Cash v debit card fees: There is no free lunch

Ever wondered why when you pay for a $4 coffee using a debit card, a ping on your phone alerts you to a charge of $4.05?

That’s the surcharge that’s attached to the use of the card. Of that extra 5 cents, a portion is paid to the customer’s bank, the retailer/merchant pays a portion to its bank-terminal provider and a card company like Visa, Mastercard or Eftpos also gets a slice.

The government has now deemed that this surcharge is another enemy to target in its fight to conquer the cost-of-living crisis.

Applying a surcharge is legal, as long as the charge aligns with the recovery of the business’s costs in providing the service.Credit:

But beware this “pea and thimble” trick. The government fully understands that the infrastructure around the payment system comes at a cost, but it thinks consumers shouldn’t be the ones burdened by that cost.

Treasurer Jim Chalmers says the government is open to banning debit card payment surcharges.Credit: Alex Ellinghausen

But even if consumers pay a smaller or no surcharge, which is instead kicked up to others in the payments ecosystem, it doesn’t guarantee a win. The cost may ultimately come back to bite consumers via higher prices. And that cup of coffee will still cost you $4.05 – but the 5 cents will be part of the retail price rather than the surcharge.

“Consumers shouldn’t be punished for using cards or digital payments, and at the same time, small businesses shouldn’t have to pay hefty fees just to get paid themselves,” Treasurer Jim Chalmers said on Monday.

That is quite the head-scratcher. Because consumers are paying for a service – they are being provided with the ability to use digital cards.

And applying a surcharge is legal, as long as the charge aligns with the recovery of the business’s costs in providing the service.

The Reserve Bank is on board now and is looking at the surcharging regime and how it might be refined or streamlined to reduce the costs for consumers. While that makes sense, providing merchants and consumers with the infrastructure that allows them to use debit cards does come at a cost.

Consumers have long understood that when they are billed for broadband or electricity they are not just paying for usage but for the infrastructure these providers supply.

And just to make it clear, there is an expensive infrastructure in use when it comes to using cash. At a senate inquiry in 2023, Commonwealth Bank’s chief executive Matt Comyn said it cost the bank $400 million a year to make cash available to customers.

If you add in the other major banks, the regional banks, the Post Offices and major supermarkets that all need to foot the bill for the ubiquitous supply of cash – the tally would be more than $2 billion.

That is a larger amount than the estimated $1 billion that consumers pay in digital debit card surcharges.

The costs of using cash are also kicked down the road and translate to higher prices for consumers. The difference is that we don’t see them show up on our transaction phone ping or bank statements. That makes cash a smaller target for the government to attack in its fight against the cost of living.

The confusing element to the government’s superhero consumer-protection stand against surcharges is that it suggests the move will also benefit small businesses.

Yet, it is often these businesses that hide behind surcharges to charge higher prices – sometimes as much as 4 per cent. National Australia Bank’s chief executive Andrew Irvine recently admitted to his outrage at being forced to pay $5.50 for a $5 coffee in Sydney recently – a 10 per cent surcharge.

To the extent the system is being rorted, it is likely that the merchant is the culprit.

If the government takes away the banks’ rights to charge the customer for the use of the card, or the merchant for using its payment terminal, they will find another way to recover their costs. And that way will be a lot less transparent.

The CBA says it already makes a loss on the part of its business that provides terminals to merchants. But having these small businesses as customers does provide banks with other sources of revenue, so they are not providing the payment terminals and the associated infrastructure as a charity.

Meanwhile, you have to wonder whether many people really noticed these payment surcharges before smartphones and watches started pinging us with instant notifications.

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