Australian consumers will see cuts in credit card surcharges applied by retailers from as early as September 1 this year, but the rewards given for spending on higher-end credit cards will also be reduced.
The move results from a new regulatory framework released by the Reserve Bank last Thursday, but has been a long time in the making.
Regulators moved four years ago calling for charges to be “reasonable”. This has often been ignored.
The latest crackdown has the power of new legislation behind it and will change merchant behaviour. This is how it will work.
Merchant credit card charges
From September, retailers will only be able to make consumers pay credit card surcharges at the levels they are charged by the banks. Analyst with research group Canstar, James Slack, said “those costs are fairly low: usually between 0.5 per cent and 0.8 per cent”.
This will be one of the biggest advantages for consumers as it means merchants will no longer be able to charge flat fees for credit card transactions.
High on the list of culprits in this regard are the airlines who hit travellers making online bookings: Here’s what they charge now.
It also means that costs from 1.5 per cent to 3 per cent or more charged by some retailers on credit card purchases will be pruned back to the regulation rates. Travel agents often use 1.5 per cent surcharges.
The changes will not apply to small business until September 1, 2017.
These charges are received by the banks from credit card companies on each transaction and they are to be reined in. At the moment they are set at a weighted average 0.5 per cent but this figure is calculated every three years.
The rate here will stay the same but it will be calculated every quarter. “This means that banks will have to stick to it consistently,” Canstar’s James Slack said.
Within that interchange fee regime, the banks have had the freedom to charge much higher interchange fees on some cards and still stay within the overall weighted average limits. For high-end cards like those labeled Black, Platinum or Prestige, these fees can be as much as two per cent.
Those individual charges will now be pegged at 0.8 per cent.
“Those charges can net the banks hundreds of millions of dollars and are used to fund rewards programs,” Mr Slack said.
“That could result in significant cuts in rewards.”
Those cuts could see caps on the number of points earned each year or rises in card fees which can already total as much as $467 annually.
Companion cards, predominately American Express (Amex), which are offered by banks alongside standard Visa and Mastercards, have been dragged into the regulatory net.
They effectively give users two accounts with one annual fee and deliver high rewards levels of up to three points for every dollar spent.
They’ve been brought under the regulatory web as other cards with interchange rates are limited to 0.8 per cent.
This may lead the big banks to stop issuing Amex cards. However Amex itself is not affected and will still offer its own cards.
The changes follow moves from major banks in recent months which have already cut rewards back on high-rewarding cards from levels of 1.5 points per dollar spent back to 0.75 per cent or less.
Cabcharge left out
Don’t expect the changes to lead to lower credit card fees in taxis. Surcharges in the industry, which range from five per cent to 11 per cent depending on the state, will be left to state governments to regulate.
In recent years, Victoria and NSW have halved taxi credit card fees from 10 per cent to five per cent with other states and territories charging 10 per cent. In South Australia the fee is 11 per cent.