Jul 26 2016
In May 2016, the RBA announced new standards relating to merchant surcharges on credit and debit card schemes after a review into card payment systems identified instances of merchants charging customers excessive surcharges. Three new standards will be implemented which aim to reduce processing surcharges for consumers using card payments. The new standards will also be extended to include previously excluded American Express and Diners Club card reward schemes. While these new standards may reduce the interchange fees generated per transaction, they will potentially boost payment volumes for consumers’ debit and credit cards, benefiting Australian credit card processors.
Current interchange fee standards require the weighted-average value of the interchange fees charged to comply with caps established by the RBA. Merchants are permitted to impose a surcharge on customers paying with a credit card, to enable the merchant to pass on the cost of accepting card payments to the consumer. However, some merchants have demanded excessive surcharges to process card payments. The RBA has therefore established three new standards to reduce instances of disproportionate surcharges.
The first standard caps the weighted average interchange fee for the credit card system at 0.5% on a rolling annual basis, with a maximum of 0.8% for individual interchange rates. The second standard lowers the weighted average benchmark for debit card systems from 12 cents to 8 cents, with fees not permitted to exceed 15 cents if levied on a fixed amount basis, or 0.2% on a percentage basis. The third standard applies to merchants, and forbids the permitted surcharge imposed to exceed the cost of accepting the card payment. The ACCC will enforce compliance. These new regulations will take effect over the next two years, with the timeframe varying depending on the merchant’s size.
These reforms are expected to have a positive effect on local credit card processors. Five credit and debit card processors operate in Australia: Visa, MasterCard, American Express, Diners Club, and EFTPOS. These companies submit customer card transactions to card issuers (usually a bank) for authorisation. Although the reforms are expected to reduce revenue generated from transaction-based interchange fees, the anticipated uptick in credit and debit card use by consumers will likely offset the effect of lower fees by increasing the volume of transactions processed.
Revenue for the credit card processing industry has grown over the past five years. Operators have benefited from the rising uptake of non-cash and contactless forms of payment over the past five years. Australia is a global leader in adopting non-cash and contactless payments, with cash expected to be used for less than half of all transactions in 2016-17, and make up about 1% of total payments value. According to the RBA, transactions using credit or debit cards averaged about 275 per person in 2015, representing a 57% increase from five years earlier.
Credit card processors’ revenue has also been supported by rising household consumption expenditure on consumer goods, and the growing popularity of online shopping. Growing demand for consumer goods represents an increase in the value of transactions processed by industry operators. The Australian consumer goods retail subdivision is expected to be worth $161.4 billion in 2016-17, making it a key source of revenue for industry operators. The rapid adoption of non-cash and contactless payments is anticipated to continue over the next five years as Australia gradually shifts towards a cashless society.