Card surcharges banned: Win for shoppers or end of rewards?

Australians will no longer be slugged extra for paying by card after the Reserve Bank banned surcharges on debit, prepaid and credit cards on the eftpos, Mastercard and Visa networks from October.

The central bank says the changes are aimed at making payments simpler at the checkout and more competitive behind the scenes.

"Surcharging no longer works as intended," says RBA governor Michele Bullock.

"Consumers and businesses find the rules complex and confusing, surcharges are often not well disclosed, and most consumers want surcharging to stop."

For shoppers, the change should mean fewer nasty surprises at the till. The RBA estimates consumers currently pay about $1.6 billion a year in card surcharges on designated networks.

Only 13% of consumers say they are always told about surcharges when they shop, while 76% want them scrapped.

The package of reforms also includes lowering the caps on interchange fees paid by Australian businesses, with a focus on small businesses, which currently pay the highest fees.

But some small business groups are not happy with the change.

"Removing surcharges may look like a saving for consumers," says Pero Stojanovski, chief economist of Business Council of Australia, "But in practice these costs are likely to be passed on elsewhere through higher prices or changes to fees and rewards."

What is a card surcharge?

A card surcharge is an extra fee added when you pay by card, on top of the price of the item or service.

Businesses add the fee to cover what their payment processor (eftpos, Mastercard, or Visa) charges for handling the transaction.

The fee is usually a percentage of the transaction, andusinesses add the fee to cover what their payment processor charges for handling the transaction.

For example, if a café adds a fee to all card payments and doesn't take cash, a $5 coffee with a 10-cent minimum surcharge must be displayed as $5.10.

Yet only 13% of shoppers say they're always told about surcharges, according to the RBA.

Some countries have already outlawed card surcharges, in full or in part.

The UK has banned surcharges on debit and credit cards since 2018. Across the EU, retailers can't charge extra for paying by card, in store or online.

Why the RBA wants to remove surcharges

The RBA first allowed surcharges in 2003 so customers could see the cost difference between payment methods.

In theory, that pushed people toward cheaper options like cash or eftpos and away from expensive options like premium credit cards.

But in a July consultation paper, the RBA says surcharging is "no longer achieving its intended purpose."

With cash use plunging, many businesses apply the same flat surcharge to debit and credit, making it hard for customers to avoid fees.

After 18 months of consultation, including more than 250 submissions and 150 stakeholder meetings, the RBA has decided to act.

Will this be the end for cash?

The removal of card surcharges will encourage more people to pay electronically. A Canstar survey of 3001 Australians found only one in three try to pay with cash when a shop charges a surcharge.

But this likely won't be the end of cash. The RBA's 2022 research shows 7% of Australians use cash to make the majority of their in-person payments.

At the start of the year, in a move to support cash payments, the federal government made it mandatory for big retailers to accept cash for essential goods and services costing $500 or less between the hours of 7am and 9pm.

Why are business groups not happy?

The other major change is a reduction in interchange fees - a key driver of merchants' card acceptance costs.

Interchange is the fee paid from the merchant's bank to the cardholder's bank on each transaction.

Small businesses pay higher interchange than big retailers. For example, Coles and Woolworths can pay as little as 0.1% due to special deals with banks; small businesses can pay up to four times more.

"The reductions in interchange fees should help to lower card payment costs for businesses, especially small businesses that are usually charged the highest costs to accept payments," Bullock says.

"To do that, the RBA is reducing caps on the interchange fees that businesses pay on debit and consumer credit cards, and we are introducing caps on fees for foreign cards."

The new cap on debit cards will drop by 20%, while the cap on credit card interchange fees will drop by 63%.

The Australian Chamber of Commerce and Industry (ACCI) opposes what it calls a "blanket approach."

"It treats surcharging as the problem instead of tackling the real issue: high and opaque merchant card payment costs that businesses must pay to banks and other payment providers," says ACCI chief executive officer Andrew McKellar.

These other fees apply when you pay by card: scheme fees, cross-border fees, network assessment fees, processing fees and foreign exchange fees.

"If you remove the ability to recover those costs at the checkout, you are effectively dumping those costs onto small businesses," McKellar says.

The RBA argues that it will be up to the 16% of businesses that surcharge to put the costs into the sticker price when surcharging ends.

"When card surcharging ends, the sticker price will be the price that consumers end up paying," says Bullock. "Consumers will no longer be surprised at the checkout by an unexpected surcharge for paying by card."

Essentially, consumers will pay a similar amount as they do now, just in a different form.

What impact will the overhaul have on credit card rewards? 

While the cut to interchange fees may help small businesses, the concern is this money also helps fund rewards programs, so providers may cut perks or raise fees and rates.

As a result, the credit card providers are likely to reduce the value of card perks or charge higher fees and rates.

This could push some customers into ditching their credit cards, however, it's unlikely to spell the end of the 11.5 million credit card accounts currently in circulation, the majority (77%) of which don't use a credit card to borrow money, according to a Canstar survey.

Credit cards are lucrative for providers. RBA banking fee data shows credit cards generate the most bank fees from households, collecting $1.6 billion in FY24, up 51% since FY21.

Banks are likely to change their offering to adjust to the new rules, rather than scrap rewards card offerings altogether.

Sally Tindall, Canstar data insights director, says the cap may rattle rewards but make the system fairer.

"For too long debit card customers have been helping subsidise credit card rewards programs. The move might push credit card fees and prices up even higher but at least debit card customers won't be helping foot the bill."

"If you've got a credit card, keep an eye on your fees and interest rates, but also your rewards offering. If you get a notification that your perks are changing, do a stocktake to see if it's worth cashing those points out."

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