Wait! I thought high surcharges was the point

It looks like the NSW Government is worried about credit card surcharges.

EXCESSIVE fees for credit card purchases could be abolished in the wake of an inquiry into exorbitant surcharges.

The charges are often applied by corporations with market dominance, such as airlines and taxi firms.

They were allowed to be introduced by the Reserve Bank in 2003 in an effort to let companies recoup the cost of transactions.

Research has found taxis and airlines are slugging customers up to 10 per cent, with Qantas and Tiger airways last year delivered a “shonky” award by Choice for charging passengers $7.70 each.

Choice said the real cost to the airlines was more like 1 per cent.

The New South Wales Government will today launch a research project into exorbitant credit card surcharges, with a view to cracking down on fees.

So almost a decade ago the ACCC/RBA had an inquiry and found that the fact that card associations prohibited surcharges was a bad thing because it prevented merchants from pricing the extra costs they faced from card use. Now the NSW Government is outraged at surcharges because they are harming card users. Of course, that was the point of the RBA prohibiting a rule stopping surcharging.

What they are saying is that surcharges should be regulated to be no more than the cost of the merchant service fee. At the moment, surcharges above that look like a mechanism for price discrimination. Of course, the RBA was fully aware that might occur and, indeed, Stephen King and I predicted it in this paper. But it was also likely because the one place that surcharges were allowed, in taxis, had a 10% charge for as long as anyone could remember. And let’s face it, the surcharge would surely be worth it relative to the cost of having enough cash for the cab. I only wish it existed here in the US.

Anyhow, I can only guess that the credit card companies and the banks will just love the NSW Governments suggestion. This is a regulation that benefits them. When merchants charge more than the costs of card usage, the banks lose out as cards aren’t used as much. Regulating in this manner would be a form of downstream price cap that will leave the banks with as much as they usually get but over more transactions. Moreover, they won’t have to compensate for the merchant action by providing expensive loyalty rewards schemes. Who would have thought that Choice, of all organisations, would be supporting the banks like this? Not that there is anything wrong with that.

From my perspective, this is not the greatest issue in the world as it is a reflection of retailer market power rather than a problem with the credit card system. But the paper we wrote back in 2001, outlines all of the trade-offs anyone would need to consider.

3 thoughts on “Wait! I thought high surcharges was the point”

  1. The main problem is that the varying surcharges make it difficult to compare prices between the airlines since they are not included in the advertised price.  BPay is a distinctly less convenient option, and I suspect they may offer it solely as a justification for not including the credit card surcharge in the published price.
    To try capture the costs added by the inconvenience, maybe vendors who apply surcharges should have to advertised the surcharge-inclusive price if more than 50% of purchases are made with credit cards (or use an average of surcharges).  You might think that convenience is irrelevant, but to take an extreme example, if an airline had a policy that the only way to avoid online payment surcharges was by paying in cash at their CBD office within 24 hours, should they be allowed to advertise the non-inclusive price?
    By the way, I got hit by another credit card-airline scam a while back.  I bought a flight on United Airlines and then had it refunded.  Six weeks later the refund still hadn’t shown up on my credit card.  After many calls to United and my credit card company,  someone finally confessed that United had an arrangement with the credit card processor to defer refunds for up to two months, presumably so they earn interest (this is only a policy in Australia, in the US they are processed within two days).  This is an outrageous policy, but one which people come across so rarely that it is unlikely to influence purchases.


  2. A reflection of retailer market power? Possibly not. Sometimes these kinds of pricing practices emerge in competitive markets where firms get an edge by advertising or promoting a cheaper price for the product, but  bundling it with an unavoidable charge. Fuel surcharges by airlines are one that spring to mind, but there are others in more competitive markets. Go onto ebay these days and many products <$20 are advertised at a giveaway price, but the sting is in the postage charges (which can’t be avoided). Seems to be more of a ‘bad equilibrium’ problem than a lack of competition.


  3. I loath credit card surcharges.  I am just another credit card user in Australia who hopes that a lot of other consumers agree with me.  A number of countries have banned these surcharges and I hope that this trend continues internationally.  As a regular shopper at ALDI, I am really pleased that they have at least dropped surcharges for debit cards, so long as you don’t press ‘credit’ presumably, although I am not sure about this.  Several years ago ALDI did charge a surcharge of 1%  for using a debit card, but this has happily stopped.  It is my hope that the ACCC & the RBA, have a change of heart about the issue in future.  If not, the federal governement should intervene and legislate its ban.  In addition, they should give the ACCC the authority to oversee credit card charges so that merchants don’t have to pay excessive costs when people use their credit cards.            


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