The Cut: Card Surcharging - Is Cash Still King?

As card transactions become the norm, has cash officially been abdicated from the throne? Tia Fitzpatrick investigates.

Last Sunday, I took a lovely trip to Brisbane’s New Farm Markets. I grabbed a coffee, some fresh fruit, flowers, and with that, incurred 80 cents of card fees. Although it doesn’t seem like much, surcharges like these amounted to $6.9 billion in card fees from Australian banks last year, exposing a multi-billion-dollar revenue stream in the payments sector (Barrett, n.d.). This left me wondering, where is all this money actually going? Who’s really pocketing the 34-cent surcharge on my strawberries?

Another Day for Apple Pay
The introduction of Apple Pay in 2014 is where ‘wallet-less’ payments truly took off. Most of the time, I’m leaving my wallet at home, perhaps forgetting my gocard or even the $7.82 left on my Dymocks gift voucher (dammit). But the reality is, we don’t really need wallets anymore. With most payments being made by card, many of us have begun to accept, or simply overlook, the 12-cent surcharge we pay on our morning coffee. Nowadays, only 13% of Australians are using cash, down from 27% five years ago – so naturally, these charges have become routine (Worthington, 2024). Surprisingly, in 2022, only 7% of all card payments involved a surcharge, but today, that number is significantly higher as platforms make surcharging more automatic and more ‘socially acceptable’.

The Rules
So, why are shop owners allowed to apply surcharge at all? Essentially, the argument is that accepting card payments is a direct expense for businesses, unlike cash. However, whilst cash doesn’t carry surcharges, there are still costs involved: like the labour costs in counting tills or transporting the money. The difference is, merchants are permitted to pass the cost of accepting card onto consumers. But this isn’t the global norm. In Europe, UK, and many states across the US, surcharging customers card users is illegal (European Union, 2024). In fact, the UK briefly tried surcharging in 2018 but quickly reversed course due to the hidden fees customers were experiencing, dubbed by consumers as a “rip-off when spending their hard-earned money” (HM Treasury, 2018).

The ACCC has also published some general surcharges for different card types:

• Eftpos: less than 0.5 per cent.
• Visa and Mastercard debit: between 0.5 per cent and 1 per cent.
• Visa and Mastercard credit: between 1 per cent and 1.5 per cent

Some businesses choose to set a fixed surcharge (e.g., 10 cents per transaction) or add a fee for payments below a certain amount. Whilst both methods are allowed, the ACCC mandates that surcharges cannot exceed the costs incurred by the business for that payment type. But in reality, these vague rules are leaving cents to fall between the cracks.

The Why
Why does Australia permit charges, you ask? The RBA tells us that surcharging “encourages consumers to use less expensive payment methods.” We all know, credit cards carry very high surcharging fees to offset the cost of rewards and points programs. But, in 2005, Visa and Mastercard introduced debit cards: a cheap new alternative to card payments. This led them to monopolise the market through tap-and-go technology and partnerships with Australia’s major banks so people could pay less fees by using their debit card.
As such, the ACCC is meant to regulate surcharges to ensure that businesses don’t charge more than the cost of accepting a particular payment method (i.e. businesses should not charge a credit fee for a debit transaction).

Small Businesses Left Behind
Whenever a customer uses a debit or credit card, the business incurs fees that are split between payment platforms (like Square), financial institutions (e.g., Commonwealth Bank), and card networks (like Visa and Mastercard). The problem? Large retailers like Coles and Woolies, benefit from economies of scale, and can negotiate lower fees with card networks and absorb the costs, so customers don’t see surcharges (Worthington, 2024). Small businesses, however, can’t negotiate such favourable terms and are forced to pass these costs onto consumers, placing them at a disadvantage. So, while you might think those New Farm market stalls and coffee shops are costing more, they aren’t dogging you on purpose. Card surcharges are forcing their prices up, making it more and more difficult for the regular consumer to support their local businesses.

Last September, a day-long outage of Square, prompted the attention of the RBA due to their lack of disclosure. As current rules state, they are not required to report transaction data because the platform does not operate a direct “exchange settlement account” with the central bank (Eyres, 2023). However, for Square’s “blended” models, vendors are charged a whopping 2.65% flat transaction fee per card-present transaction (Square, 2024). Furthermore, the platform doesn’t offer lower processing fees until you reach over $250,000 in annual sales (Forbes, 2024). This is particularly concerning when 74% of Square’s vendors are small businesses, and thus most of their vendors are paying top-rate fees.

The Issue of Credit
The other issue is flat surcharging rates. While they might offer equality for all customers, they don’t facilitate equity. Card networks generally offer “fixed”, “blended”, or “bundled” payment plans which charge consumers a flat rate, regardless of whether they’re paying with a regular old debit Mastercard, or a points generating, rewards credit card. This means that our younger generations, who primarily use debit cards to avoid fees, are subsidising older credit card users who benefit from points and rewards systems. So next time you’re waiting in line to pay for your coffee with your silver Amex premium, you should thank the debit user behind you for funding your business-class Europe flights!

