Why are more businesses charging extra to pay by card?

More small businesses are adding surcharges of between 1 and 1.5 per cent to debit card payments, in what the retail industry says is a survival response to rising costs in the sector.

Financial commentators say regulator guidelines on excessive charges have become redundant with customers willing to pay well above a retailer’s processing costs for the convenience of card.

Eating out for a day, this masthead found even debit card purchases generally added more than 1 per cent to the bill. Debit card surcharges were also found on airline websites, and when making payments through state government agencies.

But how do card surcharges work? And are they legal?

What are the rules for card surcharges in Australia?

The Australian Competition and Consumer Commission (ACCC) oversees a ban on “excessive” card surcharges – instances where the charges go beyond a business passing on their cost of processing payment.

As a guide for what counts as “excessive”, the ACCC uses the Reserve Bank of Australia’s estimated costs for different payment types: eftpos (less than 0.5 per cent), Visa and Mastercard debit cards (between 0.5 per cent and 1 per cent) and Visa and Mastercard credit cards (between 1 per cent and 1.5 per cent).

Some types of payments – including Diners Club and American Express cards, PayPal and BPAY transactions, and taxi fares – are exempt.

If a business does not take cash, it cannot charge a card surcharge (as this would just be a new price for the item).

Why are you paying card surcharges more often?

The RBA’s Consumer Payments Survey found consumers paid a surcharge on 7 per cent of transactions in 2022, up from 4 per cent in 2019. In 2022, the median surcharge per transaction was 50¢.

Anecdotally, it seems more businesses are now placing surcharges on all card payments, while they were previously only common on credit cards and other payment types which attracted higher processing fees.

Paul Zahra, CEO of the Australian Retailers Association, said surcharges for debit and credit cards were needed for small businesses to remain sustainable.

“Many retailers who were previously comfortably able to absorb these transaction costs are now not able to do so due to rapidly rising costs across the board, from rising rents, labour, utilities, insurances, and materials,” he said.

“Individual transaction surcharges may be small, but they add up significantly for a retail business particularly those with high-volume transactions.”

Steve Worthington, a financial services commentator and professor at Swinburne University, said businesses would always set prices to cover their cost, and an increase in card payments meant processing fees may now be material to their bottom line. “If you take a $5 takeaway coffee, that price has been costed to include electricity, water, staff wages, and now most people are paying for that with card,” he explained.

Worthington said customers were probably noticing these surcharges at small and medium-sized businesses, as larger chains could negotiate package deals with their banks. Small and medium-sized businesses are also more likely to use independent card reader systems, like Square, which charge higher fees.

Are universal card surcharges legal?

Consumers are used to paying a surcharge for credit payments, but businesses now commonly charge one surcharge to cover all types of payments.

In this situation, the ACCC advises businesses should charge the lowest processing cost. But sometimes the business’s payment provider charges a flat fee for debit and credit cards, and, regardless, keeping track of several different payment costs can be cumbersome: this masthead found virtually no universal surcharges at small businesses were within the 0.5 per cent to 1 per cent processing cost for debit cards, estimated by the RBA.

Associate Professor Andrew Grant, a behavioural finance researcher at the University of Sydney, said consumers understood businesses were likely charging more than what the lowest cost of payment is, but were willing to pay to avoid the inconvenience of paying cash amid dwindling ATM numbers.

“With many different payment options costing various amounts, and unclear costs to merchants, it probably makes more sense, from the business and consumer’s perspective, to charge a flat ‘card’ fee, even though this is not what the ACCC states,” he said, noting the evolving payment technology marketplace made the space hard to regulate.

While consumers might not “particularly like” paying a surcharge, he said the small amount meant it was difficult for someone to view an individual transaction as unreasonable.

“Consumers can easily round 20 cents down to zero,” he said.

Are surcharges stopping Australia from going cash-free?

Earlier this month, management of the privately owned Hamilton Island announced it would no longer take cash payments at its outlets.

The decision, which the island’s management said was more efficient and reduced the risk of theft, prompted a backlash from cash advocates, who say they should be allowed to use any legal tender and are concerned about creeping surcharges on card payments.

Macquarie Bank announced last year that it would transition to totally cashless branches by the end of this year, and ANZ, Commonwealth Bank and NAB have all recently opened a limited number of cashless locations.

However, previous moves towards card-only payments have been poorly received. Woolworths backed down on a decision to make some inner-city supermarkets cashless in 2021 amid concerns about accessibility.

Worthington said there were signs that consumers may be fed up with surcharges, pointing to a slight increase in the amount of money being withdrawn from ATMs in the RBA’s February figures (although it still declined significantly since the start of 2020).

“This could be for a whole variety of reasons, but I would contend that we all got used to using cards during the pandemic, and we didn’t pay attention to what the transaction value was, we just tapped and went. Now I think people are taking notice of that extra fee,” he said.

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