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.
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