The RBA has proposed certain measures that could undo any savings from banning surcharges. (Source: Getty)
Rewards programs could soon be drastically reduced, credit card fees could spike, and supermarket prices could increase, under a scenario predicted by Mastercard ahead of a shakeup of Australia’s card payment system. The Reserve Bank (RBA) published a draft proposal to get rid of debit and credit surcharges last month.
The central bank claimed everyday Aussies could be saving a collective $1.2 billion every year under the plan. The idea included a change to a cost baked into card surcharging - interchange fees.
Richard Wormald, Mastercard's division president of Australasia, told Yahoo Finance the RBA's proposition hinges on a "perfect storm of generosity" from business owners that would be unlikely be passed on to customers.
He claimed thatif the central bank followed through with the submission, there would be "unintended consequences" that could hit Aussies hard.
"What the RBA is doing by a broad-based reduction in interchange fees... the net result, we think, is not a $1.2 billion saving for consumers, as the RBA suggests, but a $1.5 billion cost increase for consumers," he said.
What has the RBA proposed in its bid to outlaw surcharges?
The RBA has argued that by banning credit and debit surcharges, Aussies would finally be free of those nasty surcharges every time they tapped their card.
It might only be a few cents each time, but the board said ditching the charge could help the average person save around $60 every year.
However, the cost would need to land somewhere.
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For consumers to benefit from the RBA's projected $1.2 billion saving, businesses would need to absorb the cost completely.
So, while there would not be an upfront surcharge, a pivot from business owners might result in consumers paying more for goods and services in the long run.
Interestingly, a poll of more than 1,700 Yahoo Finance readers found 71 per cent wouldn’t mind paying higher prices as long as surcharges could be banned.
Where do interchange fees come into the picture?
The proposal to ban surcharges is a multi-pronged approach to Australia's payments system, and another suggestion in the RBA's document focuses on interchange fees.
These fees are paid at every transaction by a merchant's bank to the customer's bank.
They are designed to compensate for costs like providing the card, fraud protection, new infrastructure or operations, and rewards programs - which land on the customer's bank.
However, the merchant's bank generally does not end up bearing this cost. Interchange fees - set by card networks like Mastercard, Visa, and eftpos - are passed back to business owners who pay for it as part of their overall processing fee.
The RBA said interchange fees have been essential in the past at creating new payments systems, and have contributed to the creation and development of the eftpos card network, contactless payments, and mobile Wallets and tokenised payments.
These are the costs and fees that are baked into every card surcharge. (Source: Mastercard)
How could interchange fees be changed to reduce costs?
At the moment, interchange fees on domestic cards are capped.
For credit, it's 0.8 per cent of the transaction (although they're typically closer to 0.5 per cent, due to weighted averages), which is much higher than the 0.3 per cent mandated in Europe.
For debit and prepaid cards, it's 0.2 per cent or 10 cents, whichever is lower.
For foreign card transactions, there is no cap at all.
But the RBA's investigation found the current caps might not be serving their purpose in keeping fees low.
As a result, it reached the preliminary policy view of lowering caps on domestic interchange fees and capping the interchange fees on foreign-card transactions, which can be as high as 2.4 per cent.
If interchange fee caps were reduced, merchants could save hundreds of millions of dollars, according to the RBA, and, under their thinking, these retailers would then pass that on to consumers with lower prices.
But Wormald believed many merchants, many of which might be struggling due to cost-of-living pressures, would just absorb any savings from lower interchange fees.
Why could changing interchange fees affect everyday Aussies?
While Mastercard supports getting rid of debit and credit surcharges, concerns have been expressed that by reducing interchange fees would undo any savings for consumers.
"The RBA is assuming that there's this perfect storm of generosity that every stakeholder is going to act against their own commercial interest," Wormald told Yahoo Finance.
Customer banks rake in approximately $900 million worth of interchange fees a year.
The bid to ban card surcharges could have 'unintended consequences', according to Mastercard. (Source: Getty)·Zheka-Boss via Getty Images
Mastercard said reducing that revenue stream for banks would be detrimental for customers as financial institutions would claw back the cash elsewhere.
Rewards programs could get a huge overhaul for the worse, as interchange fees help fund things like frequent flyer points and cashback systems.
Mastercard estimated there would be a $421 million cutback in rewards programs alone if those interchange fee caps were lowered.
The Mastercard division president also said banks would "have to rebuild nearly every product" they offered, and it could take a few years until those new charges could hit everyday Aussies.
The card network suggested there could be a $384 million increase in annual credit card fees, a $260 million rise in credit card account-keeping fees, and a $260 million price increase from large retailers, who have historically been able to negotiate much lower interchange fees due to their size.
Retailers like Woolworths and Coles send a huge amount of payment traffic through card networks like Visa and Mastercard, and that’s how they’ve been able to get a better deal compared to your local cafe or restaurant.
But bringing down the fee cap could see their cost of accepting credit go up, and if they had to start paying more in fees, Mastercard feared this could translate to higher shelf prices.
The RBA is now undergoing another round of consultation with stakeholders about its proposal and is due to hand down a final decision in a few months.
