𝐓𝐇𝐄 𝐖𝐇𝐀𝐂𝐊-𝐀-𝐌𝐎𝐋𝐄 𝐏𝐑𝐈𝐂𝐄 𝐄𝐒𝐂𝐀𝐋𝐀𝐓𝐈𝐎𝐍

I’m usually a defender of the Reserve Bank of Australia, particularly when it comes to decisions about the cash rate.

 

But I cannot defend its decision to remove the ability of businesses to apply a surcharge to transactions made using credit or debit cards.

 

And the more I examine the downstream consequences, the more convinced I become that this is another example of a policy designed to deliver an attractive headline without sufficient consideration of what happens next.

 

It’s a classic game of economic Whack-A-Mole. Suppress a cost in one place & watch it pop up somewhere else.

 

The RBA knew electronic payment processing wasn’t free. It also knew that banks, card networks & payment processors couldn’t simply be expected to provide their services without recovering the costs involved. After all, it was the RBA that allowed surcharging in the first place, partly to improve transparency & encourage consumers to consider the cost of their chosen payment method.

 

So, it attempted a middle ground.

 

It reduced the domestic consumer credit card interchange fee cap from 0.8% to 0.3%, alongside reductions to debit card interchange fees.

 

But here’s the problem.

 

Interchange fees are only one component of the merchant service fees businesses pay to accept card transactions.

 

The total fee also includes card network charges, payment processing, fraud prevention, transaction authorisation, settlement infrastructure & the costs associated with maintaining the electronic payments system.

 

And the proportion attributable to interchange varies depending on the card, merchant & payment arrangement.

 

Those other costs haven’t magically disappeared because the RBA reduced interchange fees.

 

Nor has the RBA abolished merchant service fees.

 

It has simply removed the ability of businesses to separately recover those fees from customers choosing to pay by card.

 

And while reducing interchange fees may provide some relief to merchants, it doesn’t necessarily compensate them for losing the ability to recover their remaining costs through surcharges.

 

Which brings me to what I consider one of the more troubling consequences of this decision.

 

Who actually ends up paying?

 

Previously, where a business applied a surcharge, customers choosing to use a credit card could see an added charge, often somewhere between 1% & 2%, depending on the merchant and payment arrangement.

 

The customer could decide whether the convenience, credit facility or rewards associated with using that card justified the added cost.

 

Or they could choose another payment method.

 

Now businesses must either absorb their remaining merchant fees, negotiate lower rates or recover those costs elsewhere.

 

And for businesses already running on tight margins, increasing their general prices may be the most practical option.

 

Consider what that means.

 

A customer paying cash may now contribute towards the cost of accepting premium credit cards.

 

A pensioner using a basic debit card may contribute towards the costs associated with a payment system that also supports frequent flyer points, cash back rewards & other benefits enjoyed by higher-spending credit card customers.

 

In effect, consumers using cheaper payment methods may end up subsidising those using more expensive ones.

 

Of course, not every merchant will increase prices. And reductions in interchange fees may also lead banks to reassess the generosity of their credit card rewards programs.

 

But the potential for cross-subsidisation is very real.

 

We’ve removed the visible surcharge without necessarily removing the underlying cost.

 

And in doing so, we’ve potentially removed something else.

 

Transparency.

 

At least when a surcharge appeared separately on the bill, customers could identify what they were being charged for their chosen method of payment.

 

Once those costs are incorporated into general prices, that distinction disappears.

 

Now I’ve seen many people arguing that the solution is simply to prohibit banks & card issuers from charging merchant fees altogether.

 

But have they considered the consequences?

 

Banks aren’t charities. Nor are card networks & payment processors.

 

If regulators forced them to absorb the entire cost of providing electronic payment services without any means of recovering those costs, they would inevitably reassess the commercial viability of their products.

 

That could mean higher annual card fees, reduced rewards, tighter eligibility criteria, lower credit limits or fewer credit products available to consumers. Albeit fewer credit products might not be a good thing.

 

It could also place pressure on investment in payment infrastructure, fraud prevention & security.

 

And let’s not forget that electronic payment systems require substantial ongoing investment to remain secure, reliable & capable of processing millions of transactions.

 

With increasingly sophisticated cybercrime & financial fraud, that security is more important than ever.

