Surcharging and PayTo: How to cut costs for your business

Australians are losing close to AUD1bn a year in surcharges when they pay by credit card instead of using cash.

For years, merchants set a minimum spend to cover the fixed costs of card transactions. This practice made people more inclined to use cash for small purchases. But as Australia shifts toward a cashless society, cards are progressively being considered the only payment option.

The other issue is that merchants used to absorb card processing fees for larger purchases. But in the current economic environment, with rising costs and persistent high inflation, they have no choice but to pass these costs on to their customers. That’s what has brought the surcharge problem to the surface.

What is surcharging?

Surcharging refers to the practice where businesses add an extra fee to transactions made using debit or credit cards. This fee is meant to cover the cost incurred by the merchant to process the card payment. While surcharging is legally permitted in Australia, it is tightly regulated by the Reserve Bank of Australia (RBA) to ensure fairness and transparency.

Costs included in surcharges

Merchants in Australia encounter a variety of costs when accepting card payments. These costs, known as the ‘cost of acceptance’, can range from less than 0.2% to over 2% of the transaction value.

They include:

• Interchange fees: wholesale fees set by card networks like eftpos, Visa, and Mastercard, which are paid from the merchant’s payment service provider (PSP) to the cardholder’s bank. These fees are influenced by the type of card, the transaction value and the merchant’s size.
• Scheme fees: fees paid to card networks by PSPs and issuers for the services provided, often charged per transaction.
• PSP margin: fees levied on merchants by their PSPs to cover the cost of providing card acceptance services.
• Additional fees: monthly or annual service fees, terminal rental fees, joining fees, etc.

Surcharges merchants can legally pass on

When calculating surcharges, merchants are allowed by the RBA to include costs directly related to the processing of card payments. These must be transparently disclosed to consumers and are limited to:

• Transaction-based fees: interchange fees and scheme fees directly associated with processing specific transactions.
• Fixed fees: monthly or annual service fees, terminal rental, and payment gateway fees that are tied to the cost of processing payments.
• Fraud prevention and security costs: these can be included if they are services paid to external providers specifically for securing card transactions.

Merchants are not allowed to include any of their internal costs (such as staff training and overhead) in the surcharge. To help consumers make informed decisions, they must also display clear and upfront notifications about any surcharges that will be applied.

Selecting the right pricing plan

Merchants can choose from various pricing plans offered by PSPs, which significantly impact their overall costs:

• Fixed plans. These plans charge a single rate for all transactions, simplifying billing but at a higher overall rate.
• Blended plans. These plans combine some transaction types at one rate, such as one rate for all Visa transactions and another for all Mastercard transactions.
• Unblended plans. Also known as ‘interchange plus’ or ‘interchange plus plus’ plans, these usually offer the lowest costs, charging merchants the wholesale cost of each transaction plus the PSP’s margin. These rates vary based on factors like card type and transaction mode.

Given this complexity, choosing the best pricing plan can be daunting, especially for small businesses. Making the right choice is a balancing act between keeping surcharges low and simplifying billing and administration.

By law, merchants must also receive an annual statement from their payment facilitators that clearly outlines the average cost of acceptance for each card type. This helps ensure that the surcharges are always aligned with the actual costs and remain compliant with regulations.

The Australian Competition and Consumer Commission (ACCC) is the authority that enforces the surcharging regulations set by the RBA, ensuring that surcharges are not excessive and reflect only the true costs incurred by the merchant.

The hidden cost of surcharges

Surcharges are commonly applied in industries where transaction fees can quickly add up, such as in airlines and hospitality. This practice is also prevalent in entertainment and event ticketing, where the fees can vary based on the popularity of the event.

Besides the monetary cost of surcharges, there are other impacts to consider:

Pricing transparency

Surcharges can hide the real cost of services, surprising customers at checkout and creating obstacles to completing their purchase. This lack of transparency can erode trust and discourage future sales.

Consumer reactions

As society shifts away from cash, surcharges become more prominent, as does customers’ propensity to buy online. This pushes many consumers to choose businesses with straightforward pricing options and no additional fees.

Broader implications

For merchants, the decision to implement surcharges must be balanced against potential customer backlash. While surcharges help cover the costs of transaction fees, they can also discourage sales if they lead to a negative customer experience.

