Rise in surcharges fuels appetite for Pay by Bank in Australia

A guest editorial by Maya Kumar, executive vice president at Banked

In Australia, credit and debit cards have largely supplanted cash, offering consumers greater convenience and added purchase protections. However, these benefits come at a cost, as card networks impose transaction fees typically ranging from 0.5% to 2% (RBA).

This presents a significant challenge for Australian retailers and global businesses operating on slim profit margins worsened by a slowdown in consumer expenditure. As the impact of these fees on financial health grows, some merchants have started implementing surcharges on customer transactions, effectively transferring card processing costs to consumers.

Unsurprisingly, this is unpopular among Australian consumers, who then face higher prices and a lack of transparency regarding these surcharges. However, Australia’s robust open banking system offers an alternative payment solution: Pay by Bank. Also known as account-to-account payments (A2A), Pay by Bank can provide a mutually beneficial solution for both merchants and consumers.

Why surcharges are increasing at a rapid rate

A surcharge is an additional charge levied by a merchant to account for the cost of processing a given transaction. The RBA (the Central Bank of Australia) strictly regulates surcharges, ensuring that the amount charged does not exceed the total cost of processing the individual transaction. A 2023 report from the RBA revealed that 7% of all card transactions include a surcharge, a 40% increase from 5% in 2019.

A key explanation for this increase is that, on the surface, surcharges work for merchants. The RBA’s report also revealed that over 40% of customers will switch to a non-surcharged payment method, including another card network or cash, when faced with a surcharge. This incentivises merchants to roll out surcharges, either covering the cost of processing payments or removing the cost altogether. However, there is a key flaw to this approach: over 20% of consumers stated that they would avoid a merchant in the future if faced with a surcharge, revealing a hidden retention issue for merchants levying additional fees.

Another cause is fintech innovation. The RBA’s report states that “the emergence of payment providers that offer automatic surcharging may have all contributed to the convergence in surcharging frequency”. Fintechs, including e-commerce providers and payments processors, have reduced the barriers for merchants to implement automatic surcharges for designated payment methods, increasing the frequency of surcharges.

Reaching a better deal for both consumers and merchants

Surcharges are a product of high fees charged by card networks, and permitted by the RBA to support merchants with razor-thin margins. Consumers however are growing frustrated with the status quo, and Pay by Bank is emerging as a solution – made possible by PayTo, Australia’s open banking payments and data infrastructure.

PayTo began its roll-out in 2022 and all major banks supported the standard by March 2023, introducing bank transfers with low fees and near-instant settlement. A new generation of fintechs, both local and international, are leveraging this open banking infrastructure to launch Pay by Bank networks.

Pay by Bank delivers faster payment settlement and 90% lower fees than traditional payment networks. This reduction in cost enables merchants to keep customers focused on their product or service rather than worrying about the final total of their bill, boosting customer satisfaction and loyalty. Merchants also avoid multi-day settlement times, enabling smaller businesses to better manage their cash flow.

Consumers also stand to gain from Pay by Bank, as it is easily recognisable at checkout as a surcharge-free payment method, helping to reduce costs; Australians lost nearly AUD $1bn to surcharges last year. Additionally, the new payment network offers privacy improvements, with payment verification occurring within the consumer’s banking app, ensuring personal financial details remain secure.

The issue of surcharges has plagued Australian merchants, consumers and regulators alike. Neither merchants nor consumers are to blame, both attempting to improve their bottom line and thrive during a cost of living crisis. PayTo’s recent introduction presents a golden opportunity for a new path forward with Pay by Bank, vastly reducing fees for merchants whilst providing a more seamless, secure and predictable consumer experience.

Image: Maya Kumar, Banked

Guest Editorial This article was produced specially for Fintech Intel by an expert guest contributor.