In a move that could reshape how Australians pay for everyday purchases, the federal government is preparing to ban businesses from slapping surcharges on debit card transactions.
Author
Angel Zhong
Associate Professor of Finance, RMIT University
This plan, pending a review by the Reserve Bank of Australia (RBA), promises to put money back into consumers' pockets.
The RBA, which is accepting submissions until December, released its first consultation paper on Tuesday to coincide with Prime Minister Anthony Albanese and Treasurer Jim Chalmers' joint announcement.
But as with any significant policy shift, it's worth taking a closer look to see what it really means for all of us.
How much are we really saving?
Based on RBA data, the potential savings are huge - up to $500 million a year if surcharges on debit cards are banned.
And if the government goes one step further and includes credit card transaction fees in the ban, those savings could hit a massive $1 billion annually.
While these figures sound impressive, when you break it down, the savings per cardholder would amount to around $140 annually.
It's not a life-changing amount, but for frequent shoppers or anyone making larger purchases, it could add up.
Of course, not everyone will benefit equally. Those who shop less might not notice the difference.
How does Australia stack up globally?
RBA data shows Australians are paying more in merchant service fees than people in Europe, but less than consumers in the United States.
These fees are what businesses pay to accept card payments, and they get passed on to us in the form of surcharges.
The proposed ban on debit card surcharges occupies a middle ground in the global regulatory landscape. The European Union, United Kingdom and Malaysia have implemented comprehensive bans on surcharges for most debit and credit card transactions.
But in the US and Canada, businesses can still charge you for using a credit card, though debit card surcharges aren't allowed.
The merchant's perspective
While the surcharge ban seems like a clear win for consumers, it's essential to consider the impact on merchants, especially small businesses. The reality is not all merchants are created equal when it comes to card payment fees.
In Australia, there's a significant disparity between the fees paid by large and small merchants. In fact, RBA data shows small businesses pay fees about three times higher than what larger businesses pay.
It all comes down to bargaining power. Bigger businesses can negotiate better deals on fees. This difference is primarily driven by the ability of larger merchants to thrash out favourable wholesale fees for processing card transactions.
For small businesses, the cost of accepting cards can range from under 1% to more than 2% of the transaction value, which can eat into profits, especially for those working with tight margins.
While the ban may sound like good news for consumers, there's still a need to fix the bigger issues in the payment system. Innovations like "least-cost routing", which allows businesses to process transactions at the lowest possible cost, could potentially help level the playing field.
How businesses might exploit the loopholes?
If payment costs are entirely passed on to merchants, they might find ways to recover those expenses through other means. We've seen this happen in other countries that abolished surcharges. Some potential strategies include
- slightly raising overall prices to cover lost surcharge revenue
- implementing or increasing minimum purchase requirements for card payments
- introducing new "service" or "convenience" fees for all transactions, or increasing weekend and holiday surcharges.
Most of these tactics have been around for a while. The challenge for regulators will be to monitor and address any new practices that emerge in response to the new rules.
Credit cards: the elephant in the room
While the ban on debit card surcharges is a step in the right direction, it raises an obvious question: why not extend it to credit cards?
The option to ban credit card surcharges along with debit cards is proposed in the RBA's review consultation paper. The answer lies in the complex web of interchange fees and merchant costs associated with credit card transactions.
Credit card transactions cost merchants more to process because of additional services and rewards programs offered by credit card issuers.
Banning surcharges on these could potentially lead to merchants increasing their base prices to cover these costs. This could effectively result in users of lower-cost payment methods subsidising those opting for premium cards.
The absence of surcharges could also reduce the competitive pressure on card networks to keep their fees in check, potentially leading to higher costs in the long run.
Some countries have managed to ban surcharges on credit cards, but they usually have stricter regulations around interchange fees than we do in Australia.
As policymakers grapple with this complex issue, they must weigh the benefits of consumer simplicity against the risk of distorting market signals and potentially increasing costs for both merchants and consumers alike.
Angel Zhong does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
