass on the reduction in their costs to merchants through lower MSFs.

Our key takeaways from the Government’s proposal and the RBA Issues Paper are summarised below.

The Government’s proposal

At the time of publication, limited detail has been provided about the Government’s proposal. What is clear is that the Government is seeking to ban debit card payment surcharges from 1 January 2026. This would bring Australia into line with the position on debit cards in the UK, the EU and a number of US states.

Whether this ban extends to credit cards is one question to be addressed in the RBA Issues Paper. The implementation of the proposal is subject to the RBA's findings following consultation.

Increased ACCC scrutiny of ‘excessive fees’

The Government has separately provided the ACCC with $2.1 million in funding to investigate and enforce the issuing of excessive fees on debit and credit cards. That monitoring can be expected to commence immediately, and PSPs and retailers should be alive to the risk of increased scrutiny by the ACCC on the issue.

Key takeaways from the RBA Issues Paper

The RBA Issues Paper focuses on merchant card payment costs and surcharging, inviting stakeholders’ views on the existing regulations and potential new regulatory responses.

The review is broad and will cover merchant service fees, surcharges, interchange fees, scheme fees and least cost routing. The key themes of the Issues Paper are:

• the reduction of merchant card payment costs as a result of a reduction in costs to PSPs from regulation of interchange fees, scheme fees and implementation of least-cost routing; and
• improving the transparency of merchant service fees to drive competition between PSPs and increase efficiency in the payments system.

What are the possible implications for card issuers, PSPs and major merchants?

Whilst the details of potential regulatory intervention to which the Issues Paper is directed is still unclear, major merchants, merchant terminal providers, card networks, card issuers and PSPs may have to consider:

• if the pricing structures offered by PSPs to merchants are appropriate. PSPs who offer single-rate, bundled or blended fee structures may need to consider re-structuring these fees to reflect the reduced costs to PSPs associated with potentially lower interchange fees and scheme fees (including as a result of least cost routing).
• the impact of a further reduction in the interchange fee benchmark on card issuers costs of providing cards
• whether merchants and PSPs have sufficient documentary evidence of their existing fees and any future fees under new structures. The ACCC will be closely monitoring and scrutinising surcharge fees both at the merchant level and at the PSP level. These parties should ensure that they have sufficient documentation to be able to answer any inquiries or investigations into fees charged.

More detail on RBA Issues Paper

Interchange fees

The RBA recognises that interchange fees, which are typically set by the card network, make up a large share of the card payment fees set by merchants. In an effort to address this, the RBA has set caps and weighted-average benchmarks on interchange fees to reduce card payment costs and promote efficiency. Despite that regulatory intervention, interchange fee schedules are becoming increasingly complex and small businesses are facing higher interchange fees than large businesses.

The RBA is seeking stakeholder views on:

1. Whether the level of interchange benchmarks or caps should be lowered on the basis that lower interchange fees should result in lower merchant card payment costs (if costs savings are passed on by PSPs).
2. Whether the difference between the interchange fees paid by big and small businesses should be limited in some way: The RBA observed that the cost of card payments remains substantial for small businesses, as they do not have the bargaining power to negotiate lower interchange rates like larger merchants do. The RBA noted that this gap is difficult to justify, as it is not aware of any difference in processing costs, and suggested imposing a floor on interchange rates, a maximum range between interchange rates imposed by a network or reducing interchange caps for small business transactions.
3. Whether interchange regulation should be extended to foreign card transactions in Australia: The RBA has become aware that the cost of foreign card transactions is significantly higher for acquirers and merchants in Australia compared to domestic card transactions, and may also be raising the costs of domestic card transactions due to the prevalence of single-rate plans. The RBA noted that foreign cards are estimated to account for around 8% of total interchange fees paid by merchants in Australia, despite only accounting for 3% of total transactions. The RBA referred to the caps set by in Europe and those being considered in New Zealand and the UK.
4. Whether and how interchange fees should be made less complex and more transparent: Interchange fee schedules have become more complex over time, with an increase in the number of categories. However, the RBA considers that the case for differentiation is not always clear, and by way of example, queries why interchange rates are higher for online transactions. The complexity makes it hard for merchants to understand their costs and compare service fees across PSPs, thereby hindering competition. The RBA is considering options such as requiring card networks to publish aggregate data on average interchange fees, setting limits on the number of interchange categories, exploring cents-based caps, and potentially simplifying interchange regulation by having only caps instead of both caps and benchmarks. The RBA noted that Australia is unique in using both caps and benchmarks.

Scheme fees

The RBA observed that scheme fees paid to card networks are unregulated but make up a significant portion of overall card payment costs, which are ultimately passed onto merchants and consumers.

The RBA is seeking stakeholder views on:

1. Whether scheme fees should be made more transparent to promote efficiency and competition and what additional information would be beneficial: The RBA suggested that the recent increase in scheme fees and significant differences between the scheme fees charged by card networks may indicate a lack of competition in the card payments market. The RBA posited that surcharging, which is the main source of competitive pressure, is insufficient to restrain growth in acquirer scheme fees.
2. Whether there is a case for regulatory action to reduce the complexity or growth of scheme fees and what form that should take: Card networks have numerous fees and fee schedules that are not publicly available. The lack of transparency in fee schedules, caused in part by card networks refusing to consent to publication of data on fees, limits the ability to compare fees across networks, hinders competition and makes it challenging to comprehend them.
3. Other regulatory action the RBA should consider to increase the competitive pressure on scheme fees: The possible regulatory actions suggested include publication of scheme fee data, improved reporting to merchants, limiting the number of scheme fees that can be charged and requiring greater transparency of how pricing decisions are made by card networks.

