Apr 17, 2006

Credit card surcharges: An even darker side to interchange reforms

When Australia’s Reserve Bank forced card companies to cut interchange fees by half, they also abolished the no surcharge rule, so merchants can charge customers extra when they pay with plastic.

Alan Hale shares his firsthand experience with credit card surcharges in Australia. “Today, I had a business lunch at which I paid the bill using one of my credit cards,” he says. “Interestingly, the café chose to add a 2% surcharge to the bill. I don't think I'll use my credit card next time.”

You can see the 2% merchant fee added at the bottom of Alan's receipt on the right.

Merchants add a surcharge because they clearly don’t see enough value in credit cards as opposed to cash. They’re willing to accept cards if they don’t cost anything. Merchants don’t see cash as a major problem in need of a solution that costs them 2%.

Adding a surcharge on credit card purchases is a common practice in many countries. It is a huge barrier to moving cash transactions to plastic. Some banks have gone to the extreme of eliminating surcharges by reimbursing the cardholder, which is the approach taken by banks in India. In the café example here, that would represent a loss of 200 basis points per transaction. In comparison, the UK banking industry went through a major upgrade to Chip & PIN when fraud approached the crisis threshold of 30 basis points.

Most Australian merchants didn’t immediately begin adding surcharges after the RBA decision. Things appear to be changing now.

“When our interchange fees were lowered by the RBA, it was part of a bundle of reforms,” Alan says. “One of the reforms was that merchants be allowed to pass on the cost of the interchange fee that they incur. Two of our major corporations decided this was something they would do: Telstra and Qantas. I have deliberately avoided making credit card payments to these entities, if at all possible. Other than these two major players, I haven't seen any other large or small merchants do this. Now a local café does this and it sets up an attitude in me that I will not use a credit card there any more, or maybe I just won't go there any more.”

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