Are Credit Card Surcharges Out Of Control?

Businesses in Australia are allowed to impose surcharges for credit card users to recover fees they are charged, but recent research suggests that the charges are much higher than would be needed simply to cover those costs.

Prior to 2003, there was no such thing as a surcharge for credit card use in Australia. Credit card providers didn't want people to feel discouraged from using cards, so any store which wanted to offer credit card facilities also had to agree not to charge customers extra for using it — even though that meant that profits on credit card sales would be lower than on cash sales. (Incidentally, that was one reason why stores could readily offer "pay less for cash" deals, since there was still some room to move if credit card provider charges weren't an issue.)

That all changed after the Reserve Bank effectively decided that the practice of not letting retailers recover the costs associated with credit card payments was anti-competitive and bad for business overall, and legislated to ensure that credit card agreements couldn't include a "you can't charge surcharges for using this" clause. Not every retailer chose to take up that option, but it did become increasingly common, especially for higher-value purchases such as electronic goods and airline tickets. Sometimes the additional charge is a percentage; sometimes it's a flat-fee (Qantas charges $7.70 on domestic airline tickets, for instance).

The theory behind that change was that businesses should only recover their own costs associated with accepting credit cards, rather than using the surcharges as a source of profit in and of themselves. But has that actually happened?

Recent analysis by financial research firm East & Partners suggests that surcharges are out of sync with what retailers are actually paying to offer a credit card service. Across Australian industry as a whole in 2010, the average surcharge imposed for credit card use is 2.55%. In the retail sector, the figure is slightly lower at 2.34%, and that number actually fell from 2.4% in 2009.

While that drop might suggest that competition ensures that fees aren't ridiculous, they are still much higher than the actual percentage charges imposed on retailers, which East & Partners lists as 0.81% for Mastercard and Visa, which are the dominant credit card players. (American Express charges 1.92% and Diners Club 2.12%, but even that last figure is lower than 2.34%.)

The silver lining is that we're increasingly shunning credit cards in favour of debit cards, which is a sounder financial management practice. Credit cards now account for 22% of annual revenues for merchants, while debit cards account for 40.5%. Even so, if that trend continues, don't be surprised if the Reserve Bank decides to tweak the regulations at some point.

In practice, you won't always be able to avoid credit charge surcharges, but it's worth checking your options. For instance, as we discussed recently, you can pay for airline tickets on Qantas and Virgin Blue direct from your bank account.

Lifehacker's weekly Loaded column looks at better ways to manage (and stop worrying about) your money.


    Debit cards are great, until companies like Woolworths and it's offspring like Dick Smith decide that you can't make eft tranactions with them anymore, only credit transactions. This is so Woolworths can make even more money off you.

      I understood it was the other way around with Woolies, that they don't allow you to use a debit card as a credit card? I only have the option to use my cheque account now, despite being able to use it as a credit card in most other retailers.

        Funnily enough, their debit card refusal change hasn't affected me at all. When I use my debit card at either Woolworths or Dick Smith, the credit option is still available.

      ...Using credit cards, even Woolies credit cards reduces the profit on the checkout transaction for Woolies. And for pretty much any vendor who doesn't recover credit card fees.

      It's a fine line between cash handling costs in a large business, and the merchant fees from a bank - but it's probably about the same for them for you to use eftpos debit or pay with correct change. Depends on who's numbers you look at about handling times and unitary costs for actual average cash transactions.

      Accepting credit cards is expensive for the vendor. Both in terms of actual cost, and in administration - check out the relatively clear and simple explanation of fees from Commonwealth -

      It's not a small task to just figure out how much you're supposed to be paying so you can check that the transaction costs are correct when you do your bank recs. And the actual costs aren't insignificant.

      For the vendors who've diversified their revenue stream to include credit provision - IE partnered through some bank to provide branded credit cards - it depends on the deal - but usually they'd probably rather that you used credit with their competitors and paid them in cash or eftpos.

      Is it out of control? Yeah. Is it the fault of the vendors? Not really. The finance industry desperately needs a major overhaul to implement real consumer protection. But since finance industry shares are pretty popular with politicians - I don't see it happening any time soon.

    ...and why are any of these charges based on a percentage of the amount?
    Oh, because it uses more electrons to pay for a $200 item than a $20 item.

    "Are Credit Card Surcharges Out Of Control?"

    Your example of the QANTAS flat-fee of $7.70 is a good example, as that fee is per ticket.

    "surcharges as a source of profit", YES again.
    For starters, know of the fee's involved with Credit Cards, a business would factor that into their prices. (hence less with cash options) BUT the same businesses that did that, when they changed over to charging a fee for Credit card, they did not reduce their prices, so the factored in price was now additional profit.

    Also there is a Fee to use B-Pay, I'm sure using Australia Post to Pay bills incurs a Fee from Australia Post BUT none of these have the Reserve Bank approved decision to charge for it.
    Paying in person would have the highest fee for service if businesses were allowed to charge for that also. But this tends to go against the point of selling anything.

      The final point is the most relevant..
      Handling cash is the most expensive option, yet this is the cheapest way to pay!

