The Australian federal government is planning to outlaw companies that impose surcharges on debit card transactions, a move that could fundamentally alter how Australians pay for routine purchases.
This idea pledges to put money back into consumers’ pockets pending the Reserve Bank of Australia’s (RBA) review. The central bank also released its first consultation paper in 2024, and submissions are being accepted through December.
However, like with any major policy change, it’s important to examine it more closely to determine its true implications for everyone.
What are these surcharges?
According to RBA data, if debit card surcharges are prohibited, there might be significant annual savings of up to $500 million. And the savings might reach a staggering $1 billion a year if the government goes one step further and incorporates credit card transaction fees into the ban.
Even while these numbers seem remarkable, the savings per cardholder would come to about $140 a year when broken down. Although it’s not a significant sum, it could build up for regular buyers or those making bigger purchases. Naturally, not everyone will gain the same advantages. The difference may go unnoticed by those who buy less.
According to RBA data, merchant service costs for Australian consumers are lower than those in the United States but higher than those in Europe. Businesses must pay these costs to accept card payments, which are called surcharges.
In the context of international regulations, the proposed prohibition on debit card surcharges strikes a compromise. Surcharges for the majority of debit and credit card transactions are completely prohibited in the United Kingdom, Malaysia, and the European Union.
Although debit card fees are prohibited, companies in the US and Canada are still permitted to charge people for using a credit card.
Traders’ viewpoint
The effects on merchants, especially small businesses, should be considered, even though the surcharge ban seems to benefit customers. The reality is that when it comes to fees related to card payments, not all retailers are the same.
The fees that large and small merchants pay in Australia differ significantly. According to RBA data, small firms pay costs that are around three times more than those paid by larger businesses.
It all boils down to the ability to negotiate. Larger companies can bargain for better fees. The capacity of larger retailers to negotiate advantageous wholesale costs for handling credit card transactions is the main factor causing this discrepancy.
Accepting cards can cost small businesses anything from less than 1% to over 2% of the transaction value. This can reduce profitability, particularly for firms with narrow profit margins.
Merchants may find ways to recoup payment costs through other channels if they are fully passed on to them. This has occurred in other nations that have done away with fees. Among the possible tactics are adopting or raising minimum purchase requirements for card payments, adding new “service” or “convenience” fees for all transactions, hiking weekend and holiday surcharges, or marginally raising overall pricing to make up for lost surcharge revenue.
The elephant in the room is credit cards. Although prohibiting surcharges on debit cards is a positive move, it begs the question of why credit cards should also be exempt.
The RBA’s review consultation paper suggests outlawing credit card surcharges in addition to debit card surcharges. The intricate network of interchange fees and merchant expenses related to credit card transactions holds the key to the solution.
Because credit card issuers offer extra services and rewards programmes, processing credit card transactions costs businesses more.
Merchants may raise their base pricing to offset these expenses if surcharges are prohibited on these. This might essentially lead to people who choose premium cards being subsidised by those who use less expensive payment methods.
The lack of surcharges may also lessen the pressure on card networks to control their rates due to competition, which could ultimately result in greater costs. While some countries have succeeded in outlawing credit card surcharges, their laws governing interchange fees are typically more stringent than ours.
Are things that easy?
On one hand, the savings from banning debit card surcharges could provide Australians with a modest annual reduction in costs, especially for those who frequently make purchases or have larger transaction volumes.
This would be especially impactful for budget-conscious consumers who feel the sting of surcharges every time they use their debit cards. With savings potentially amounting to up to $500 million annually, or even more if the ban is extended to credit cards, the financial relief could be significant for many households.
However, these savings are not likely to be felt equally across the population. The average savings of $140 per person per year may seem like a drop in the ocean for some, especially for those who do not make frequent card transactions.
The reality is that small businesses, especially those with thin profit margins, could face increased financial pressure if they are forced to absorb higher transaction fees without the ability to pass them on to consumers.
Moreover, while consumers may benefit directly from the removal of debit card surcharges, there are risks that businesses could shift these costs elsewhere. Merchants may seek alternative ways to recoup the lost revenue, such as introducing new fees, raising minimum purchase requirements, or increasing prices. These strategies could neutralise the financial benefit to consumers or, in some cases, even exacerbate costs.
Additionally, the increased costs faced by smaller merchants may lead to reduced competition or the closure of smaller stores, which would harm the consumers the policy seeks to protect.
The policy’s proposed expansion to include credit card surcharges may help standardise the playing field, but it could also trigger higher overall prices for all consumers, including those who do not use credit cards.
If merchants are no longer able to impose surcharges on credit card payments, they may be compelled to raise their prices to cover the additional costs, leading to an indirect price increase across the board.
The Reserve Bank of Australia’s review and consultation process provides an opportunity to balance the interests of consumers and businesses while ensuring that the payment system remains fair and efficient. Ultimately, the success of such a policy will depend on its ability to address the needs of both consumers and merchants without distorting the market or increasing costs in other areas.