 

You cannot legislate away the cost of providing a service. You can only change who pays for it, how they pay for it, or whether the service remains commercially viable.

 

The RBA argues that its reforms will reduce payment costs, improve competition & make pricing simpler.

 

It estimates the changes will save businesses approximately $910 million annually.

 

But estimated savings across the entire payment system tell us little about how those savings will be distributed, particularly among smaller businesses that previously recovered their processing costs through surcharges.

 

And whether the reforms achieve their stated objectives for consumers & businesses is another question entirely.

 

I’ll acknowledge that there was a legitimate problem with some businesses applying excessive surcharges or charging the same surcharge regardless of whether a customer used a low-cost debit card or a more expensive credit card.

 

But Australia already had rules requiring surcharges to reflect the reasonable cost of accepting the payment.

 

So why wasn’t the answer better enforcement of those rules rather than prohibiting surcharges altogether?

 

Because simpler pricing isn’t necessarily cheaper pricing.

 

And I’d argue it isn’t necessarily simpler either, if consumers can no longer distinguish between the cost of a product & the cost of their chosen method of paying for it.

 

A cost that becomes less visible doesn’t cease to exist.

 

And now we have the ATO debacle.

 

The ATO proposed stopping credit card payments rather than absorbing processing costs estimated at approximately $200 million annually.

 

But following considerable backlash from small businesses, Treasurer Jim Chalmers has intervened, providing funding to allow the ATO to continue accepting credit card payments until the end of June 2027 while further consultation takes place.

 

Think about the absurdity of that.

 

When the costs become a problem for a federal agency, the govt finds a way to provide temporary relief & further consultation. And guess what the other way is = all tax payers are funding it. 

 

Yet thousands of small businesses must deal with the consequences of the same surcharge reforms.

 

If the ATO considers those costs too significant to absorb, why should we assume small businesses can do so without consequences?

 

And if taxpayers ultimately fund the ATO’s card processing costs, why should those who don’t use credit cards to pay their tax liabilities subsidise those who do?

 

The question isn’t whether consumers should be protected from excessive or unjustified surcharges.

 

They absolutely should.

 

The question is whether prohibiting legitimate cost recovery was the most sensible way to achieve that objective.

 

Because when regulators interfere with the way businesses recover their costs, those costs don’t simply vanish.

 

They move.

 

Sometimes into higher prices. Sometimes into reduced services. Sometimes into fewer payment options.

 

And sometimes onto the shoulders of consumers who weren’t responsible for incurring them in the first place.

 

That’s the problem with economic Whack-A-Mole.

 

You might succeed in knocking down the surcharge.

 

But you haven’t necessarily reduced the cost of doing business.

 

You’ve just made it harder to see who’s paying for it.

 

𝐓𝐇𝐀𝐓 𝐋𝐈𝐓𝐓𝐋𝐄 𝐓𝐀𝐏 𝐎𝐅 𝐘𝐎𝐔𝐑 𝐂𝐀𝐑𝐃 𝐈𝐒𝐍’𝐓 𝐅𝐑𝐄𝐄. 𝐀𝐍𝐃 𝐍𝐄𝐕𝐄𝐑 𝐖𝐀𝐒.

There have been several responses to my recent X posts about the banning of card surcharges suggesting, & in some cases demanding, that card issuers should simply stop charging merchant fees.

I suspect many of those making that demand don’t understand what a merchant fee covers.

 

Because merchant fees aren’t simply levied for the sake of it. Nor are they pure profit flowing into the pockets of banks & card companies.

 

They pay for an extraordinarily complex payment system that most of us use every day without giving it a second thought.

 

Consider what happens when you tap your card at the local coffee shop.

 

Within seconds, information travels from the payment terminal through a network of processors, payment networks & financial institutions. Your account is checked, the transaction is authorised, the merchant receives confirmation & the process of transferring the money begins.

 

All in the time it takes you to put your card back in your wallet.

 

But behind that simple transaction sits an enormous amount of infrastructure.

 

Transaction processing. Every payment must be authorised, processed, recorded, reconciled & settled.

 

Payment networks. An intricate system of electronic connections, switches & communication networks linking merchants, banks, processors & card schemes. These systems must operate reliably, around the clock, processing millions of transactions.

