The major banks say they will be forced to cut interest-free periods on credit cards and raise rates or fees if the Reserve Bank of Australia reduces interchange fees alongside its proposed surcharging ban.

In a statement, the Australian Banking Association (ABA) said it supported banning debit and credit card surcharges but rejected lowering the existing cap on interchange fees – fees charged by banks to merchants for the use of their systems.

If surcharges were banned but interchange fees remained the same, the cost of processing card transactions would fall on merchants. For small-business operators who rely on surcharging to pass card transaction costs on to customers, this could introduce a new cost burden.

Conflict over merchant protections

While the banks reject lowering the cap on interchange fees, small-business advocates argue that they are the bare minimum to protect merchants.

Responding to the RBA’s surcharge proposal in July this year, the Council of Small Business Organisations Australia (Cosboa) said the changes to interchange fees would not be enough to reduce the new burden on small businesses.

“The reduced interchange fee is welcomed; however, merchant fees include many other charges,” said Cosboa chair Matthew Addison. “The reality is that these fees will still be paid, just not disclosed. That cost will be baked into the price of coffee, groceries and services across the country.”

But the major banks say that reducing interchange fees would increase card costs and reduce card benefits, such as interest-free periods.

“The RBA’s own data shows interchange fees in Australia are already among the lowest in the world,” said ABA CEO Simon Birmingham. “There is a risk that driving them down further would put more pressure on household budgets through higher card fees, shorter interest-free periods and diminished rewards.”

Birmingham acknowledged the potential extra burden on small businesses – which, aside from being cash-strapped, often cannot secure the same sweetheart deals on transaction fees that large businesses can. However, he recommended alternative adjustments for small businesses, such as a special interchange rate.

• This story was originally published on Inside Small Business.