Why credit card surcharges are unreasonable

There is no surcharge if I pay by cash and no surcharge if I pay by cheque - yet if I pay by credit card I'm whacked a surcharge. I thought collecting payment was part of the business of being in business.

While I applaud the Reserve Bank's decision to limit card surcharges to the reasonable cost of the merchant accepting the card, I never understood why consumers were penalised for paying by credit card in the first place.

There are costs associated with all forms of payment, including cash.

Cash may be the lowest-cost payment method for smaller transactions but, according to a Reserve Bank report into payment costs, the cost of a cash payment rises with the value of the transaction. So cash can become more costly than Eftpos for payments even of moderate value.

Research undertaken by Edgar Dunn for the federal government showed that a merchant's cost for a $100 transaction was lowest with a direct entry payment, highest with a cash payment. In between, in ascending order of cost to a merchant, were Eftpos, cheque and credit card payments.

Yes, it does cost to accept payment, but why heavily penalise customers for one form of payment? MasterCard's vice-president of strategy and corporate affairs, David Masters, says: "Merchants get substantial benefits by accepting credit cards that far exceed their costs of acceptance, including among other things guaranteed payments, increased sales and protection from fraud and credit losses."

Cards are singled out because it's a cost that can be passed on to consumers.

When cardholders use their credit card to buy something, the retailer's bank charges them what's called a merchant service fee.

It's supposed to reflect the price of benefits associated with card payments, such as payment guarantees. It also covers other costs such as processing the transaction and the cost of renting the terminal. According to the RBA, the average cost for a retailer to have transactions processed by banks - the merchant service fee (MSF) - is 0.87% for MasterCard and Visa and 1.84% for American Express. Both Visa and MasterCard are pushing for reasonable costs to be set at these levels.

But currently the average surcharge - what we, the customers, pay - sits around the 2.5% mark.

Some retailers seem to see the fee as revenue raising.

How else could you explain a flat $7.70 credit card fee charged by Qantas when booking tickets online, or the Cabcharge scheme where credit card use carries a 10% fee - 11% when you consider they add the surcharge after the GST cost.

How is it that it costs more to use a credit card with Qantas than, say, my local grocer? "Easy," say Masters.

"There's more competition in local stores then in airlines."

While the RBA's 2010 Consumer Payments Use study found consumers paid a surcharge on only 5% of their credit card transactions, a massive 44% of holiday travel transactions involved a surcharge.

So where to from here? Well, come January 1, 2013 we can expect much lower surcharges.

"After 10 years of having surcharges, the general agreement is that it's out of control," says Visa's country manager Australia, Vipin Kalra. "The biggest issue is making certain we are all clear on what is exactly a reasonable cost. The MSF is a good proxy for what is reasonable."

MasterCard, Visa and Amex will be policing fees through their clients (ie the banks) who in turn will be enforcing it with the merchants.

If you come across a retailer who continues to charge you excessive fees, it's best to contact your card issuer directly, - Visa, MasterCard or AMEX.

In the meantime, don't be afraid to ask for a reduction in the fee if you believe it to be excessive.

If you're unable to negotiate a lower surcharge then choose a payment option that doesn't attract a surcharge or better still, take your business elsewhere.

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