How banning debit card fees could cost you more money
The government is hoping that by stopping retailers from putting a surcharge on debit card payments that consumers will be charged the same amount for a $5 cup of coffee, regardless of whether they pay in cash or with their debit card.
But Wes Lambert, CEO of the Australian Restaurant and Café Association, isn't so sure.
And he thinks the proposed cost of living measure might actually push up prices for all shoppers, regardless of how they pay.
How a ban on debit card surcharges could push up prices
A lot of small retailers currently put a surcharge on debit card payments, to recoup the amounts banks and payment service providers charge them. So a café owner might charge debit card user $5.08 for a cup of coffee instead of $5.
Lambert says if the government carries out its plan to ban debit card surcharges at the start of 2026, merchants will still have to recover the cost of payments, and so will put up their prices.
But they're unlikely to increase the price of that cup of coffee to $5.08 and instead will choose a rounder figure, like $5.25.
"If the aim of the of the announcement was to ease the cost of living, that's not going to happen, because restaurants and cafes cannot afford to absorb that cost," he says.
Why these surcharges exist
Under rules introduced more than 20 years ago, merchants are allowed to surcharge consumers for the reasonable cost of accepting card payments. (This also includes credit cards, but the government is only planning to ban surcharges on debit cards.)
This is very important for small businesses, which pay about three times as much as large retailers because they can't negotiate favourable prices like supermarkets, department stores and other large retailers, according to the Reserve Bank of Australia, which regulates the payments system.
And it has become more of an issue as more consumers moved away from cash to card payments. In the mid-2000s, cash was still Australians' preferred payment method, but by 2022 just 13% of transactions were made with cash and more than half were made with debit cards.
And with an increasing number of businesses refusing to take cash altogether, it becomes very difficult for consumers to avoid card surcharges.
The RBA wants businesses to pay less
While the government is proposing to ban debit card surcharges, the RBA is trying to tackle the other side of the issue - by reducing the amount merchants have to pay for each card transaction.
"Merchant costs and surcharging are interrelated issues: merchants would be less likely to surcharge consumers if card payment costs were lower," the RBA wrote in an issues payer on surcharging released on Tuesday.
The RBA is considering what regulatory changes it come make to drive down merchant card payment costs by promoting competition and efficiency.
Among solutions it is considering are a stopping merchants from surcharging for any card payment, including credit cards or placing a cap on the surcharge retailers could charge.
When a shopper uses their debit or credit card to make a purchase, the merchant is charged a fee by their payment service provider (PSP), the companies which act as intermediaries between the shopper and the retailer. They verify the customer's card details and checks whether the customer has enough funds or credit in their card account to make the payment.
The PSP also pays in interchange fee to the cardholder's bank, and both the PSP and the cardholder's bank pay fees to the card scheme, such as Visa or Mastercard.
"The cost of card payments is often opaque and difficult to understand," the RBA said.
The RBA has commenced collecting merchant-level data on surcharging from acquirers, terminal providers and other payments software providers.
Credit card transactions generally cost more to facilitate than debit card transactions, but many businesses are charged a 'blended rate' for their card transactions, that is the same price for credit and debit cards.
The effect of this is that debit card transactions actually subsidise credit card transactions, and Wes Lambert warns that a ban on debit surcharges could result in higher credit card surcharges.
Get stories like this in our newsletters.