Crackdown on credit card surcharges

The end of excessive credit card surcharges is on the horizon.
 
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01 .Ending excessive surcharges

Excessive credit card surcharges

CHOICE has been calling for reasonable surcharges for years, and finally an end is in sight.

As of 18 March, surcharges applied to credit cards will be capped at a reasonable cost for the retailer – that is, on average, less than one per cent for Visa and MasterCard, and about two per cent for American Express and Diners Club cards.

This is a far cry from the 11% surcharge charged for using a credit card to pay a taxi fare, or the $17 fee applied for a single-sector return flight by Jetstar and Tiger Airways.

CHOICE has been on the case to have surcharges reined in for some time: in 2010 we partnered in a research project on excessive surcharges with NSW Fair Trading. The Reserve Bank of Australia (RBA) has taken notice of these concerns and launched a review in 2011, resulting in the current reforms.

We expect to see considerable reductions in excessive surcharges over the next few months. Although we probably won’t see an end to excessive surcharging by all retailers immediately, we should start seeing sharp reductions in over-inflated surcharges as the new rules take hold. 

But in the absence of any official regulator looking after the timely introduction of the reforms, it’s up to consumers to make it work. Join us in calling for reasonable surcharging and sign our petition for Cabcharge and the airlines to cut their surcharges. 

 
 

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While many retailers are doing the right thing and have reduced or abolished excessive surcharges, others are holding firm or even employing sneaky tactics. Among the worst offenders are Cabcharge, recipient of a 2012 Shonky, and the airlines, with Qantas receiving a Shonky in 2009.

The RBA cited the recent taxi industry inquiry in Victoria that argued the Cabcharge surcharge should be capped at five per cent. But against the backdrop of a falling share price, Cabcharge has stood defiant and said it will fight any cap on its surcharge.

The airlines have also dramatically increased their surcharges since our 2010 investigation into surcharging in this industry. For domestic flights surcharges have increased:

  • from $3.50 per flight per passenger to $8.50 for Jetstar.
  • from $3.50 per sector per passenger to $7.70 per booking per passenger for Virgin Australia.
  • from $7.20 per sector per passenger to $8.50 per sector per passenger for Tiger.

Both Virgin and Tiger posted increases after the RBA made public its view on surcharges, Tiger in January this year.  And all three airlines are muddying the waters, calling their credit card surcharge a “booking fee” or “booking and service fee”.

Are they preparing a similar stunt to that carried out by UK carrier Ryanair? Ordered by UK Fair Trading to scrap an unlawful £6 debit card fee, Ryanair complied but then hit consumers with a new £6 “website administration fee” and an additional two per cent credit card fee.
What is an excessive surcharge?

The RBA has said that in most cases the cost to the merchant for accepting a credit card payment should be the merchant service fee plus other direct fees - which RBA data shows are an average of 0.85% for Visa and MasterCard, 1.81% for American Express and 2.08% for Diners Club. So in general any surcharge above these amounts may well be excessive.

What can you do?

Avoid businesses charging a surcharge, especially if it sounds excessive. For example, when making a restaurant booking, ask if they charge a surcharge. If they do, consider going somewhere else and let them know about it.

Use a payment method that’s free.

  • Pay cash – some retailers may even give you a discount if you offer to pay cash. 
  • Use EFTPOS – for retailers, EFTPOS transactions cost less than credit cards and are rarely surcharged.
  • BPAY and Pay Anyone – travel industry providers (such as airlines) often allow you to use BPAY or Pay Anyone for free. It usually takes a few days for banks to process these payments, so there are time restrictions on bookings, such as up to eight days before departure by Qantas.
  • POLi is one option used by Jetstar, Virgin and other websites. However, one New Zealand bank has expressed security concerns about POLi.
  • Some merchants allow fee-free transactions for a specific credit or debit card. It’s not a good idea to get the card just for this purpose – at the very least, consider the annual fees and interest rates associated with the card as well.

Complain to the retailer about the surcharge:

Complain directly to the credit card company and your bank:

Sign our Take Charge petition.

In 2003, the RBA reduced the fees that retailers pay for credit and debit card transactions. At the same time they changed the card scheme rules to allow retailers to add a surcharge to cover their card-transaction costs, rather than charging all customers higher prices.

In reality, however, some retailers introduced excessive surcharges to profiteer on the changes. In 2011 about 10% of large merchants applying a surcharge for Visa and MasterCard credit cards charged three per cent or more, which amounts to a 250% mark-up on the average merchant service fee (MSF) of about 0.86% for those cards.

In 2010, CHOICE teamed up with NSW Fair Trading to research excessive surcharges. As a result of increasing concerns the RBA launched a review in 2011, resulting in the latest reforms.


While the RBA will monitor any developments, there’s no regulator enforcing the reforms; instead it’s left to the card schemes themselves. 

Visa and MasterCard told us they’re considering a compliance and auditing program if merchants do not follow the reforms. They also indicated they will work closely with the banks, which better understand retailers’ costs.

“Those who don’t correct themselves will be audited, we know who the usual suspects are” says Visa country manager for Australia Vipin Kalra.

“I think the responsible merchants will come into line without us being the angry guys”, adds MasterCard's vice president of strategy and corporate affairs, David Masters.

Visa and MasterCard will target so-called "blended" surcharges, where retailers apply the same surcharge for all card schemes even though costs for American Express and Diners Club are much higher. According to the RBA, 30% of retailers who charge a surcharge for Visa, MasterCard and American Express charge the same surcharge for all three.


Also in the firing line are surcharges applied as a fixed amount instead of calculated as a percentage of the price. For example, Jetstar charges a flat $17 fee per passenger for a $70 return flight from Sydney to Melbourne paid using either Visa or MasterCard. This amounts to a staggering 24% surcharge and a 2670% mark-up on the average MSF.


What else is happening?

Another possible solution may come in the shape of further reforms as the entire payments system in Australia undergoes rapid change. Along with the reforms to rein in excessive credit card surcharges, there are broader reforms at work to shape how we pay for goods and services, what the systems will cost to use, and how much systems will support choice and flexibility.

For example, the RBA recently concluded a Strategic Review of Innovation in the Payments System. One of the most important issues for consumers raised by the review is a call for the payments industry to make real-time payments available to consumers by 2016. This would make it possible for people to near-instantly transfer cleared funds from their bank account to any other person or retailer, eliminating the usual three-to-five-day wait.

One significant benefit of this would be in providing a widely available alternative to using credit cards for online purchases and so being able to avoid paying an over-inflated surcharge. 

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