So long to surcharging

Does your credit card surcharge exceed the cost of the transaction? By Andy Kollmorgen

Letting people pay with a credit card is a generally a good business move in this increasingly cashless world. The card issuer will charge you a bit of money to process the transaction, but for most restaurants the costs will be outweighed by the benefits of letting customers pay how they want.

Or at least that’s the theory. Smaller restaurants generally face higher costs, but what are the options, really?

For all but the smallest eateries, it can’t be a winning strategy to turn away customers just because they forgot what a bank note looks like. You might as well bar entry to large portions of both Gen Y and millennials.

The other thing is that customers tend to spend more when they’re paying with plastic, since the relationship of credit cards to actual dollars can seem tenuous.

Besides, credit card transactions costs are hardly a massive hit, and it’s common practice for restaurateurs and other businesses to pass them on to customers anyway.

The average cost to businesses per transaction for Visa and MasterCard is slightly less than one per cent of the bill; it can go up to two per cent for American Express and Diners Club.

So for a $200 dinner the diners would face an additional $2 or $4—hardly a deal breaker.

The question is whether the surcharge you’re applying to cover the card transaction exceeds the cost of the transaction.

For businesses like airlines—where credit card surcharges have long hovered well above the cost of transactions—excessive surcharging has been a part of the businesses model and a primary source of profit margins for many years.

But as of September 2016 it was no longer legal for large businesses such as airlines to charge more for a credit card (or debit card) transaction than the cost of the transaction.

That would mean Tigerair’s onetime surcharge of $8.50 per person per flight (the airline’s surcharges have varied over the years)—or $68 for a family of four on a two-way flight—would have been illegal if it was applied after September last year, since it would have amounted to a 17 per cent surcharge on a $4000 fare.

And that’s the point of the excessive surcharge ban—it wouldn’t cost the airline $68 to process that single credit card transaction, even if it calls the surcharge a booking fee, service fee or something else. The excessive surcharge ban is aimed at the culprits of such over-the-top markups, not so much the hospitality industry.

In July 2011 Restaurant & Catering Australia made the point in a submission to the Reserve Bank of Australia (RBA) that excessive surcharging in the restaurant businesses was low compared to other businesses and cited research showing that surcharging across the industry was roughly in line with cost recovery.

As the era of cash and carry continues to wind down, it looks like the era of charging customers
extra to use their credit card is over as well.

Market forces have been effective, the submission argued, saying that “when consumers are confronted with a surcharge, consumers will either select a different form of payment or chose to patronise other businesses”.

Businesses with significant market power, particularly in the travel industry, are where regulation is called for.

Despite the appeals to government, the restaurants and catering industry did not win an exemption. As of September this year, it will be illegal for any business—including restaurants—to excessively surcharge.

In years past, only the costlier American Express and Diners Club cards attracted a surcharge at restaurants. Nowadays many restaurateurs apply surcharges to all payment cards and don’t dial it down for MasterCard or Visa. Whether or not the surcharges are excessive is open to question.

In any case, the ban has been in the works for a long time. The Competition and Consumer Amendment (Payment Surcharges) Bill 2015 was passed by Parliament in February 2016 to enforce a ban on excessive credit card surcharging originally enacted by the RBA.

The RBA ban came into effect in March 2013, but it was missing something. The ruling made credit card issuers (mainly banks) responsible for enforcing the ban, but it didn’t specify an actual enforcement mechanism, and it wasn’t exactly a priority for huge multinational credit card companies like Visa and MasterCard to come up with one. (That said, credit card companies themselves are no fans of excessive surcharging, since it leaves the impression that it’s the credit card to blame, not the business.)

With businesses and consumers left scratching their heads for a few years, the 2015 bill filled the void by calling on a specific regulator, the Australian Competition and Consumer Commission, to do the enforcing.

This time it sounds like the government means business. The ACCC has said that businesses like restaurants caught applying excessive surcharges to credit card or debit card transactions could be hit with fines of up to $233,100 if a case goes to court. If it doesn’t, fines range from $2,160 to $10,800 per incident depending on the type of establishment.

The competition regulator says it will provide further guidance on how oversight of the ban will work and how customers can complain if they think they’ve been overcharged.

What we know so far is that banks that process credit card transactions for restaurants will be required to provide clear information to the restaurant about the costs of transactions starting 1 June 2017, and restaurants will have to limit surcharges to that amount after 1 September 2017.

Transaction costs will be expressed as a percentage—such as the approximately one or two per cent outlined above. As the ACCC puts it, “we can issue surcharge information notices, and these will require a business to provide us with evidence of their costs of processing a payment, in comparison to the surcharges they are applying, in order to determine whether or not their surcharges exceed the permitted level.”

“If the ACCC has reasonable grounds to believe that a business has breached the ban, we can issue an infringement notice or take court action against the business, seeking pecuniary penalties.”

As the era of cash and carry continues to wind down, it looks like the era of charging customers extra to use their credit card is over as well.

The excessive surcharge ban will apply to all EFTPOS, Debit MasterCard, MasterCard Credit, Visa Debit, Visa Credit and American Express cards issued by Australian banks.

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  1. Surcharging for restaurant is necessary:-
    1. our restaurant accept split bills, it means more process time and costs for EFTPOS;
    2. For group sharing bill, some patrons collected cash to build up their card points and paid the total of the bill by card thereby incurring us costs;
    3. our banker is Westpac. They charge us at a rate unknown to us depending on what type of card customer is using leaving us in a unchartered sea.
    4. Because of point 3 above, how can we know how to surcharge only the cost of bank charge? It’s impossible.
    5. With surcharge, less card payment method and less costs to the restaurant; without surcharge, credit card payments build up to a substantial costs to the business.

  2. Interesting article & well written. Please if you are going to refer to us as -people who own &/or manage restaurants – please spell us correctly. restaurateurs not restauranteurs

    1. Thank you for picking up that typo, Justin. We have fixed it in our online edition.

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