Banning surcharges only solves a political problem for the RBA

No one likes to pay something for nothing, especially when times are tough. And punters understandably hate paying surcharges for using their own money when paying for a beer or a meal at the pub, or a bed for a night away from home.

The RBA’s second consultation paper on Merchant Card Payment Costs and Surcharging was released recently. To put it simply, it does not go far enough to lower costs for consumers and business—at a time when many are counting every cent, and business owners are struggling for survival.

First published in the latest edition of AccomNews. Read it HERE.

Hotels understand the frustrations of Australians with the cost of debit and credit card surcharges, but it’s a symptom of a much bigger structural malaise—unreasonably high fees.

The RBA is right when it says fees charged by the card payments industry are “opaque and complex”, but their proposed fix has a long way to go.

Businesses like hotels, pubs, cafes, restaurants and newsagents often pay 300 percent more than big businesses in card fees. Business would not need to surcharge at all if these fees were reasonable.

We welcome the RBA proposing a reduction in so-called “interchange” fees in its consultation paper—but it needs to do a lot more to reduce all the fees charged by banks and international credit card schemes. Banning surcharges without fixing all the underlying issues hides a political problem, which is convenient for the RBA and politicians, but it does not provide meaningful productivity reform.

The RBA is relying primarily on the hope that competition will put downward pressure on card costs, while business would prefer the certainty of regulation. So, I suspect, would consumers.

Australians pay $6.4 billion in card payment costs each year, which flows to the card payments industry made up of the banks, Mastercard, Visa, eftpos and payment service providers.

To provide a more equitable balance, the AHA has proposed solutions such as improving enforcement by the regulator, separating the pricing of debit and credit cards and regulating caps on scheme fees charged by the global credit card schemes. But the RBA says that these proposals are not within its power, or too big a step, or just too hard.

The RBA also needs to act to address the disparity between debit card versus credit card transactions.

The cost to process a credit card payment is at least twice that of processing a debit card payment because of the cost of perks for credit cards like frequent flyer points, complimentary travel insurance and so on. The perks for the 25 percent of credit card users are being subsidised by the 75 percent of debit card users.

Is that a fair system?

Walk into any business in your main street and you will notice that the surcharge fee can be as high as 1.6 percent. This 1.6 percent is a blended rate paid by debit card users and credit card users, even though the cost for debit card users should be much less.

The RBA needs to answer one simple question—if the debit card processing cost on a cup of coffee today is 1.6 percent, how much will that 1.6 percent come down under their new rules?

Answer?  It won’t come down in a meaningful way because the RBA is not prepared to take stronger action on scheme fees or blended rates which are at the heart of the problem.

The best cure to this inequity is finally separating debit transactions from credit transactions, and mandating dynamic least cost routing (DLCR). DLCR would give businesses like your local hotel the ability to route every debit transaction via the lowest cost network.

Since 2017, the RBA has been encouraging the payments industry to increase LCR without a clear definition of how it should be implemented. But instead of vaguely relying on the hope of competition to increase DLCR, the RBA needs to mandate and define it.

The RBA should also be doing more to tackle scheme fees charged by the big credit card companies—these are charged by Visa and Mastercard and account for around half of debit card transaction wholesale costs.

The RBA is concerned by the current level of scheme fees, but has stopped short of proposing a cap or limit.

Banning surcharges may solve a political problem for the RBA, but it needs to tackle all the issues.

The RBA is designing a political fix, not a solution, and millions of Australians and the thousands of business owners deserve better.

Read more from AHA in AccomNews. HERE.