A top official at Australia’s central bank says the institution will move to ban businesses in the country from imposing excessive credit card surcharges on their customers.
The practice, he said, is widespread.
Malcolm Edey, an assistant governor at the Reserve Bank of Australia, made the disclosure in a speech at the Cards & Payments Australasia 2012 Conference in Sydney on March 20 (see document).
In the speech, a copy of which is available on the central bank’s website, Edey said the central bank’s payments reforms of 2002 had worked toward their primary goal of reducing card-payment costs.
“In the case of the four-party credit card schemes, the average merchant service fee has fallen by about 60 basis points,” he said. “Merchant-service fees for the three-party schemes have fallen by a similar amount.”
A three-party scheme consists the issuer and the acquirer being the same entity, which means there is no need for charges between the issuer and the acquirer. These include such card brands as Diner’s Club, American Express and Discover. In a four-party scheme, the issuer and acquirer are different entities, and it is open for others to join, such as Visa Inc. and MasterCard Worldwide. There is no limit to participation in the scheme, as long as the scheme requirements are met.
However, the reforms also saw merchant credit card surcharging increase significantly, Edey pointed out. About one-third of Australian merchants impose a surcharge on at least one of the credit cards they accept, he said.
The percentage is higher for the largest merchants with annual sales greater than AU$530 million (US$555 million or 420 million euros), where the proportion surcharging is slightly more than half, Edey added.
“It also seems likely that surcharging will become more widespread in the future, with only 12% of merchants saying that they are not at least considering applying a surcharge,” he said.
However, the growth in surcharging has brought to light practices that appear inconsistent with the efficiency objective, according to Edey.
“There is significant anecdotal evidence of some surcharging that is not reasonably related to the cost of acceptance,” he said. “One example is the practice of blended surcharging, where a merchant might be recovering costs on an average basis without distinguishing between high- and low-cost card payments.”
Another example would be where a surcharge simply exceeds any reasonable estimate of the cost of acceptance, Edey said.
For these reasons, the central bank has reopened consideration of the surcharging standard it proposed last year, Edey said, adding that the bank released a draft revision to the standard in December and is now in the final stage of consultation.
“If adopted, the revised standard will allow schemes to limit surcharging to a reasonable cost of acceptance, but schemes will not be able to prohibit surcharging altogether or prevent merchants from recovering their costs,” he added.
The standard will define the cost of acceptance to include, but not necessarily be limited to, the merchant service fee.
The Payments System Board, a central bank unit, in 2002 considered, but did not proceed with, an alternative approach that would have allowed schemes to limit surcharging to an amount linked to the cost of acceptance, according to Edey.
“The board’s view was that giving merchants the right to surcharge was important in realigning incentives and in giving merchants more bargaining power in the determination of fees,” he said. “The board also took the view that market forces could be expected to work as a discipline against excessive surcharging.”
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