So, what’s being done?
Last month, Labor MP Jerome Laxale initiated his campaign for ‘fee-free digital payment reform,’ citing the $4 billion annual gouging in card surcharges by big banks and card providers (Laxale, 2024). Laxale, quite literally, illustrated this with the example of the price of a coffee: $5.08 with card, $5 with cash, and simply asked “why?”.

Treasury is contemplating regulatory reforms that would give the RBA broader oversight, enabling it to supervise individual payment providers under a new licensing regime (Eyres, 2023). These reforms would enable a more transparent reporting regime, so that small businesses could use the data to compare and decide whether to switch payments terminals. It’s also being investigated as to whether Square simply runs the transactions through the cheapest EFTPOS network, then profits from the difference between vendor charged and vendor paid.

Liberal MP Garth Hamilton has also proposed more widespread “least cost routing” (LCR), which would allow merchants to automatically route tap-and-go debit transactions through the cheaper eftpos system, rather than the Visa, Mastercard, and American Express systems (Hamilton, 2024). LCR would reduce the inequities that arise from blended and bundle packages that mix credit and debit charges into a flat-rate. Whilst 52% of businesses currently use LCR, the RBA estimates that other merchants would save a further $1,150 annually with LCR enabled (RBA, 2024; ABC, 2024). 

However, banning surcharges still has its risks. Forcing small businesses to absorb these costs would significantly cut into their already tight margins, giving larger companies yet another advantage. Small businesses might then raise prices across the board, which would unfairly impact both cash and debit users. 

What should you do?
The easiest way to avoid surcharges altogether? Use cash! Sadly, this feels like a step backward in a world of Apple Pay and tap-and-go technology. The hassle of carrying cash or visiting ATMs just to save a few cents on fees makes cashless transactions oh-so hard to resist. And it doesn’t help that most of your trendy James St coffee shops are operate entirely cashless – so you might not even be able to pay with cash at all. Another option is to operate LCR yourself. Simply insert or swipe your card rather than tapping, and select the "savings" option. Debit cards often support dual networks, allowing payments through either the cheaper Eftpos system or the more expensive Visa/Mastercard system. This means you should be able to manually select the cheaper option, rather than being randomly allocated the surcharge fee chosen by the operator.

The convenience of card payments has led many to ditch cash and make the switch to digital. However, the additional expense of card surcharges threatens the monarch. For now, cash remains king—but its reign is on shaky ground. 

References
ABC. (2023). Australia's transition to a cashless society raises concerns about 2inancial exclusion, privacy and safety. Retrieved from https://www.abc.net.au/news/2023- 08-23/cashless-society-Binancial-exclusion-safety-privacy-concerns/102706718
Barrett, J. (n.d.). ‘Opaque and complicated’ card surcharges are costing Australians billions. Is an overhaul needed? Retrieved from https://www.theguardian.com/australia-news/2024/sep/14/australia-card-surcharges-credit-debt-rba-review
Chong, D. (2024). Credit card surcharge: What is it and how to implement legally? Retrieved from https://www.helcim.com/guides/what-is-surcharging/
European Union. (2024). Electronic and cash payments. Retrieved from https://europa.eu/youreurope/business/Binance-funding/making-receiving-payments/electronic-cash-payments/index_en.htm#:~:text=You%27re%20not%20allowed%20to,online)%20 made%20throughout%20the%20EU.
Eyres, J. (2023). Square payment outage raises red 2lags at the Reserve Bank. Retrieved from https://www.afr.com/companies/Binancial-services/square-payment-outage-raises-red-Blags-at-the-reserve-bank-20230911-p5e3ow
Forbes. (2024). What Is Square And How Does It Work? Retrieved from https://www.forbes.com/advisor/business/software/what-is-square/#why_small_businesses_love_square_section
Hamilton, G. (2024). CONSIDERATION IN DETAIL – TREASURY. Retrieved from https://www.garthhamilton.com.au/speeches/consideration-in-detail-treasury-2/
HM Treasury. (2018). Card surcharge ban means no more nasty surprises for shoppers. Retrieved from https://www.gov.uk/government/news/card-surcharge-ban-means-no-more-nasty-surprises-for-shoppers
Laxale, J. (2024). Sick of paying card surcharges? Me too. Retrieved from https://x.com/jeromelaxale/status/1824228196273049751
RBA. (2023). The Evolving Retail Payments Landscape. Retrieved from https://www.rba.gov.au/publications/annual-reports/psb/2023/the-evolving-retail-payments-andscape.html#:~:text=The%20Birst%20row%20has%20the,changes%20from%2 02007%20to%202022. RBA. (2024). The Effect of Least-cost Routing on Merchant Payment Costs. Retrieved from https://www.rba.gov.au/publications/bulletin/2024/apr/the-effect-of-least-cost-routing-on-merchant-payment-costs.html
Square. (2024). Learn About Square’s Fees. Retrieved from https://squareup.com/help/ca/en/article/5068-what-are-square-s-fees#:~:text=Square%27s%20processing%20fees%20are%202.65,That%27s%20it .
Worthington, S. (2024). Surcharges are added to most purchases, but what are the rules behind these extra fees? Retrieved from https://theconversation.com/surcharges-are-added-to-most-purchases-but-what-are-the-rules-behind-these-extra-fees-23796