End of the line for credit card surcharges

Bit on top: an inquiry is now looking at the practice of adding a surcharge when purchases are made with credit cards. Photo: Michel O’SullivanFor several years now, regulators have tacitly acknowledged that some businesses are gouging customers who pay on credit.

However, attempts to stamp out the excessive fees for paying on plastic are proving to be frustratingly slow.

Credit card surcharges – the extra fees levied on customers who use credit, instead of some other payment type – have the dubious honour of being the most complained-about issue in the last year’s financial system inquiry.

An online campaign led to more than 5000 submissions being lodged about this issue. But it is not just a populist concern.

The Reserve Bank, which supports the principle of surcharging, has nonetheless argued that a minority of credit card surcharges are really a sneaky way for some businesses to make extra money from their customers.

It wants to stamp out these “excessive” charges, so that businesses can only pass on the true cost of accepting credit card payments.

For consumers, however, progress on this front has been painfully slow.

An RBA discussion paper in mid 2011 raised concerns about excessive surcharging. It found that the practice was most rife in industries where payments are typically made online and there are fewer alternative payment methods – such as when you are booking a holiday.  As the graph shows, this is also the industry where surcharging is most common.

Ultimately, the RBA’s concerns led to rule changes designed to stop merchants using credit card surcharges to gouge their customers.

But it’s been almost two years since those rules came into force, and some of the most unpopular surcharges, such as those used by airlines, remain.

That is because the current system has proven difficult to enforce – as it’s complex and time-consuming to establish the retailer’s exact costs of accepting credit.

Now, the government has been presented with a new proposal on how to deal with excessive surcharging.

The financial system inquiry, chaired by David Murray, argues that what is needed are clear surcharge limits, rather than leaving it open to companies to determine. The proposal is open for consultation now.

Under the model proposed by Murray, some amount of surcharging would continue because it is an important “price signal” to customers.

It tells shoppers that paying on credit is more expensive for the retailer – and gives customers an incentive to use a lower-cost method.

But rather than the current system that is proving tough to enforce, Murray has proposed allowing low-cost cards, such as debit cards, to ban retailers from surcharging altogether.

Medium-cost cards, such as Visa and MasterCard, would be allowed to cap surcharges at a certain level. While the higher-cost cards – American Express and Diners Club – would continue with the current approach, but be forced to better explain to their customers why they might have to pay a surcharge.

Murray reckons this approach would be simpler, would reduce excessive surcharging, and would allow customers to avoid surcharges altogether if they want to. It seems a sensible response to a gripe that refuses to go away.

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