How will the RBA credit card surcharge reforms change how much you will pay when you make a purchase with plastic?
With annual costs of over $1.6 billion, surcharges are a huge expense for Australian credit card and debit card users. In fact, according to research done by Mastercard in 2014, the average person pays over $130 in surcharges every year, a figure that could rise as people continue to seek out faster and more convenient ways to pay for purchases.
Reports of excessive surcharging have led to a series of government reforms aiming to limit surcharges to the actual card payment costs imposed on merchants so that the system is fair for businesses and consumers alike. Here, we look at the latest changes to credit card surcharges, what they mean for you and how you can reduce or avoid these fees when you pay with plastic.
What is a credit card surcharge and why is it charged?
A credit card or card surcharge is an additional fee that can be applied by merchants when you make a purchase using a credit card, debit card or prepaid card. It is designed to help these businesses cover the cost of accepting card payments, which can cost them up to 3% of the transaction value depending on the card and the type of transaction.
According to the Australian Competition and Consumer Commission (ACCC), the average costs for businesses are:
|Type of transactions||Transaction value|
|Mastercard and Visa debit card transactions||0.5% of the transaction value|
|Mastercard and Visa credit card transactions||1% to 1.5% of the transaction value|
|American Express credit card transactions||2% to 3% of the transaction value|
Note that these are average costs, and could be higher in some cases. For example, data from the Reserve Bank of Australia (RBA) has shown that some premium Mastercard and Visa credit cards could cost merchants more than 2% per transaction.
What changes have been made to credit card surcharges?
In February 2016, a law was passed banning excessive payment surcharges and providing the ACCC with new regulatory powers. This law, known as the Competition and Consumer Amendment (Payment Surcharges) Act 2016 or CAA, also operates in conjunction with the RBA standard for surcharges.
While merchants still have the right to apply a surcharge for accepting card payments, there are three key conditions they will have to follow:
- Card acceptance costs. The RBA has narrowed the definition of acceptable costs to: “fees paid to the merchant's acquirer (or other payments facilitator) and certain other observable costs paid to third parties for services directly related to accepting particular types of cards.” This definition means that businesses can only apply surcharges up to the amount they have to pay for processing a transaction. For example, if a business is charged 3% for an Amex payment, they could only apply a surcharge worth up to 3% of the total transaction amount if you paid with an Amex card.
- Average costs and percentages. The companies responsible for the fees merchants must pay (payment facilitators) have to provide merchants with an annual statement that outlines the average cost of acceptance for each type of card payment regulated by the RBA. These costs will be represented as a percentage of each transaction. It’s expected that merchants who apply a surcharge will also use a percentage, rather than a fixed fee. The RBA notes that this includes the airline industry.
- ACCC regulation powers. The ACCC has the power to investigate possible excessive surcharging and to enforce these surcharge standards.
Large merchants have to comply with these standards as of 1 September 2016, while smaller merchants have until 1 September 2017. The RBA also states that these rules will apply to all payment surcharges, even if a different name is used for these fees: “Merchants will not be able to avoid the rules by calling their payment surcharges something else while still applying them to some payment methods and not others.”
The change will have a major impact on businesses that were charging excessive and/or fixed-rate fees for card payments, such as Qantas and Virgin Australia. Both Qantas and Virgin will be charging a credit card surcharge of 1.3% on all domestic, trans-Tasman and international flights with caps up to $70 for international flights. Prior to the reform, Qantas customers paid credit card surcharges of $7 per passenger for Australian and Trans-Tasman flights and $30 for international trips. Virgin Australia charged $7.70 per passenger for domestic flights and $30 for overseas trips.
Whether these new surcharges result in savings for credit card holders depends on the flight, though. Using Virgin Australia as an example, a return business flight from Sydney to London (Heathrow) would've attracted a $30 flat rate, but the same flight will now require you to pay the new $70 cap. You'll see savings on most domestic flights, though. While you have had to have paid $7.70 on a return economy flight from Sydney to Melbourne worth $245.00, you'll only have to pay a $3.19 booking fee from September 1.
