It might be chump change when it comes to buying a coffee, but the surcharge on debit purchases adds up to billions of dollars a year – and it could be about to disappear.
Australia’s payments sector could be overhauled amid a government pledge to reform a system of fee charges that is deeply unpopular with consumers already grappling with punishing living costs.
While the Albanese government has flagged its intention to ban debit card surcharges, it will also consider wider measures flowing out of a Reserve Bank review of the sector that started on Tuesday.
What happens next?
Why is there a sudden focus on card fees?
As the Independent Payment Forum notes, debit card fees can add more than $12 to the cost of a school laptop, and $6.40 to a car service.
Card payments now account for the lion’s share of transactions, with about 80% of consumer payments conducted via debit, credit, prepaid and charge cards, RBA data shows.
But a complicated system of opaque fees has long perplexed consumers, who might not know they are paying a surcharge until they tap their card. This disproportionately affects younger Australians, given they use cards more often than older cohorts.
Shoppers have also found they are often charged the same amount for a debit or credit transaction, even though they rightly assume the latter is more expensive to process.
All up, Australia’s banks, payment platforms and global card companies charge $6.9bn in fees a year, according to the Independent Payments Forum, which are costs either paid by businesses or passed to customers.
Transaction fees in Australia are higher than in several comparable economies such as the UK, but lower than in the US. The Biden administration is trying to combat high card charges as part of a wider campaign to tackle high consumer prices.
What is the solution?
While banning surcharges on debit transactions would be a relief to consumers, there are concerns businesses, especially smaller ones, will need to bear the transaction cost or raise their prices.
The RBA, which has regulatory powers over the payments sector, said in its discussion paper that the average transaction fee paid by small merchants is around three times that paid by larger ones.
This is because they generally cannot negotiate the same types of deals with payments networks as big businesses.
The ability for the government to ban debit surcharges therefore relies on broader reforms to lower transaction costs for small businesses.
“These two issues are linked as merchants would be less likely to surcharge consumers if card payment costs were lower,” the RBA says.
It says a debit surcharge ban may prompt payment platforms to price debit and credit card transactions differently.
For consumers, this would mean debit transactions are free, and credit card payments are charged a higher rate. The measure could also stir competition among payment platforms to offer businesses more competitive rates on debit transactions, given merchants will no longer be able to pass the fees to their customers.
The RBA has invited feedback on whether all card surcharges should be banned, but notes that this could drive a shift towards more credit card transactions, which would also increase transaction costs for businesses.
The RBA is also considering making “least-cost routing”, a policy designed to process payments via the cheapest network – usually Eftpos – a default setting for merchants’ terminals, which should decrease costs.
Who are the winners and losers?
The government’s proposed ban sparked an immediate sell-off in payments platforms, with shares in SmartPay Holdings and Tyro Payments suffering double-digit share price falls on Tuesday.
The Tyro chief executive, Jon Davey, said in a statement that consumers should not pay excessive surcharges, nor should businesses fund the consumer benefits that come with high-cost cards and loyalty programs.
“We support any review that assesses the true cost of card acceptance, including both debit and credit, for the fair regulation of payment acceptance in Australia,” Davey said.
Many payment platforms, including the US company Square, design packages for businesses that blend fees for debit and credit charges, with the costs passed to customers.
This model could be disrupted by a ban on debit surcharges because it relies on subsidising credit card transactions by charging debit card users far more than the cost of the transaction.
It’s unclear what impact the government’s proposed ban would have on the major card networks, Visa and Mastercard, which were contacted for comment.
The RBA review, which is designed to increase transparency and competition in the payments sector, could fast-track a shift to alternative payment options such as “pay by bank”. This system is a type of direct debit which cuts card networks out of the process and should be cheaper for merchants.
Australia’s banking sector broadly supports a ban on debit surcharges, which means there is little opposition to the government banning the unpopular fees.
“This would be a win for consumers and lead to more clarity and certainty for them,” the Australian Banking Association CEO, Anna Bligh, said.
