The Art of Surcharging: Navigating Regulations and Market Trends Worldwide

In the complex world of card payment processing, surcharging has emerged as a practice that impacts both merchants and consumers. This fee-shifting strategy has gained attention over the last decade, sparking debates about fairness, transparency, and the balance of costs in financial transactions. As the value of card transactions has increased from 33 trillion USD in 2020 to 51 trillion USD in 2024 globally and is set to continue at a 9% CAGR growth rate until 2028, understanding surcharging becomes increasingly important for businesses and customers alike.

What is surcharging?

Surcharging refers to the practice of adding a fee to a customer's purchase when they use a specific payment method, typically a credit card. This additional charge, usually a percentage of the transaction amount, is imposed by merchants to offset the acceptance costs that are passed to them from their Acquirers.  While it allows businesses to recover some of their operational costs, surcharging has been met with mixed reactions from consumers and regulatory bodies.

Merchants also face additional expenses beyond direct processing fees when accepting cards. These include procuring specialized hardware and software, compliance with cardholder data security standards, and potential losses from credit card fraud and chargebacks. These hidden costs contribute to the overall expense of card acceptance for businesses.

Some merchants view surcharging as a strategic tool. By implementing surcharges, they can incentivize customers to use other payment methods that incur lower processing fees, such as cash or alternative payment methods (e.g., domestic schemes, Account-to-Account). This approach allows businesses to manage their payment acceptance costs more effectively.

How do surcharging regulations vary around the globe?

The concept of surcharging gained prominence in the late 20th century as credit card usage became widespread. Initially prohibited in many regions globally due to consumer protection concerns, surcharging rules began to shift. Australia was one of the pioneers in this space, lifting the ‘no-surcharge’ rule set by card networks back in 2003. A significant change occurred in the United States in 2013 when the “Payment Card Interchange Fee and Merchant Discount Antitrust Litigation” settlement allowed merchants to surcharge on credit card transactions. These changes were driven by merchants’ long-standing complaints about the high costs of accepting credit cards and their desire for more control over pricing. Since then, various countries have implemented or modified surcharging regulations.

The surcharging ecosystem and regulations remain a grey zone in many markets globally. While generic guidelines are set by global card networks such as Visa, Mastercard, Amex, and Discover, these are often superseded by market-level regulations enforced by local regulatory bodies or governments. For example, In Australia, the Reserve Bank of Australia (RBA) enforces specific regulations regarding surcharging practices that take precedence over the guidelines established by the card networks. Generally, surcharging regulations primarily target expensive card types, particularly credit cards and corporate cards.

Developed countries have more granular regulations in place due to their early adoption of card payments, driven by a high level of banking penetration. Card surcharging trends exhibit notable differences between emerging and developed markets, influenced by regulatory environments, consumer behaviour, and payment infrastructure. In developed markets such as the US, Australia, and the EU, regulations governing card surcharges are stringent, often limiting the maximum surcharge and requiring full transparency to protect consumers. These regions have legalized surcharging on all or certain cards with strict guidelines, and consumers, who frequently use these cards, are generally aware of their rights. Additionally, the advanced payment systems and diverse payment options in these markets facilitate the implementation and management of surcharges.

Conversely, emerging markets exhibit varied regulatory landscapes, with some countries lacking specific regulations and others imposing prohibitive rules. For example, in African markets, where mobile money is the primary payment instrument for retail payments rather than cards, the focus is less on surcharging rules. Cash and local alternative payment methods remain dominant in emerging markets, though card usage is growing, and consumers, often more price-sensitive, are significantly impacted by surcharges.

Market regulations drive the prominence of surcharging more than sectoral trends

The adoption of surcharging in a particular sector is driven more by regulations and competitive actions than by industry-specific practices. The travel and hospitality sector, for instance, has embraced surcharging in markets where it is permitted, reflecting its international business model. Some global carriers such as Singapore Airlines, Emirates, and Air France have implemented surcharging based on the region of departure. Similarly, hotel chains like Hilton apply surcharges based on the property location. In countries where surcharging is allowed, such as the US and Australia, the practice is prevalent across various sectors. It is common in restaurants and cafes, supermarkets, retailers, administrative offices, and ticket counters. These trends show that in markets where regulatory frameworks support surcharging, businesses across diverse sectors embrace the practice to manage costs.

The case study of Australia

Australia stands out as a leading example of a country that has legalized card surcharges and has prohibited payment networks from contractually banning merchants from imposing such fees. Cards have always been, and still are, a prominent payment instrument in the country, with an estimated share of 70.4%  of the total transactional value in 2024.

The Reserve Bank of Australia enacted a regulation allowing merchants to surcharge customers back in 2003, placing pressure on networks to reduce fees to sustain usage. Although this wasn't the sole contributing factor during this period, since the 2003 regulation, RBA data shows that Visa/Mastercard average merchant fees dropped from about 1.5%  in 2003 to 0.91%  in Q1 2024, and Amex fees from about 2.5% to 1.33%.

