If the Reserve Bank wants consensus on its proposal for merchant fees and surcharging, it’s a lost cause.
The best the central bank can hope for is a decision in the public interest, leveraging strong sentiment on issues such as scheme fees, least-cost routing and the burden on small business.
RBA Governor Michele Bullock has a tough call to make on merchant fees and surcharging, with doubts emerging around the RBA’s economic assumptions and little consensus on a fix. Picture credit: Erik Scheel
Commentary by Gabby Taylor
When Reserve Bank of Australia (RBA) last week published the submissions to the Review of Merchant Card Payment Costs and Surcharging consultation paper, only one thing was clear – there is no consensus.
Multiple submissions challenged the validity of the RBA’s baseline assumptions and predicted benefits, so its final decision is going to be a tough call.
The ever-controversial issue of merchant service fees and surcharging has this time produced 146 public submissions, and a further 37 confidential ones.
The submissions range from scheme giants, Mastercard and Visa to consumer groups like Choice, small business advocates such as the Independent Payments Forum and Family Enterprise Ombudsman, fintechs, business owners and of course, Australia’s biggest and most profitable banks.
Out of the vast and different array of responses to the proposed surcharge ban and lowering of interchange fees, there are very few instances of support for all of the RBA’s proposals.
There does seem to be a large contingent of submissions that want to see greater intervention on scheme fees, beyond more transparency.
CHALLENGING THE RBA’s ASSUMPTIONS
A number of submissions challenge the validity of both the RBA’s assumptions and predicted outcomes.
When it comes to the Issuer Cost Study on interchange fees, the Commonwealth Bank (CBA) has “a number of concerns” and questions the “validity of the findings”.
The modelling they commissioned suggests not only that “consumers will be worse off as they face higher rates and fees, less access to credit, and loss of benefits including rewards”, but that “small businesses will be worse off as regulated card interchange reductions are not passed on by acquirers, card mix shifts to more expensive unregulated payments, and small businesses lose the benefits of commercial cards that play a key role in their management of working capital.”
This viewpoint is similarly reiterated by the Australian Banking Association (ABA).
The Independent Payments Forum (IPF), its participants, along with SmartPay, challenge the RBA’s data on surcharging with IPF producing a survey showing over 40% of main street businesses are surcharging, the Australian Hotels Association (AHA) quotes 97% of its members, whilst SmartPay says that “upwards of 30% seems more reasonable”.
Zenith Payments in their submission also acknowledges that for hospitality, travel, rentals and other low-margin sectors, surcharges are more prevalent, and quotes estimates that “in excess of 95 per cent of accredited travel agents opt to levy a surcharge.”
If any of these challenges to the RBA’s numbers are true, the $1.2 billion savings that Michele Bullock has written op-eds about and appeared in videos promoting will not eventuate under the current measures and have banks and business groups alike speculating about the possible long-term outcomes.
Economist Nick Hossack in his contribution says it should be emphasised that the $1.2 billion reduction in surcharging revenue is not a one-off, it is an on-going, year after year, revenue hit to businesses that surcharge.
He states that: “Using a present value concept with a discount rate of 5%, the revenue hit to surcharging businesses over a ten year period is calculated at $7.7 billion, almost eight times the annual estimate.”
INTERCHANGE & REWARDS
Unsurprisingly, most of the banks and the card schemes are arguing for a ban on surcharging but are against a reduction in interchange fees.
Visa and Mastercard seem to be sounding the alarm that the lowering of interchange fees will “reduce benefits and rewards”, and “would have significant consumer impacts… as well as diminished rewards programs”.
This is despite the fact that the RBA has made clear that rewards programs should not be funded by interchange.
However, National Australia Bank cites the 2016 interchange reduction in Australia where “rewards programs were significantly devalued”.
The ABA repeats notions that lower interchange will mean less rewards and includes concerns about American Express stating that “if the RBA decides merchants should not bear the cost of rewards on four-party credit, then competitive neutrality would suggest the same principle should apply to three-party schemes whose entire model is built on merchant-funded rewards.”
Qantas warned that “further capping of interchange fees will have unintended consequences which will ultimately erode the financial benefits expected by the RBA, including likely increases in credit card fees and interest rates.”