      I see this stream is more than a year ago. However, my tale of woe is this week. With a credit of $233 from a flight I had to cancel this year, I contacted Virgin a few months ago to check if there was a time limit on using it and was told I would have telephone them to make the arrangements (I couldn't do it on line). Imagine my surprise when told the sale price of $114 each way to Adelaide I was buying was now $129 each way - why? - for the privilege of talking to a live person! I would have gladly made the booking on line if I could have. With the transaction complete, the Virgin rep started mumbling about the difference - I told him it was $49, he mumbled something... I hear 'nine' but it wasn't until he said I had to pay $58 more, not the $49 that I found out there was a $9 fee being charged to me for using my Visa (Debit card) to pay. I am so angry that is 18.3% I've been charged. Yes, we pay 1% on utility bills now but we do have an alternative - go to their shop front and pay cash, or pay by cheque, or direct debit (ie if you trust that kind of arrangement). I, for one, will not use Virgin again but rather will use a travel agent where I can pay cash! $9 on a $49 charge on a trip which would have already incurred charges when the original booking was made (so they have double dipped) , not to mention I had to pay a cancellation fee as well, is skyway robbery and I'm sick of being ripped off. What the cert that that $9 has gone into Virgin's coffers under the heading "sucker customers".

    Quick question: When you mention that debit cards don't attract a fee - which cards did you mean, more specifically? I have a Debit Mastercard, so I choose the credit option and then opt to sign (more secure).
    Am I being charged for doing this? Do I need to select "savings" when using an EFTPOS machine to avoid a charge?

    25c for EFTPOS? I thought it was illegal to charge a surcharge for EFTPOS.

    A slightly related off topic divergence, what if I reworded a few sentances

    "Apple didn’t want people to feel discouraged from using itunes, so any app developer which wanted to offer in-app purchases also had to agree not to charge customers extra for using it — even though that meant that profits on itunes sales would be lower than on external sales."

    "That all changed after the Reserve Bank effectively decided that the practice of not letting app developers recover the costs associated with itunes 30% payment charge was anti-competitive and bad for business overall"

    An interesting parallel or doesn't it make sense *shrugs*

    Additional notes:
    Debit Card charges are about 0.2%
    There is a monthly terminal fee of $30+ as well
    It is a percentage to cover the insurances for all concerned.
    Minimum EFTPOS purchase amounts are also a scam. It costs up to 40c (fee plus modem phone call) to use it for a small business. $10, $20, $30 minimum purchase is rubbish. Offer 50c or walk out for something small.

    Of course there's that niche of big-spending credit card users who pay off their balance each month and simply use their cards as an incentive/loyalty program. The fees really go towards paying for these schemes.

    The fees which banks charge businesses to run merchant facilities surely are a cost of doing business, and would be a claimable, tax-deductible cost for the business? If so, why are they then allowed to charge us for it too? Isn't that then double-dipping?

      That's like saying "Surely the cost of the t-shirt I purchased is a tax-deductible cost for the business. How dare they charge me for it!"

    For places like this, I've got a $100 note in the back of my wallet. They're nightmarish for traders. Just make sure you buy something under $5 and preferably right when they open.

      ahaha that's awesome

    What I really think needs addressing is the ridiculous 11% surcharge for using a credit card to pay for a taxi. It sounds like CabCharge - the service provider - has a monopoly across Australia, and charging 11% of any credit card fare can only mean a huge profit margin.

      Agree Adam - 11% is ridiculous. Taxi drivers should be happy to carry less cash around - safer!

    "For instance, as we discussed recently, you can pay for airline tickets on Qantas and Virgin Blue direct from your bank account."

    I tried using the bank deposit function a few times for Virgin Flights. I can't remember the reason why, but I remember it failed every time.

    There are 3-4 card networks, so monopolistic behavior (i.e. high interchange fees) is far more likely than a similar behavior (i.e. high surcharge for card usage) by hundreds of merchants - in theory. Looks like the situation on-the-ground is at a gross variance from theory. Tells us something about how competition does not necessarily result in low prices for consumers. More under

    It might be .81% on average, but small businesses are paying much more than that - usually double, so a 2% charge is fair enough. It's easily calculated too.

    And remember, the businesses are possibly also factoring in credit card fraud, and fair enough. Why should my cash or eftpos payment subsidise the fraud when a stolen credit card is used to buy something?

    Also remember that the fee AUD includes GST at the same ratio as the items you're buying (eg if $8.50 of your $10 purchase is subject to GST, then 85% of the credit card fee is also subject to GST) therefore the business owner doesn't keep all of the fee yet still has to pay fees on it. ie banks charge their alleged .81% on the $10, so if you're charged 1% that is ok because the shop can only keep 91cents (9c GST from the fee). And remember the bank will actually charge .81%x$10.10 ($0.08), whilst the shop charges 10c and retains 9c of it. There is also usually a monthly fee on top too, plus fraud, to be paid from that 1c (9c-8c), or a 0.1% fee.

    Personally, I don't begruge any business charging credit card fees (nor debit - they're not as cheap as eftpos cos visa/mastercard still claim their cut). I do, however, think flat fees are wrong eg the airlines. That is massive profiteering - $7.70 on a sometimes $100 ticket! Someone the size of Qantas would have enough transactions to be paying around .45%, yet they're charging up to 7.5%.

    What I don't understand is how eBay can legally PREVENT businesses from passing on the costs. Westfield or Centro can't, why can eBay? Aren't they acting as a landlord or a shopping mall, allowing retailers to trade under their "roof" for which the retailer pays "rent" (fees)? Yet the ACCC treats them under different laws.

    I had this discussion with my bank thismoring, what is a fair surcharge? there reply was anything up to the maximum amount the bank is charging you to provide a card service, this is what my bank charged me this month
    2.73% on domestic cards, an additional .88 on overseas cards so for those a total of 3.61%
    However they also charged$70.15 in service fees and a cross border transaction assessment at .44%
    Although not charged on this bill they also have additional items which can be charged for if needed which include International service assessment.
    So for me to recoup bank charges I would need to charge a surcharge of at least 4%, personally I dont think thats acceptable and I wont be doing it. In reply as to whether I can claim these fees on the tax return, my understanding is that the gst is claimable.

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