Customers are familiar with being charged a surcharge on different payment types, and businesses are very used to passing on merchant costs for different payment schemes in the form of a surcharge. However, new laws came into effect on 1 September 2016 that strictly regulate what costs can and cannot be legally included in a payment surcharge.
The object of the new laws is to ensure that payment surcharges are not excessive, and reflect the cost of using the payment methods for which they are charged.
Whilst this is a simple premise, as with many laws of this type the devil is in the detail, and it can be difficult and time consuming for businesses to calculate what is and what is not ‘excessive’. As strict and significant penalties apply for non-compliance, it is important for businesses to understand the new prohibition and to ensure they are complying or are ready to comply.
What are the laws?
The Competition and Consumer Amendment (Payment Surcharges) Act 2016 (Act) became law in February of this year. The Act is a relatively simply one – it amended the Competition and Consumer Act 2010 (Cth) (CCA) to include a new ban on excessive payment surcharges and to include related enforcement powers for the ACCC.
In short, the Act prohibits businesses from passing onto the customer, in the form of a surcharge, fees that exceed the business’ costs for accepting a payment type.
Do you need to comply now?
The new laws have a staged introduction. They commenced for large businesses on 1 September this year. They will apply to all businesses from 1 September 2017.
A business will be a large business if it satisfies two of the following three criteria:
- consolidated gross revenue for the financial year ending 30 June 2015 (including revenue of related bodies corporate) of $25 million or more
- consolidated gross assets as at 30 June 2015 (including assets of related bodies corporate) valued at $12.5 million or more
- 50 or more employees as at 30 June 2015 (including employees of related bodies corporate), whether full time, part time, casual or employed on any other basis.
What is a payment surcharge?
‘Payment surcharge’ is defined in the Act to mean:
- an amount charged, in addition to the price of goods or services, for processing payment for the goods or services
- an amount (however described) charged for using one payment method rather than another.
The new laws do not apply to fees unrelated to the payment type, such as booking fees charged on all bookings irrespective of how they are paid for. These fees can still be charged, but obviously businesses charging any ‘add-on costs’ such as these need to comply with the existing component pricing laws and prohibitions on misleading and deceptive conduct.
Businesses cannot avoid the new laws by just re-naming a surcharge something else, and still applying it to some payment methods and not others – payments only fall outside of the scope of the laws if they are genuinely unrelated to the payment type.
What payment types do the laws apply to?
The prohibition on excessive payment surcharges is located in the CCA, but the detail on its application and implementation is found in the Reserve Bank of Australia (RBA) standard number 3 of 2016 (Standard), which can be found here.
The RBA has designated the following payment types as being covered by the new laws:
- Eftpos (debit and prepaid)
- MasterCard (credit, debit and prepaid)
- Visa (credit, debit and prepaid)
- American Express ‘companion cards’ (issued through an Australian financial service provider, rather than directly through American Express).
This means a number of payment types are not covered by the laws, including cash, cheques, BPAY, PayPal, Diners Club and American Express cards issued directly by American Express.
What is and what is not excessive?
The RBA has said a permitted surcharge is a surcharge not exceeding the average costs of acceptance for each payment type. Effectively this will be the relevant average percentage cost per transaction, calculated on an annual basis.
What a business can and cannot include in its costs of acceptance is very specific (see paragraph 5.1 of the Standard) and includes:
The RBA’s guidance on what merchant fees may be imposed on businesses is as follows, but businesses can only pass on the fees actually charged to them (i.e. a business cannot be safe just by using a fee within the suggested window):
- Visa or MasterCard debit card – 0.5 per cent of the transaction value
- Visa or MasterCard credit card – 1 to 1.5 per cent of the transaction value
- American Express credit card – 2 to 3 per cent of the transaction value
A limited category of other costs including:
- terminal rental and maintenance fees
- gateway and fraud protection services.
However, such fees can only be included if they are directly related to card transactions in the scheme (i.e. excluding fees incurred irrespective of the method used to make the payment). The fees must also be recorded in the relevant contract, statement or invoice. Such fees must be apportioned as per the RBA’s requirements based on total transaction values (as some fees will apply to multiple card types). The RBA has specific rules around how such fees are to be calculated.
The RBA has stated that a merchant’s internal costs cannot be included, and discounts, rebates and other allowances received or receivable by the business regarding card payments must be taken into account.
How to calculate your costs
Businesses must determine their costs of acceptance using an average cost per card transaction over the previous 12 months, or if this is not is not reasonably ascertainable (e.g. because the business or provider is new), an estimate of the costs in good faith.
From 1 July 2017, the statements received from financial institutions will stipulate business’ average costs of acceptance for each card scheme. This will make compliance with the new laws much more straight forward.
However, large businesses must comply with the new laws now, and do not yet have the benefit of these statements. Given this, the RBA has stated that fees should be calculated as follows:
In the period until mid-2017, large merchants who have not yet received an annual statement will need to calculate their average percentage payment costs based on monthly statements that they receive from their acquirer or payment facilitator. If a merchant wishes to surcharge for some costs in addition to those paid to their acquirer or payments facilitator, they will have to keep records of the costs paid to other providers.
Penalties for non-compliance
The ACCC has new powers to enforce the content of the Act. They include the power to:
- issue surcharge information notices, requiring a business to provide evidence of the costs used to calculate the surcharge
- issue an infringement notice if the ACCC has reasonable grounds to believe that a business has breached the ban
- take court action seeking pecuniary or other penalties.
The relevant amounts payable to satisfy an infringement notice are:
- 600 penalty units ($108,000) for a listed corporation
- 60 penalty units ($10,800) for a body corporate
- 12 penalty units ($2,160) for a person other than a body corporate.
Court ordered pecuniary penalties have a limit of 6,471 penalty units ($1,164,780) for a body corporate.
What to do now
Businesses should review any surcharges they are applying to ensure they do not fall into the category of excessive payment surcharges. It can take some time to calculate costs of acceptance and so businesses should allow for this, or prioritise this task if they are a large business. It would also be an opportune time to re-look at payment components generally and check for compliance regarding to other applicable laws, such as component pricing.