For a full outline of the credit card surcharges that the four major Australian airlines are charging as of 1 September, please see our guide of airline credit card surcharges and how to avoid them.
Earlier credit card surcharge reforms
In 2013, the RBA surcharge reforms specified that retailers could only charge customers for the “reasonable cost” of accepting electronic payment. At the time, electronic payment giant Visa was the first to ban its merchants from applying hefty surcharges to card transactions.
The RBA also stated that under their new surcharging rules, customers must be informed of the surcharge at the point of sale and are entitled to a refund of the surcharge when obtaining a refund of a purchase. Other payment companies, including Visa and American Express followed suit.
These changes were introduced after RBA research from 2011 found that surcharges were typically 1% higher than the merchant service fee for Visa, Mastercard and American Express cards, and 1.9% higher for a Diners Club card. Airlines and taxi companies were widely seen as the biggest surcharge offenders, with the former often charging flat fees of between $5 and $10 per purchase, while Cabcharge applied a 10% “service fee” for credit card payments.
The updates in 2016 are designed to further restrict excessive surcharging. But how much of an impact will they really have? To give you a better idea of the potential savings, check out the case study below.
Comparing the cost of old and new surcharges for a Qantas flight
Freya is planning to fly from Melbourne to Sydney for Christmas in December 2016. She wants to book her flights in advance using her credit card, and plans to fly with Qantas.
In August, Freya finds a flight for $116 but sees that she would also have to pay a credit card surcharge of $7. That works out to be 6% of her transaction cost.
But Freya also sees that Qantas is changing its credit card surcharge fee to 1.3% of the transaction cost as of 1 September 2016. If the same fare is available then, she will only have to pay a surcharge of $1.50.
In fact, even if the fare was $500, under the new system she would still pay less than under the old system ($6.89 compared to the $7 flat fee). So by waiting until 1 September 2016 to make her booking, Freya is able to save money on the surcharge and keep her credit card costs more reasonable as a result.
Other factors to consider
While the credit card surcharge reforms will provide us with fairer fees when we pay with plastic, there are a few other key details to keep in mind. These include:
- Taxi fees. Individual state authorities regulate surcharges in the taxi industry, which means they don’t have to follow these standards. In some cases, that could mean you still pay a fee of more than 10% when you use a credit card to pay for your taxi fare. But state authorities in Victoria, NSW, WA, SA and the ACT are all limiting taxi surcharges to no more than 5% of the fare price, with other states and territories considering similar action.
- Debit cards vs credit cards. As credit card payments typically cost more to process than debit card payments, it’s likely there will be more noticeable differences in the surcharges you pay for these types of cards. For example, a credit card booking with Qantas will cost 1.3% of the total fare price, while a debit card booking will cost just 0.6%.
- Surcharge information. Merchants are required to inform you of any surcharge before you make a payment so that you can choose whether or not you want to go ahead with the transaction.
- Other payment options. Merchants will still have to provide you with a fee-free alternative payment option. This could include cash, direct debit, BPAY or some other electronic payment option (such as POLi).
- Additional fees. While surcharges will be limited, there are currently no regulations that stop merchants from increasing their prices or introducing other fees that apply regardless of the payment method (ie, a booking fee that is charged for all available payment methods). The ACCC says that any such fees would still need to be included in the advertised total price before a purchase is made in order to comply with Australian Consumer Law.
For more information on credit card surcharge regulations, other fees and your legal rights, contact the ACCC Infocentre on 1300 302 502 or via its website.
The latest changes to credit card surcharges provide customers with a more reasonable pricing system to help keep costs down when you pay with plastic. Now that you know more about how surcharges work, when they’ll apply and the average costs for both credit cards and debit cards, you can choose the most convenient and affordable payment options for you.