Credit and debit cards have largely replaced cash in Australia, providing customers with increased convenience and introducing purchase protections. However, card networks charge a fee for each and every transaction, normally between 0.5% and 2% (RBA). 

This is a problem for Australian retailers and businesses the world over as they navigate tight profit margins in the midst of a cost of living crisis. The fees charged by card networks are increasingly impacting the financial health of businesses. One solution for merchants is levying a surcharge to customer transactions, effectively passing the cost of card processing onto the consumer. This approach is gaining traction in Australia, reflecting a shift in how businesses manage transaction costs. 

Understandably, Australians are not too happy with this new deal, as it increases the cost of goods and services for consumers whilst surcharge notices are often opaque or absent. However, Australia’s robust open banking network opens the door to an alternate payment method: Pay by Bank. Also referred to as account-to-account payments (A2A), Pay by Bank can be a more mutually beneficial offering for both merchants and their customers.

The Rise of the Surcharge

In short, a surcharge is an additional charge against a consumer’s card to account for the merchant’s cost of processing the transaction. The RBA, the central bank of Australia, strictly regulates surcharges, mandating that the amount charged cannot exceed the total cost of processing each transaction. According to a 2023 report from the RBA, 7% of all card transactions now include a surcharge, up from 5% in 2019.  

One explanation for this increase is that surcharges work for merchants, at first glance at least. The RBA’s report highlights that over 40% of customers will switch to a non-surcharged payment method, including other card networks or cash, when faced with a surcharge. This incentives merchants to roll out surcharges, either covering the cost of processing payments, or avoiding the cost all together. However, over 20% of consumers stated that they would avoid a merchant in the future if faced with a surcharge, revealing a difficult to spot retention issue for merchants using additional fees

Another explanation is fintech innovation. The report also suggests that “the emergence of payment providers that offer automatic surcharging may have all contributed to the convergence in surcharging frequency on credit and debit cards.” In essence, e-commerce platform providers and their payment processors have made it easy for merchants to enable automatic surcharges for certain payment methods, increasing the frequency of surcharges.

Forging a Better Deal for Merchants and their Customers

The root cause of surcharges is often the high fees charged by card networks, but Pay by Bank is emerging as a solution. 

The launch of PayTo, Australia’s open banking payments infrastructure, commenced in 2022, and all major banks went live by March 2023, introducing bank transfers with no fees and near-instant settlement time. A new generation of payment providers, both local and international, are leveraging this open banking infrastructure to build Pay by Bank networks. 

For merchants, Pay by Bank delivers faster payment settlement and 90% lower fees than the card networks. This reduction in fees enables merchants to keep customers loyal to their brands, whilst also greatly reducing the high fees squeezing their margins.

Consumers also benefit from Pay by Bank, easily identifying Pay by Bank at checkout as a surcharge-free payment method, reducing their costs during the ongoing cost of living crisis; Australians lost almost AUD $1 billion last year to surcharges. The new payment network also boasts privacy benefits as payment verification takes place within the consumer’s banking app, keeping personal financial details private. 

As Australia celebrated the one-year anniversary of PayTo’s full launch, the issue of payment card surcharges reared its head once more. Neither consumers nor merchants are to blame, both protecting their margins during a squeeze on the cost of living and macroeconomic headwinds. PayTo’s introduction enables an alternative: Pay by Bank, vastly reducing fees for merchants and providing a more seamless and secure consumer experience.