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If there exists a phenomenon more unloved than the credit/debit card surcharge, I can’t imagine it. It’s up there with suppurating pustules and bumper-to-bumper traffic, especially amid our cost of living crisis. The shelf price of things has risen quite enough; to have an additional few per cent added is an insult.
So it is welcome that the Reserve Bank is undertaking a big study into card surcharging — with the goal of making them go away, or at least get much smaller.
Card surcharges can be very high. The worst among them adds more than 2.5% to the prices of what you buy. The average Australian credit card service fee is a touch under 1%.
As the following chart shows, fees are higher for using credit than debit cards.
So how do we crack down on the evil and unscrupulous small business owners so wilfully making the lives of everyday Australians worse? Wait… we don’t?
Here’s the rub. The RBA review finds that the apparent perpetrators of surcharges are often not to blame. The reason the fish-and-chip shop owner charges you 1.5% to pay for those dim sims is because they are being charged that much — or more — by payment system operators.
Couldn’t the small business just absorb that? Perhaps, if the small business has a fat profit margin on their sales.
But what of the small business whose profit margin is thin? Imagine a newsagent or café owner who sets prices low and hopes at the end of the year to take home $60,000 by stacking up 10% profit on every sale across the year. If everyone now pays by card, a chunk of that 10% profit is eaten away by a 1.5% surcharge. Their take at the end of the year drops to $51,000.
A café that sees profit dropping like that may well choose to bring in a card surcharge. That is risky — it may cause the red mist to descend for some of their customers. An invidious position to be in for the entrepreneur: they cop the blame and face the tradeoffs while the payment costs keep rising to “an estimated $6.4 billion in 2022/23” across the economy.
This is the understanding the RBA study would like to spread: the culprits in the surcharging game are big greedy businesses, not small struggling ones. There’s a thorny thicket of interchange fees behind the scenes, but at the end of the day much of the cost is kicked to the small business to pass to the customer.
Running a payments system has big costs. Someone needs to pay, and it makes sense this should be the people using the system. That’s fine, but some of the costs are fixed — costs that don’t scale with the number of payments being processed.
You’d think that as the number of card payments being made goes up, the price per payment should fall. As the next chart shows, we haven’t seen much sign of that. Instead, it has been a magnificent time to be in the payment processing business. Card payments are booming and the price charged has edged down only slightly.
So what can be done? The Commonwealth Bank has quietly suggested to the RBA a way forward that would be both simple and popular: ban surcharging. Well, a bank would say that, wouldn’t they?
If little cafes are banned from surcharging but big payment processors aren’t banned from charging per payment, what will happen? The price the small business pays per transaction could well rise, with no way to signal to us, the customer, that it might be strangling their profit margin. Especially where paying by debit card leads to a small fee for the business but paying by credit leads to a big fee.
That is why the RBA is highly unlikely to do the simple thing and ban surcharging. Instead, it is likely to operate on the big guys. It will step into the thorny thicket of interchange fees and swing the machete a bit. Several dozen submissions have been received by the review and published on its website and the RBA’s recommendations will arrive in the not-too-distant future.
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