Are card surcharges legal in Australia? A merchant's guide

What is a card surcharge?

A card surcharge is an additional fee businesses charge customers who pay using a credit or debit card. The surcharge covers the cost that businesses incur for processing card payments. These costs arise from fees set by banks, credit card networks (like Visa, Mastercard and American Express), and payment service providers.

Typically, businesses pay a percentage of each transaction in fees, which vary depending on the type of card used. For example, processing fees for premium or international cards can be higher than for standard credit or debit cards. By applying a surcharge, businesses pass this cost on to the customer.

In many cases, card surcharges cover the overheads of payment terminals and the fees associated with using a third-party payment processor. For small businesses with tight margins, these additional fees can add up quickly.

How much does a card surcharge cost in Australia?

The cost of card surcharges in Australia is generally tied to the actual cost of processing the transaction. This means the fee should reflect what their bank or payment provider charges the merchant. The Reserve Bank of Australia (RBA) sets caps on these surcharges to ensure businesses don't overcharge customers.

For most credit and debit card transactions, the surcharge is between 1% and 1.5% of the transaction value. However, this rate can rise to around 2% to 3% for more expensive or premium credit cards.

According to a report by the RBA, the average merchant service fee for Visa and Mastercard credit cards was 0.91% in 2023. The fee for debit cards was much lower, at 0.37%. However, for American Express, which is known for higher costs, the average fee was around 1.50%.

In practice, if a customer makes a $100 purchase using a Visa or Mastercard, a business may apply a surcharge of $0.91 to $1.50, depending on the card used and the merchant's agreement with their payment provider. These small percentages can stack up quickly, especially for businesses handling hundreds of card transactions daily.

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How are card surcharges calculated?

Card surcharges are calculated based on the percentage fee that your payment provider charges per transaction. When setting a surcharge, businesses must ensure that the fee does not exceed the cost of accepting that specific card type.

To break it down, most businesses use the following calculation for their surcharge:

Surcharge = Transaction value x Merchant service fee

For example, let's say your payment terminal charges you a merchant service fee of 1.2% for Visa credit card transactions. If a customer pays $50 for an item using a Visa card, the surcharge you apply should be:

$50 x 1.2% = $0.60

In this case, you would add a $0.60 surcharge to the customer's bill to cover the cost of processing the card payment.

It's important to note that businesses cannot apply a flat fee that exceeds the cost of processing a card payment. For instance, you couldn't use a $3 surcharge for a transaction that only costs $0.60 in processing fees, as this would breach Australian regulations.

Are card surcharges legal in Australia?

Yes, card surcharges are legal in Australia, but they are closely regulated. The Australian Competition and Consumer Commission (ACCC) enforces surcharge transparency and fairness rules. Since 1 September 2016, businesses have been prohibited from charging excessive surcharges under the Competition and Consumer Amendment (Payment Surcharges) Act.

The key regulation here is that businesses can only charge a "reasonable cost" to cover the card processing fees. The ACCC defines this as the direct costs of processing the card payment, which include:

• Merchant service fees
• Terminal fees (for card readers and payment terminals)
• Other costs related to card acceptance, such as gateway fees or switching fees

If businesses overcharge customers, the ACCC has the authority to intervene. Fines for excessive surcharging can reach up to $126,000 per infringement for listed companies and $12,600 for small businesses.

In short, while you can apply card surcharges in Australia, the amount must be directly tied to the cost of processing the card and transparent to your customers.

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How can I avoid surcharges in Australia?

As a business, you might avoid surcharges altogether to enhance customer satisfaction and provide a seamless payment experience. While surcharges help offset the costs of card payments, they can sometimes discourage customers from completing transactions, especially if they feel the fees are excessive.

To avoid surcharges:

1. Absorb the cost: Some businesses choose to absorb the cost of card payment fees as a standard business expense. This approach can improve customer loyalty by eliminating surprise fees during checkout.
2. Encourage alternative payment methods: Offering payment options like bank transfers or BPAY, which don't incur the same fees as card transactions, is another way to reduce or avoid surcharges. You could also offer incentives like discounts for customers who use direct debit or cash payments.
3. Negotiate with your payment provider: Depending on your transaction volume and business relationship, you can negotiate lower merchant fees with your payment provider, reducing the need to pass these costs onto your customers.

By being strategic with your payment options, you can offer customers more choices and avoid the need to apply surcharges to every card payment.

Who regulates card surcharges?

In Australia, card surcharges are primarily regulated by the Australian Competition and Consumer Commission (ACCC) and the Reserve Bank of Australia (RBA). These bodies work together to ensure businesses do not apply excessive surcharges and that payment systems remain fair and competitive.

The ACCC is responsible for enforcing the laws surrounding card payment fees and ensuring that businesses comply with regulations on surcharge transparency and cost limitations. They monitor businesses, investigate complaints, and issue fines for those who overcharge customers.

The RBA sets the standards for interchange fees and payment systems, influencing businesses' merchant service fees. By regulating the interchange fees, the RBA ensures that these costs remain competitive and that consumers are not disproportionately affected by card payment fees.

Are card surcharges GST-free?

When applying a card surcharge, it's crucial to understand the implications for GST (Goods and Services Tax). In most cases, the surcharge applied to a card payment is considered part of the total price of the goods or services, meaning it is not GST-free. If the underlying goods or services are subject to GST, the card surcharge will also attract GST.

For instance, if you sell a product for $100 and apply a 1% card surcharge, the total charge would be $101, and GST would be applied to the total amount. The GST-inclusive price would, therefore, be $101 / 1.1 = $91.82 as the price of the goods and $9.18 as GST.

Businesses must account for this when reporting taxes and reconciling payments. If the goods or services are GST taxable, always ensure that you include the surcharge in your total price calculation.

Final thoughts

Card surcharges can be an effective way for small businesses to recover the costs associated with card payments. However, they must be applied carefully, ensuring they align with the actual costs of processing card payments and comply with Australian regulations. By understanding how surcharges are calculated, the legalities surrounding them, and how they impact GST, you can make informed decisions that balance your need to cover costs with providing a positive customer experience.

If you run a business that accepts card payments, review your payment provider's merchant fees and consider how surcharges fit into your overall pricing strategy. Whether you pass these costs on to your customers or absorb them as a cost of doing business, staying informed will help you make the best choice for your small business.