Least-Cost Routing (LCR)

In 2019, in an effort to cut card payment processing fees for businesses and see savings passed on to consumers, the RBA introduced the Least-Cost Routing (LCR) scheme. LCR lets merchants choose the lowest-cost network for debit card transactions, directing transactions through the most cost-effective network available – such as eftpos instead of Visa or Mastercard. 

Despite its benefits, the adoption of LCR has been slow. According to the Reserve Bank, only 64% of business terminals are equipped with LCR – a take-up rate that the RBA finds disappointingly low.

One major hurdle is the lack of incentive for banks to promote LCR. Payment analysts have noted that banks tend to profit more from transactions processed through networks like Mastercard and Visa. Therefore, they may delay promoting LCR until regulators force them.

But why focus on LCR if there is a solution that eliminates surcharges altogether?

Open banking: the infrastructure for the digital age

The common perception is that surcharges are a necessary evil – after all, someone has to pay for the cost of processing transactions, right? Truth be told, the real issue lies in outdated and inefficient legacy infrastructure.

In the traditional card payment model, several intermediaries are involved. When a customer swipes their card, the merchant sends the transaction to an acquirer, who then forwards it to the card scheme (like Visa or MasterCard).

The card scheme routes it to the issuing bank for approval. Each of these steps involves communication and coordination among different parties, which adds time and increases the costs due to service and interchange fees charged at various points. Approvals and fraud checks required at multiple stages cause further delays.

To break free from the limitations of legacy infrastructure, in the last decade, many countries throughout the world have adopted open banking. In Australia, open banking is a government-mandated framework that promotes transparency, competition, and innovation in the banking sector by enabling secure data sharing between banks and authorised third-party providers.

Open banking streamlines the payment process by directly linking merchants and banks through a Payment Initiation Service Provider (PISP), reducing the number of steps, intermediaries and associated costs. This equals to higher levels of efficiency and shorter transaction times.

Introducing PayTo: The enemy of surcharges

A major innovation in the open banking framework is PayTo, the payment method that processes direct account-to-account transfers without the need for intermediary payment networks. Finally, customers can make payments directly from their bank accounts to the merchant’s account.

With PayTo, merchants bypass credit card schemes so they don’t have to impose surcharges on customers. The added benefits of this shift are a more transparent, faster, and easier checkout experience, and a higher standard of security and compliance with regulatory requirements.

What merchants can gain from adopting PayTo:

• Lower processing fees. Transactions incur lower fees compared to traditional card payments, allowing merchants to retain more revenue.
• Competitive pricing. By removing extra charges, PayTo makes prices more competitive which helps boost conversion rates. 
• Real-time processing. Transactions are processed instantly, reducing the time and resources needed for payment reconciliation and settlement.
• Simplified cost management. PayTo alleviates the burden of calculating various surcharging models (Fixed, Blended and Unblended plans), reducing admin overhead.
• Streamlined user experience. A smoother process reduces friction and  makes it easier for customers to make purchases.

Developed to overcome the structural limitations of legacy infrastructure, PayTo is the most effective way to eliminate surcharges. By reinventing a more efficient payment process for both merchants and customers, PayTo has the potential to become the payment method of choice in the digital age.

Democratising the payment industry

Open banking represents a systemic shift in the payment industry, one that democratises the process by levelling the playing field for all participants. Open banking and PayTo introduce a public framework that challenges the Visa and MasterCard duopoly that has long controlled the payment system.

For merchants, adopting PayTo means participating in a movement that not only enhances their profitability but also supports a fairer, more competitive market. It’s an opportunity to align with a system that values transparency and consumer choice over hidden fees and opaque corporate practices.

“In Australia, despite the convenience of tap-and-pay, surcharges are leading more merchants to promote alternative payment methods. I believe there’s a revolution coming and it’s merchant-led,” says Jordan Lawrence, our Co-Founder and Chief Growth Officer.

Are surcharges cutting into your profits? Integrating PayTo with Volt can help you bypass unnecessary fees and boost your bottom line.

Whether you’re a local merchant, or looking to expand into Australia, you can find out more on our PayTo solution on our dedicated pages.