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.
