Online payments soar – but so do the surcharges

The number of Australian businesses accepting online payments leapt by 57% in the year to December 2010, but the average value of payment surcharges is also on the rise, according to new research.

Analyst firm East & Partners surveyed 2,300 Australian businesses, revealing that 13.9% of businesses accepted online payments in December 2010, compared to 8% in December 2009.

The wave of web transactions has been accompanied by a spike in the average value of payment surcharges applied by merchants, which has soared from 1.9% in 2008 to 2.4% in 2009 and 2.55% in 2010.

The steep rise, mainly driven by larger businesses, comes despite the annual average merchant service fee being capped at 1.62% for all businesses.

The findings are worrying for the Reserve Bank of Australia, which argues businesses with market power are exploiting payment system regulations to generate new income by effectively imposing a new tax.

Last week, RBA assistant governor Malcolm Edey said the issue is “an area of concern” for consumers and the financial services industry.

The RBA intended the surcharging mechanism to benefit consumers and businesses by allowing merchants to transparently pass on the card fees they incurred rather than having them buried among other less visible charges.

East & Partners principal analyst Paul Dowling says the power has shifted to the merchants, describing them as the payment “traffic controllers”.

Dowling says large merchants hold a degree of pricing power to negotiate lower processing fees than smaller businesses because of the volume of sales they transact.

According to Dowling, the travel and accommodation sectors are the most aggressive when it comes to surcharging, while utilities and telecommunications companies also embrace the mechanism.

One tactic used by businesses is to “actively manage” when online consumers are alerted to the fact they will be hit by an additional fee.

“Often, surcharges are not made apparent until the last stage of the [transaction] process,” Dowling says.

Dowling says this approach makes it less likely for consumers to abandon the transaction because they have already invested time and money into the payment process.

Ingrid Just, spokesperson for consumer group Choice, says recent data by the RBA reveals 20% of small businesses surcharge their customers, compared to 40% of large businesses.

According to Just, surcharge fees can have a particularly damaging effect on small retailers as customers may be less inclined to return after they have been hit, particularly if they have been hit unknowingly.

“What we’re saying is that surcharging needs to be transparent and it needs to be fair. The cost of using a card is typically 1% for most cards – that is reasonable,” she says.

“Once people are aware of how much a transaction is, they can make a decision as to whether they wish to proceed or use an alternative payment method.”

Just predicts the problem will get worse before it gets better, particularly as tap-and-go payment technology means consumers are increasingly less “involved” in transactions, combined with the rise of online retailing.