Least-cost routing

The RBA noted that debit cards are the most used consumer payment method in Australia, with the majority being dual-network debit cards (DNDCs) that default to the more expensive international networks for contactless transactions, raising costs for merchants. Least-cost routing (LCR) allows merchants to choose the cheaper network for DNDC transactions, lowering their costs and increasing competition among networks. The RBA is seeking stakeholder views on whether regulatory intervention is needed both to ensure PSPs offer LCR and that the benefits are passed on to merchants in the form of lower MSFs.

The RBA will seek stakeholder feedback on LCR for online and mobile wallet transactions in a future phase of the review.

Surcharges

The RBA recognises there are some benefits to surcharges, including allowing merchants to directly recover costs from consumers, and to incentivise consumers to use lower-cost card payment methods.

In contrast, the RBA identified the following issues relating to surcharges:

• Debit cards and credit cards are often being surcharged at the same single-rate, blended or bundled rate despite debit cards being far cheaper to process than credit cards
• Consumers often do not know how much a surcharge will be until they make payment
• Australia has higher merchant fees than some other advanced economies (such as in Europe), with consumer concern that some merchants may be charging excessive surcharges
• There is a big difference between the fees paid by large and small merchants - with small merchants generally paying three times as much
• Foreign issued cards tend to be more expensive for Australian merchants to accept
• Cost of card payments are opaque and difficult to understand - there is limited publicly available information on retail prices, wholesale prices, margins and transaction volumes, which reduces competitive pressure to reduce prices
• Consumers are finding it harder to avoid surcharges for retail payments, as fewer consumers carry cash, and for online transactions surcharges are unavoidable

The RBA has outlined six different measures it is considering in relation to surcharges:

1. Should surcharges on debit transactions be banned? Banning surcharges on debit cards would help ensure that there is a surcharge free method of non-cash payment available to consumers. The ban would be easy for consumers to understand and would still allow merchants to price signal to consumers, and to pass on costs of credit card transactions. However, removing surcharges on debit transactions may result in merchants otherwise absorbing the costs imposed by merchant terminal providers, card issuers and scheme providers, resulting in that merchant increasing their prices.
2. Should surcharges on cards generally be banned? Banning surcharges on all card payments would bring Australia in line with the EU and the UK. This would address consumer concerns around surcharges and would simplify rules around pricing. However, the RBA considers that banning all surcharges may result in an overall increase in costs as merchants seek to recover their costs through other avenues.
3. Should the RBA cap surcharges? The RBA is considering setting surcharge caps on different types of payment methods. A numerical cap would be an improvement on the current rules, which can be complex and difficult to enforce. However, a key issue with setting caps is determining what the caps should be and how often they need to be reviewed.
4. Should the RBA mandate differentiated pricing for transactions across different networks? Another alternative is to mandate differentiated pricing for different transaction types, rather than changing just the surcharging rules. This could result in debit surcharges becoming lower, however this would mean that single-rate plans and blended pricing offered by merchant terminal providers would no longer be possible.
5. Should the RBA confine cost of acceptance to the direct cost of payment processing? This would mean PSPs could not charge for the broader notion of total ‘cost of acceptance’, which can include software and other services combined into the merchant fees.
6. Should the RBA monitor surcharges issued by network and acquirers? While this proposal would improve visibility over surcharging practices, they would require PSPs to update their systems, possibly to account for a revised ‘cost of acceptance’ definition.

Merchant service fees

The RBA has highlighted the distinct lack of publicly available information on merchant service fees in Australia. This lack of transparency has an adverse impact on competition as it makes it harder for merchants to compare pricing and to switch to competing merchant service providers for better pricing.

To address this issue, the RBA is consulting on three measures:

1. Should PSPs be required to publish pricing information to increase transparency and promote competition? This could include publishing average fees, wholesale costs and margins for merchants each quarter. Currently, it is difficult for merchants to assess pricing as PSPs often only publicly provide their percentage-per-transaction fee which is negotiated between the PSP and the merchant.
2. Should card issuers, card networks and PSPs be required to publish aggregate information on transaction volumes and values? The RBA already collects and publishes similar data in an aggregated way. Publishing information in a disaggregated way would provide more transparency which should facilitate improved competition.
3. Should the RBA require PSPs to provide a breakdown of their fees? Currently some merchants report that their fees are difficult to understand, especially for merchants who are on single-rate plans. One option is to require PSPs to break down the fee into interchange fees, scheme fees and their gross margin. This would provide merchants with more leverage to negotiate better deals.

What’s changed since the RBA 2021 review?

The RBA last considered the retail payments regulation framework in 2021. That review coincided with Treasury’s review of the Australian payment systems, which broadly considered whether the broad regulatory architecture of Australia’s payments system remained fit for purpose. This 2024 review comes in response to concerns of heightened costs of living. As such, the 2021 review is a far more holistic review of Australia’s payment systems, whilst the 2024 review is more confined in scope and purpose.

The RBA appears to have pivoted on some of its positions from the 2021 review. Most notably, in an issues paper released in 2019, surcharging was less closely considered. Overall, surcharges were observed as decreasing significantly. The RBA concluded in its 2021 conclusions paper that it was comfortable with the surcharging framework and that the framework did not need any further changes.

What’s next?

Following the initial round of consultation, the RBA will release an assessment of stakeholder submissions with detail on its reform proposal. The RBA may also consult on the reform proposal if it determines doing so would be in the public interest.

Stakeholders are invited to provide written submissions by 3 December 2024. Due to the potential consequences of any proposal on retailers, merchant terminal providers, card issuers, payment scheme providers and fintechs, many readers of this update may consider making a submission. Additionally, major merchants and PSP should be prepared for close monitoring by the ACCC of any ‘excessive’ surcharge fees, and should consider seeking advice in that respect. The experts at King & Wood Mallesons would be happy to assist.