In recent years, it has become common for companies that accept credit or debit cards in Australia to charge transaction fees or surcharges for the use of the cards. For example, restaurants, doctors, shops, and other merchants commonly charge between 1% and 5% over the price of the goods or services for a customer who uses a credit or debit card. Event ticketing companies and airlines often charge several dollars per sale in transaction fees. In some cases these fees or surcharges are higher than what a bank charges to these merchants for use of the system.

The Australian Government now has passed an amendment to the Competition and Consumer Act that limits the amount that can be charged by a merchant that accepts credit or debit cards issued by networks designated by the Reserve Bank of Australia (RBA). The regulations currently limit surcharges to the average cost of accepting the card, calculated as the sum of the merchant service fee, terminal rental charge, fees for payments processing, and any fees/premiums paid to insure against risks if the merchant handles payments as an agent for another entity. Costs can only be included if the merchant has certain documentary substantiation of the costs.

In practice, any merchant that wishes to impose a significant surcharge may need a detailed cost model to ensure that its charges do not breach the permitted surcharge levels. Additionally, such companies will need to ensure recordkeeping is sufficient to establish that the surcharge is permitted under these new regulations.

The situation is considerably more complex, because each company may be subject to up to nine different maximum surcharge limits, because the cost calculation applies separately to RBA-designated system: Visa credit, Visa debit, Visa pre-paid, MasterCard credit, MasterCard debt, MasterCard pre-paid, American Express Companion Card, EFTPOS debit and EFTPOS pre-paid. While the costs of jointly used infrastructure can be apportioned, any cost elements that differ (such as the merchant service fee) will result in a different limit.

The Australian Competition and Consumer Commission (ACCC) is responsible for enforcing the new law. For violation of the law, the ACCC can seek penalties of up to AUS$10 million, three times the gain from charges above the allowed amount, or 10% of the annual turnover of the company concerned. Executives could be held personally liable for fines of up to AUS$500,000 if involved in their employer's non-compliance.

Further, the ACCC has gained the power to demand broad information and documents from any company that imposes a credit card or debit card surcharge, and it is a criminal offense not to comply with such demand. In principle, this could enable the ACCC to require every invoice issued to a customer, be it for using a designated payments method with a transaction fee or surcharge or not. In other contexts, the ACCC's information gathering powers can only be exercised if the ACCC has a "reason to believe" that a breach of the law may have occurred, and the recipient may resort to the administrative law courts if it believes the request is unjustified. In this case, however, no "reason to believe" is required and there is some risk the ACCC could use this new power to circumvent the statutory limits that apply to its general information gathering powers (at least in a concurrent investigation into price exploitation and a traditional antitrust matter).

Merchants that only accept card payments (and not cash), where a surcharge or transaction fee is unavoidable, also must be careful to comply with Australia's prescriptive laws on how prices, fees and charges are quoted and advertised.

"Large merchants" (who exceed certain revenue, asset or employee number thresholds) must comply with the new laws from September 1, 2016. All other merchants must comply from September 1, 2017. Taxi companies are exempt because their credit card and debit card charges already are subject to regulation.

Existing Australian payment systems regulatory structure

In 1996, the Australian Government commissioned a report into the performance of the financial system. The Wallis Report concluded that there were considerable inefficiencies in Australian payment systems and that a significant contributing factor was that participation by the same banks in multiple payments systems that might otherwise compete. In response, Parliament enacted laws granting specific regulatory powers to be exercised by the RBA, concurrent with the general competition law being enforced by the ACCC.

The RBA's payment systems regulatory powers are similar to the Australian approach to the regulation of telecommunications, railways, water, power and gas utilities. A competition-related public benefit test is used to determine which payments systems are "designated," and when a system is "designated" the RBA may impose obligations of access and price regulatory standards.

Since the RBA gained its payment system regulatory powers, it has progressively "designated" each of Visa and MasterCard's credit, debit and pre-paid systems; American Express cards issued through Australian financial institutions (but not directly by American Express); the Australian EFTPOS system (debit and prepaid); and the interconnected ATM system. Others are not designated, such as Union Pay, JCB, Diners Club, and Cabcharge.

While the details of the RBA's requirements vary among schemes, there are requirements that incumbent participants facilitate the entry of new players, there is regulation of interchange fees, and merchant acquirers are prohibited from preventing merchants from surcharging.

Over the years, the regulatory instruments have become more complex, to address a range of efforts to circumvent the regulation. The RBA considered that the ability for merchants to impose surcharges was an important tool to enable merchants to drive customers to cheaper and more efficient payments systems. However, there has been consumer backlash where merchants (especially those with few competitors) impose surcharges in excess of the charges levied on the merchants by payments providers.

Meanwhile, the ACCC and the Australian Competition Tribunal have continued to carry a caseload of standard competition law cases in the payments systems area (such as the ACCC's litigation against Visa concerning dynamic currency exchange). Soon after the RBA received its payments systems powers, the RBA and the ACCC concurrently examined interchange fees, with the ACCC alleging that interchange fees constituted collusion and the RBA treating them as a utility.

The new legislation prohibits "excessive" payment card surcharges and provides the ACCC with specific powers to investigate and seek sanctions. However, as with each previous regulatory requirement in this field, companies and their banks have incentives to amend their commercial terms to work around the new prohibition. The scope for "work-arounds" arises because most merchants purchase a range or bundle of services from their bank and the cost calculation that is required by the new prohibition applies to part only of the bundle. There is nothing in this legislation to prevent banks and merchants from shifting to service packages with higher cost for payments systems and correspondingly lower costs for other products in the suite.

Implications

Any company in Australia that accepts credit or debit cards should evaluate whether it has documentation to justify the current level of surcharges, and adjust them downward if necessary. Between now and the next opportunity to renegotiate with the banks, companies should implement procedures to obtain and retain documentary evidence for all relevant cost categories for each of the nine different payments products, so that in subsequent periods the company has maximum latitude in setting surcharges that is permissible under the legislation. Over the long term, companies should identify opportunities to renegotiate the with their bank and terminal provider, or encourage customers to switch towards unregulated payments products.