However, over time, issues emerged with merchants charging excessive surcharges, using blended rates for different card types, and applying fixed-fee surcharges that disproportionately affected lower-cost purchases (especially in the airline industry for low-fare tickets). In response, the RBA revised surcharging regulations in 2017, limiting the amount of any surcharge to what it actually costs the merchant to accept a card payment. These rules have since been monitored by the Australian Competition and Consumer Commission (ACCC), which issues infringement notices and penalties to merchants who don’t abide. Payment acceptance providers were also required to provide granular statements detailing all costs related to accepting card payments, such as merchant service fees, terminal fees and any other processing fees. While the ACCC reported in 2018  that they were pleased with the execution, there were still many merchants (especially small cafes, restaurants and takeaway food) who exhibited deviations.

An RBA 2022 survey showed how the prominence (% of card payments where a surcharge was paid) increased from 4.7% in 2019 to 7.3% in 2022. This trend suggests that despite surcharging's impact on customer experience, an increasing number of consumers are willing to accept it, preferring to use card payments even with added fees. There's less resistance to surcharges on credit cards, as issuers often offer lucrative reward points and miles to encourage continued usage.

To further enable merchants to cut card costs (Australians pay nearly $1 billion  annually in card surcharges), the Reserve Bank of Australia introduced least-cost routing (LCR) in 2021. LCR refers to a practice where, when a customer makes a payment using a dual-network debit card, the merchant can choose to process the transaction through the debit network that charges them the lowest acceptance fee. Most debit cards in Australia are dual network, featuring a Mastercard or Visa logo on the front and an eftpos logo on the back. Processing transactions on the domestic eftpos debit network is typically cheaper than using international networks. Although LCR has been growing in adoption since its recent introduction, as of December 2023, only 65% of business terminals are enabled with LCR. This limited adoption is partly because providers earn less from eftpos transactions compared to those processed through international schemes like Mastercard and Visa.

In summary, as cash usage declines, Australia is likely to see growth in surcharge prominence. The country exemplifies a well-regulated, transparent surcharging environment. While there's room for improvement, ongoing involvement from regulators, payment providers, merchants, and consumers are fostering a transparent and competitive business environment. Customers are increasingly aware of their rights and the upfront costs, allowing them to choose payment instruments according to their needs and expectations.

How can merchants navigate the surcharging decision?

In today's competitive business landscape, merchants face the complex decision of whether to implement surcharges on card payments. This choice can significantly impact customer relationships, operational costs, and overall profitability. We have already observed how the surcharging landscape remains quite complex and still ambiguous in many parts of the world. While surcharging offers potential financial benefits, it also carries risks that must be carefully weighed. The steps outlined below can offer merchants a comprehensive approach to make an informed decision about surcharging, ensuring alignment with both business objectives and regulatory requirements.

• Regulatory Assessment: As a first step, merchants must thoroughly review the legal and compliance requirements in their jurisdiction. It is crucial to confirm that surcharging is permitted and to understand any restrictions or guidelines that may apply from regulators and payment providers.

• Market Analysis: Merchants should evaluate the competitive landscape to determine if surcharging is common practice among competitors. If it is not, they need to carefully consider the implications of being an early adopter in their market.

• Operational Readiness: It is essential to verify that existing booking/billing systems can handle surcharging effectively. This includes assessing the complexities of applying surcharges to all channels, as well as the ability to implement different pricing structures based on the payment method. Subsequently, the merchant should check with their respective providers about available solutions to support these fees.

• Consumer Impact Study: To gauge potential effects, merchants should conduct a pilot study in a test market, measuring any adverse impacts on customer behaviour or satisfaction. Insights gained from this pilot can inform decisions about broader implementation and help in fine-tuning the surcharging strategy.

• Segmentation Strategy: Merchants also need to carefully decide which customer segments will be subject to surcharges. This involves considering exemptions (if any) for valuable groups such as frequent customers or co-branded card users. A well-thought-out segmentation strategy can help maintain loyalty among key customer groups while implementing surcharges more broadly.

• Implementation and Continuous Monitoring: After considering all previous factors, merchants can proceed with rolling out their surcharging strategy. It's crucial to continuously monitor the impact on sales, customer satisfaction, and overall profitability.

In conclusion, success in navigating surcharging decisions requires a nuanced understanding of local regulations, an on-going assessment of competitive dynamics, and a customer-centric approach. The payments landscape is growing increasingly complex, with card usage and payment acceptance tactics varying significantly across markets. The optimal strategy is not one-size-fits-all and depends on numerous factors. By staying informed about regulatory changes and market trends, merchants can make strategic decisions that optimize their payment acceptance. At Edgar, Dunn & Company, our Regulatory Practice is ready to assist you in crafting a tailored surcharging approach, ensuring your payment strategy aligns with both local requirements and your business objectives.

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The  content of this article does not reflect the official opinion of Edgar, Dunn  & Company. The information and views expressed in this publication belong  solely to the author(s).