Credit card, consumer groups applaud RBA probe into credit card surcharges

Consumer groups and credit card giant MasterCard have both welcomed a pledge from the Reserve Bank to investigate the growing number of businesses now charging consumers excessive transaction fees for paying through credit cards.

The RBA said yesterday there is increasing evidence to suggest it is now becoming more common for merchants to set surcharges at levels that are higher than their costs for offering such services.

MasterCard vice president of strategy and corporate affairs David Masters says the company wants a cap put on excessive surcharging to avoid its customers from being punished.

“We don’t like surcharging, that’s no secret, and in the majority of markets we don’t allow it. But where we do allow it because of regulation, we think it’s fair that the surcharge should only represent the cost of that transaction.”

In 2003 the RBA removed “no-surcharge” regulations from the market. But although surcharging was slow to develop, the RBA now says more and more companies of all sizes are doing so.

In a discussion paper, the RBA references data from East & Partners which shows almost 30% of merchants impose a surcharge on at least one of the credit cards they accept. It says this is most prominent in the hospitality and holiday travel industries, with some industry analysts saying airlines are particularly culpable.

“The results also indicate that consumers respond to differential surcharging: when faced with a surcharge that is higher on one type of credit card than another, only around 10% of consumers indicated that they would complete the transaction with the card attracting the higher surcharge,” the RBA said.

Choice spokesperson Ingrid Just says the RBA statement is welcome, and points to data showing 20% of businesses are now surcharging, “and that number is growing”.

“The main offenders are the airline industries. It’s obviously reasonable to expect the 1.5-2% fee to be passed on, but we’ve seen examples of charges that are well beyond that. So to have further review is really important.”

“More and more consumers are now using credit cards to pay, we’re being encouraged to do so, and for some businesses there is no other method of paying. Further review must be completed.”

Choice also argues that because many merchants don’t reveal surcharges until the last minute, many customers are obligated to pay.

The RBA is considering a cap on surcharges, which would stop retailers from increasing the surcharge on credit cards above and beyond the actual cost.

“The board believes that allowing some limit to be placed on the level of surcharges could improve the effectiveness of the reforms at relatively little cost, particularly given that the practice of surcharging is now well established.”

Masters says this is exactly the type of solution MasterCard wants, but there is another problem – blended surcharging.

“The RBA tracks the average cost of accepting different types of cards, and the average cost of MasterCard is 86 basis points. But for American Express, it’s well over 100.”

The problem here is that a retailer will then “blend” the two costs into one surcharge rate. “So when you see a blended surcharge of 1.5%, MasterCard holders are effectively subsidising American Express,” he says.

“Given the average cost of charging a MasterCard is 86 basis points, anything above that on average is excessive. It means that card holders are paying more for their products.”

Masters says the RBA needs to cap the cost of surcharges at the transaction value, and says anything else is excessive.

“If the RBA is insisting on maintaining the surcharging system then we want to see the surcharge capped at the cost of transaction.”

The RBA is currently taking submissions over the next month.