Fed up of paying extra simply for using your credit card? 2013 is shaping up to be the year of the consumer as the Reserve Bank scales back credit card surcharges, but will surcharge reforms actually put more money in your pocket?
23 January 2013: The villain of the credit card world - the surcharge, will be scaled back by the Reserve Bank of Australia in March this year.
The reform previously slated for New Year's Day was delayed by two months to allow merchants to decide on how to implement a number of revisions the RBA made in November 2012.
Under the new reforms a merchant can surcharge only enough to cover the 'reasonable cost' they incur to accept credit card payments.
Russell Zimmerman, Executive Director of the Australian Retailers Association, said he understands the RBA's position, but thinks the reforms are aimed more at the taxi and airline industries.
I see where the RBA is coming from. There are people who are surcharging to a great extreme. There are also people surcharging across the board whether it's a Mastercard, Visa or American Express.
'Consumers won't see any changes at the till from retailers. It's more the taxis and airlines. That's where we're going to hopefully see some changes.'
Mr Zimmerman said retailers generally don't surcharge, so consumers won't see a great deal of change when the reforms come into effect.
'We've always used surcharges only as a threat to reduce service fees.'
'Coles and Woolworths don't surcharge, so if smaller retailers want to, they've got enough problems combatting them.'
The reaction of the taxi and airline industries are some of the most eagerly awaited. Consumers have complained for years about the high surcharges they are hit with when paying for taxi fares or booking tickets using their credit card.
Qantas wasn't available for comment, and Virgin Australia said they were, 'Working with a range of different stakeholders on the impacts of the revised RBA guidelines and will announce any associated changes once finalised.'
Both airlines charge customers $7.70 per booking per domestic ticket when purchasing with a credit card.
Blair Davies, Executive Director of the Australian Taxi Industry Association, said that consumers are too concerned with the 10% surcharge as a number, and aren't looking at the full picture.
'The average taxi fare is somewhere between $20 per fare, so when we talk about a surcharge the amount being paid is actually small.'
Mr Davies also said that the surcharge is set by the market.
'The surcharge has been applied for 25 years and set by the market. As new players enter the payment services space they all charge around the 10% level. The market is pushing the surcharge to this price,' he said.
'There is nothing to stop other providers coming in, and if it was cost effective for them to do it, offer lower surcharges. This hasn't happened in 25 years, so it's not the case.'
What makes up a surcharge?
In addition to merchant service fees which are paid to the acquiring bank, the RBA outline the five following categories which are also allowed to make up a surcharge:
- 'Acquirer' costs - These are the merchant service fees paid to an acquiring bank such as Visa, Mastercard, Diners Club or American Express. These costs cover the renting and maintenance of the card terminals and can cover other fees in relation to credit card schemes and equipment.
- Costs payable to other payment service providers. This can cover switching fees a retailer may be charged with when moving from one payment service provider to another, as well as the costs associated with setting up and maintaining card terminals.
- A merchant's own card acceptance costs. This includes if a merchant buys their own card terminal rather than rents one from an acquiring bank, as well as other costs like line rental.
- Fraud costs related to accepting cards. This can include the fees and transaction values associated with chargebacks for fraudulent transactions.
- Any other fixed equipment, systems or developments costs which are incurred by the merchant as a result of complying with a card scheme or mandatory rules.
The RBA especially points out this doesn't include general business costs or staff training to use card terminals.
This may sound vague, but that's just what the RBA wants. According to their report, this gives merchants the flexibility to include all of the costs directly related to offering credit card payment facilities. This should theoretically translate into fairer surcharges for consumers.
An old pain for credit card users
Prior to 2003, card schemes such as Visa, Mastercard and American Express had a no-surcharge rule in place.
The RBA put a stop to this so merchants could pass on the cost of accepting a credit card onto their customers. It's hardly a surprise then that the number of merchants surcharging jumped from 7% in 2006 to 20% for small merchants in 2011 and 40% for larger merchants. Now the RBA is concerned surcharges have become excessive.
Research from East & Partners in 2011 shows the difference between the service fee, or what a merchant pays to their acquiring bank to accept credit cards, and the surcharge is surprisingly large.
For a larger merchant the average surcharge was at 2.5% in 2011, and the average service fee was slightly below 1.25%. Smaller merchants had slightly lower surcharges, but higher service fees.
The service fees charged by different acquirers can also vary. Statistics from the RBA in 2010 put this at approximately 0.80% for Mastercards and Visas, 1.90% for American Express and 2.10% for Diners Club.
Sometimes merchants will add these different fees together and charge consumers a flat rate regardless of what card they use. This is called 'blending'. This might mean you're actually paying a higher surcharge then what you should be. Examples of this include some taxi services, which charge a 10% 'service fee' for any card used.
Merchant service fees aren't the only costs a merchant has to pay in order to accept card payments, so this difference doesn't always indicate a merchant is using high surcharges to line their pockets with extra cash.
The biggest surcharge snakes in Australia
The RBA identified a number of industries where high surcharges are the norm:
- Accommodation and travel
- Entertainment, leisure and recreation
- Rental, hiring and transport
- Restaurants, dining and takeaway
- Internet shopping
The RBA also noted that some of these industries offered little in the way of alternatives to paying with a credit card, so consumers are usually unable to avoid these surcharges.
Tips when paying credit card surcharges
Surcharges can come in both flat rate dollar amount fees or percentages. Knowing what a dollar surcharge equates to is a good way of finding out if it's excessive. Airfares generally charge a flat rate dollar fee. Qantas for example surcharge $7.70 per person per ticket for domestic flights, and $30 for some long haul flights.
Jim wants to fly to Atlanta in North America to visit his family. He books a flight with Qantas for approximately $1500 using his credit card. This attracts a $30 credit card surcharge, which equates to only 2%. If the flight was only $700 however, this would mean the $30 surcharge would equate to over 4% of the transaction cost.Until March 2013 comes around, there are still a few ways to avoid surcharges, or minimise the amount you pay when you pull out plastic to make a purchase.
Use a different card scheme - As mentioned above, surcharges can differ depending on what card scheme you have. If you have to pay a surcharge, pulling out a Visa or Mastercard rather than an American Express or vice versa may save you money.
Pay cash - This may be an obvious one, but it's important nonetheless. Paying with cash doesn't incur additional fees or surcharges, and it's accepted more readily than a credit card is. If you stay in a hotel, don't automatically hand over your credit card to pay, even if you've given your card details as security during your stay.
New internet payment options - Newer internet payment options like POLi allow you to pay for some purchases through an electronic funds transfer. This is only available with some online retailers, although both Jetstar and Virgin Australia offer POLi payment options, meaning you can save on the often expensive surcharges associated with booking airfares online.
Credit cards are a very convenient way to make purchases, and with the introduction of the RBA's new reforms in March will be an even more effective spending tool. It's unlikely that surcharges will go away completely, so know how to minimise these surcharges and you'll save yourself thousands over the course of your spending life.