 

Fraud prevention. Sophisticated systems continuously monitor transactions for suspicious activity. And have you ever stopped to consider what happens when someone fraudulently uses your card? Or when a fraudulent merchant, potentially operating from the other side of the world, manages to enter the payment system? Identifying & investigating fraudulent activity, resolving disputes, recovering funds & potentially reimbursing cardholders all involve costs. And cross-border transactions can add further complexity. Those costs don’t simply disappear.

 

Security & infrastructure. Data centres, computers, cybersecurity, software, communications networks, system maintenance & continual investment in technology. None of it comes cheaply.

 

And then there are the people needed to build, run, maintain & support these systems.

 

Of course, merchant fees contribute to revenue & profits across the payments industry. I’m certainly not suggesting banks or card companies operate as charities. They don’t, but they’re not necessarily the villains either. Nor should we confuse the total merchant fee with pure profit. A substantial part supports the infrastructure, services & risks involved in processing payments.

 

But there’s a significant difference between questioning whether a fee is reasonable & demanding that it shouldn’t exist at all.

 

And here’s another point that seems to have been overlooked.

 

There’s a reason business increasingly prefer electronic payments.

 

Cash isn’t free to handle.

 

It must be counted, reconciled, secured, stored, transported & deposited. There are banking charges, staff time, security risks, losses & the cost of managing discrepancies. Electronic payments can also reduce opportunities for theft. And as one small local business told me a couple of days ago, modern payment terminals provide them with far more information about their transactions, making reconciliation & business management easier.

 

For a small business handling limited amounts of cash, those costs may be modest. But for larger businesses, the costs can be considerable.

 

Cheques, although increasingly uncommon & being phased out, have historically involved substantial manual handling & processing costs for businesses & financial institutions.

 

Electronic payments eliminate many of those expenses.

 

Indeed, research into the costs of different payment methods has shown that electronic payments, particularly debit cards, can be more economical than cash in many circumstances, especially when the full costs of handling physical money are considered.

 

A report commissioned by Mastercard & conducted by the Boston Consulting Group (BCG), which is also referenced in the RBA’s July 2025 consultation paper, found that accepting cash was more than twice as expensive for Australian merchants as accepting card payments.

 

The report’s estimated point-of-sale costs, expressed as a percentage of transaction value, were:

 

·       Cash: 3.9%

·       Card payments: 1.8%

 

While these are findings from industry-commissioned research rather than a universal measure of payment costs, they illustrate a crucial point. Cash carries costs that aren’t necessarily obvious at the checkout.

 

And then there’s something else we rarely discuss.

 

Our convenience.

 

We can walk into a shop, buy a coffee, tap a card, or phone & walk out.

 

We don’t have to visit an ATM, carry cash, count coins, wait for change or worry about whether we have enough money in our wallets. Or even handle grubby notes & coins not knowing where they’ve been.

 

Businesses don’t have to spend the same amount of time handling physical money, & transactions can be completed quickly.

 

We’ve come to regard all that convenience as an entitlement rather than a service supported by substantial investment.

 

None of this means merchant fees should escape scrutiny. Of course they shouldn’t. Competition, transparency & reasonable pricing matter.

 

But the proposition that banks & card companies should simply abolish merchant fees ignores the underlying economics of the entire payment system.

 

And there’s an interesting piece of history worth remembering.

 

It was the RBA itself that introduced the card surcharging framework back in 2003, some 23 years ago.

 

At the time, card network rules prevented businesses from imposing surcharges. The RBA intervened to allow them, partly to encourage consumers to choose lower-cost payment methods & partly to increase competitive pressure on the card networks.

 

Now, 23 years later, the RBA has reversed course, arguing that the payments landscape has changed & surcharging is no longer achieving its original purpose.

 

There may be legitimate reasons for reviewing a policy introduced more than two decades ago. And the RBA’s reforms also include reductions to interchange fee caps, which should reduce some of the underlying costs of accepting card payments.

 

But one thing hasn’t changed.

 

The cost of operating the payment system hasn’t magically disappeared.

 

The merchant fee remains, even if some components are reduced. What has been removed is the business’s ability to recover that cost through a separate surcharge on the card transactions covered by the ban.

 

Businesses must either absorb the remaining cost, recover it through their general pricing, or find savings elsewhere.

 

And whether we pay directly or indirectly, somebody must bear that cost.

 

Because that little tap of your card was never free. And pretending otherwise won’t make it so.