The way you pay is costing you big time. Here’s how to play your cards right

There’s no doubt we’re paying for convenience when it comes to transaction fees. Gone are the days of bus drivers painfully counting out change on a busy commute to work. And 18-year-old me, who worked at a second-hand bookshop six years ago, would today be less stressed balancing the cash drawer at the end of a shift.

That’s partly because cash usage has plunged from about one third of transactions in 2019 to just 16 per cent in 2022. Most payments are now made electronically, but sneaky transaction fees – with a nearly $1 billion price tag in Australia last year – on cashless payments are burning an increasingly noticeable hole in our wallets.

Illustration: Simon Letch.Credit:

Some of my more savvy friends have been boycotting card payments for a while, flashing their notes and coins to make a point every time we go out. But for the past few years, especially after the pandemic, I’ve stubbornly shrugged off the 0.5 per cent to 1.5 per cent surcharge on electronic payments as a convenience levy. It doesn’t seem like much … until you add it up and realise you’re paying hundreds of dollars each year … to pay for things.

Big businesses such as supermarkets don’t usually have surcharges (partly because they can negotiate more favourable terms). But smaller businesses, including local cafes, tend to pass on the cost to their customers.

One way to sidestep these surcharges – and spend less generally – is to carry around cash. Less convenient? Yes. But you’ll avoid paying surcharges and even get discounts at some businesses.

There’s also a psychological reason why paying cash helps us spend less. Research has shown consumers spend more when using cashless methods. Why? When we pay using notes and coins, and we physically have to hand them over, it hurts us more because we’re losing a tangible object. By contrast, when we tap or swipe our card, we don’t lose anything, so we’re more likely to spend more.

But with cash usage falling, supply and circulation of cash dwindling, and some stores going cashless, it’s becoming harder to avoid cashless payments.

The surcharges we pay largely end up with big companies, including the banks and payment services providers such as Mastercard and Visa. Innovation is a good thing, and if these companies are making our lives easier (as well as saving a business money it would otherwise be spending counting, safeguarding and transporting cash), it makes sense for us to pay up. But as we increasingly lose the option to pay by cash, it’s important to make sure there’s healthy competition keeping prices under control, especially for small businesses which have less power to negotiate favourable terms.

The Reserve Bank has done some things to keep surcharges in check. It has set benchmarks which limit certain fees charged by payment service providers, and banned shops from surcharging more than they pay to accept particular card types (although not all businesses have followed the rules).

Figuring out who actually takes the surcharge fee home at the end of the day is a complex task. Generally, most of the surcharge collected from a customer by a business goes to the customer’s bank or a platform such as Square, a little goes to the business’s bank, and an even smaller cut goes to a payment network: usually Visa or Mastercard. But Visa and Mastercard – which essentially own the digital equivalent of railroads in the payments process – can also charge banks and companies such as Square additional service, scheme and data processing fees, which those companies can pass on to businesses (which in turn pass them on to consumers).

We know the credit card processing industry in Australia is highly concentrated – the top four companies generate more than 70 per cent of the industry’s revenue. Established card processors such as Visa and Mastercard dominate the market (in Australia and globally) and it’s pretty difficult for new companies to challenge them because of the high level of investment needed – along with other barriers – to start these businesses.

Apple has been disrupting some parts of the payment process, especially through its Apple Pay and Tap to Pay services, which allow users to make payments through their Apple devices, and turn iPhones into terminals that can accept card payments. But this mostly impacts banks which have traditionally been the providers of payment hardware, and Apple’s payment services still rely on Visa and Mastercard’s digital railroads.

While the presence of a few giant companies doesn’t always lead to reduced competition, it can raise eyebrows when they’re raking in profits. Return on assets (a measure of profitability that compares a company’s net income with its total assets) for Visa and Mastercard, for example, are exceptional at about 16 per cent and 23 per cent respectively. By comparison, Australia’s biggest bank has had a return on assets hovering just under 1 per cent over the past few years.

Payment service providers should be rewarded for all the investment they’ve put in to build up these impressive payment systems. But now, their huge networks of users and infrastructure (which make it hard for competitors to break into the industry) mean we need to keep an eye on these payment processors and ensure competition keeps prices at bay.

As consumers, we can reduce the amount we pay in surcharges through choosing the domestic debit scheme, EFTPOS, which is generally less expensive compared to the Mastercard and Visa card systems – especially for larger transactions. If you have a debit card with an EFTPOS logo (which most should), you can insert or swipe the card when making a payment and choose the cheque or savings payment options at places that accept EFTPOS payments.

The Reserve Bank has tried to encourage businesses to take up “least-cost routing” which allows them to process electronic payments, even when a card is tapped, through the card network that costs them the least (usually EFTPOS). But banks and payments services aren’t too keen on promoting this to businesses (partly because it would cost banks more to update their payment devices, and because it would increase competitive pressures for payments services and likely reduce their – and the banks’ – profits). And business owners are often too busy to be shopping around for the best deals.

Last year, RBA governor Michele Bullock said there might need to be formal regulation to make sure payment service providers enable least-cost routing for businesses. So far, about 65 per cent of businesses have taken it up. But there probably needs to be a stronger push.

Millie Muroi is an economics reporter. Ross Gittins is on leave.

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