Interchange and Surcharge

Ingo Noka
Opinion

Everything that can be said about merchant surcharge and interchange fees has already been said, for instance (1), (2) or (3), but it hasn’t been said by everybody yet. Especially not by me. So, here I go.

Three Principles

I have three principles when considering this topic: interchange fees are a thing of the past, competition, not government regulations, controls the cost of digital payments, and the end price to customers is controlled by merchants competing with each other.

  1. Interchange fees may have had a purpose in the past. It helped issuers promote cards usage and got the industry out of the chicken-and-egg problem of acquiring and issuing. But this purpose has been served and the fee should be abolished.

  2. Only competition can reduce cost, or at least derive fair prices. Government regulations, on the other hand, cannot do it. In any case, I have to ask, why do central banks have the right to decide which costs can or cannot be included in the price of a product? Aren’t they busy enough with detecting and preventing the next financial crisis?

  3. Merchants should not increase prices over and above the surcharge after the surcharge was banned. This was suggested by some Australian retailer organization. If they do this, it will diminish their case against the surcharge. But whatever they do, at least, on the merchant side, there is enough competition to regulate the price automatically.

The new instant A2A payment systems already demonstrate that it is possible to charge receiver and sender a fee according to the cost of providing the service to either side. They also demonstrate that competition drives the fees that are charged. For instance, C2C transfers would normally incur a fee to the sender (see bill payments), but for payments in merchant environments this fee is usually waived, because the C2M transaction is “free” for the sender. It also shows that merchants will drive their customers towards the cheapest payment option for the merchant, and customers will insist on using the option that is cheapest for them. The result is often a lower cost for everybody.

Surcharge

The central bank presumes to have authority over the prices merchants charge to their customers. I do not believe they should have that power. Whenever government meddles with prices, the result is always bad, often the opposite of what was intended. I know this from personal experience. I grew up in a country where the supermarket shelves were full of price regulated nothingness.

I also question the motivation for meddling with surcharge fees. What would happen when merchants add a surcharge to cash payments? After all, banks increasingly make cash handling more expensive. Would the central bank prohibit such a surcharge as well? They could make a much better case for getting themselves involved. One of the central bank’s main responsibilities is the management of currency, and, other than card payments, cash acceptance is usually mandated, often by the constitution. Would the Central Bank and the banks spend the same amount of energy to fight such a surcharge? I do not think they would.

Merchants absolutely have the right to add the cost of card payments to the price of their products. It does not matter whether the cost is only charged to customers using a particular service, or whether the cost is spread across all customers, even those that do not use a service that incurred a higher cost.

That said, it is also not unusual to average a particular cost across all products or customers. For instance, customers shopping at night incur a higher electricity cost, and nobody would add an electricity surcharge for night shoppers only. The cost of electricity is averaged out over all products and customers.

Interchange

The surcharge is driven by the cost of card acceptance and the interchange fee is a big part of it. The interchange fee goes to the issuer, which means without surcharge the merchant ends up paying the fee that should be paid by the issuer’s customer (the cardholder).

I am not alone in thinking that interchange is anti-competitive and not needed anymore (see (1)).

Acquirers should charge merchants for the acquiring services, and issuers should charge customers for the issuing services.

It is not clear to me why merchants should be the only ones paying for the entire payment system.

Customers also derive value from using their cards. With a surcharge, the cost is at least partially born by the customer, but Merchants are still at a disadvantage as they are made the de-facto revenue collectors for the issuers. Let the issuers collect the fees from the customer directly.

If it is true that customers value the convenience of card payments so highly, why is everybody afraid that customers would switch back to cash when they have to pay for the convenience?

If the issuers want to maintain loyalty programs, run marketing campaigns or hand out freebies to their cardholders, they should pay for it out of the revenue they generate from providing services to their cardholders.

Besides, customers shouldn’t need freebies to use electronic payments, unless the payment products are not as fantastic as the industry is claiming them to be. Interchange fees also have the ridiculous effect that merchants pay issuers more to promote expensive cards - expensive for the merchant that is!. This additional revenue is then used to increase use of expensive cards even further, which causes higher cost for the merchant and even higher revenues for the issuer.

Summary

The core of the issue is the lack of competition.

If the Central Bank wants to be useful, they should spend their time opening up access to the payment market for new innovative players so that an actual competition can unfold. Other countries have shown that instant account to account payment (with or without QR) can lower the barrier for new players and get banks and their payment schemes to work for the profits which they have so far taken for granted.

References

OpenClipart, “Girl with empty wallet.” https://freesvg.org/girl-with-empty-wallet , May 13, 2018.

(1) C. A. T. (CAT), “Judgement - UMBRELLA INTERCHANGE FEE CLAIMANTS v UMBRELLA INTERCHANGE FEE DEFENDANTS.” [2025] CAT 37, Jun. 2025, [Online]. Available: https://www.catribunal.org.uk/cases/151711722-um-merchant-interchange-fee-umbrella-proceedings.

(2) G. Taylor, “With No Consensus on Card Fees and Surcharging, Will the Public Interest Prevail?,” AACS, 2025, [Online]. Available: https://aacs.org.au/with-no-consensus-on-card-fees-and-surcharging-will-the-public-interest-prevail/.

(3) RBA Banking Department, “Review of Merchant Card Payment Costs and Surcharging Consultation Paper: RBA Banking Department Submission to the Consultation Paper,” Reserve Bank of Australia, Sydney, Australia, Submission, Aug. 2025. Accessed: Oct. 29, 2025. [Online]. Available: https://www.rba.gov.au/payments-and-infrastructure/review-of-retail-payments-regulation/2025-07/.