Given that the RBA has acknowledged that “lowering interchange caps would also narrow the gap between interchange fees paid by small and large merchants, thereby reducing the cross-subsidisation of the payments costs of large merchants by small merchants”, and with 97.2% of all Australian businesses as classified as small businesses, this argument may not play well.
With a surcharge ban and no move on interchange, the higher fees small business face would be paying not only for their customer’s choice to use a card for payment, but also frequent flyer points and rewards.
Australian Seniors showed concern about rewards programs calling for the “charging all consumers higher fees on the basis that it cross-subsidises rewards programs for some people is unfair to those who do not participate in these schemes.”
CBA has advocated for a better deal on interchange for small business recommending “limiting the discount available to big business to 30% of the underlying transaction rate rather than the 60%+ they enjoy today, so that small businesses don’t pay more than their fair share of interchange.”
Macquarie are supportive of lowering interchange stating that, “We strongly support proposals to cut interchange rates and eliminate debit card surcharging.”
Westpac, however, in their submission, outline what they see are “flaws” in the RBA’s proposal including the danger that the lowering of interchange will have on “large retailers”, lamenting that the “lower merchant rates would be removed, almost certainly prompting large retailers to reprice their goods and services.”
They instead want to see a Small Business Merchant category for interchange, but given that 97% of businesses in Australia identify as ‘small’ this may be redundant.
Another interesting observation by Westpac is that lower interchange won’t lead to lower prices for small business due to blended pricing models, and illustrated via a graphic.
Unlike others, they do not call for the ban of blended pricing and continue to offer that pricing model to small businesses.
Source: Westpac submission: https://www.rba.gov.au/payments-and-infrastructure/review-of-retail-payments-regulation/2025-07/submissions/pdf/westpac-banking-corporation.pdf
Many small business groups and fintechs are supportive of lowering interchange, stating the RBA has not done enough.
IPF points out that the RBA’s new interchange caps, still see Australian small businesses potentially paying six times what the big retailers are paying today.
Least-cost routing was another hotly debated issue, with small business groups calling for dynamic least cost routing to be mandated.
Australia Post acknowledged that “A mandated, dynamic LCR requirement would automatically route debit transactions via the lowest cost network at the point of sale, ensuring merchants and their customers benefit from lower transaction costs without needing complex manual settings.”
This call was echoed by many, including IPF, The Australia Small Business and Family Enterprise Ombudsman, The Australian Hotels Association, Australian Restaurants and Cafes Association, The Australian Chamber of Commerce and Industry (ACCI), the Australian Travel Industry Association (ATIA), the Australian Lottery & Newsagents Association, the Australian Meat Industry Council, the Law Institute of Victoria (LIV), with Fintech Australia asking that the “RBA mandate the use of opt-out least cost routing.”
The benefits of LCR were heralded by many submissions with the company IPSI showing the expected savings when using Dynamic LCR over blended flat rate pricing.
Source: IPSI submission: https://www.rba.gov.au/payments-and-infrastructure/review-of-retail-payments-regulation/2025-07/submissions/pdf/ipsi.pdf
Some remained opposed to mandating LCR, with businesses such as MYOB, Adyen and Square happy with the RBA’s proposal not to mandate.
BLENDED PRICING
Although this was not part of the RBA’s proposal moving forward, many submissions were keen to address the issues they see with blended pricing models.
Qantas, Macquarie, many of the small business groups, such as the Australian Association of Convenience Stores and members of IPF all called for legislation around blended or single rate pricing.
SCHEME FEES
Although the submissions all raised a range of issues from a range of different viewpoints, scheme fees was an issue raised across the industry.
Banks were critical of RBA’s lack of regulation around scheme fees with the ABA saying: “The RBA notes widespread concern with scheme fees but appears to cite design complexity as a reason not to propose a policy response.
The ABA considers that complexity is not a justification for a reform that bears down solely on regulated issuers while leaving scheme and wallet economics unaddressed.”
Consumer groups were critical with Choice saying: “However we remain wary of the potential consequences of a blanket ban on surcharging without direct regulatory intervention to reduce the complexity of scheme fees and drive costs down.”
Small business groups such as the Council of Small Business Organisations Australia (COSBOA) says that “consideration should be given to a cap on scheme fees, which form a material part of cost of acceptance.”
It seems the Payments System Board may have a long road ahead.
Public submissions to the Consultation Paper are available on the Reserve Bank’s website.
View article source here.
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