The $1 billion hidden cost of going cashless

A bouquet size costs $89 if you pay with cash or bank transfer. But using a card would bring the total to $90.69, with a 1.9 per cent card surcharge.

Braddon Flowers, run by Lauren King, is just one of many businesses in Australia that adds a small surcharge at the till to cover the transaction fee set by their bank or financial provider for card payments.

For a small business, like Ms King's, those fees would otherwise add up quickly over the year.

"It would be thousands," she said, adding lost revenue represents rent and wages.

"It sucks that there is a processing fee, but nobody's carrying cash these days. So that's how they have to pay. And if that's the option they choose then ultimately ... someone has to pay it. I don't want it to be me."

Australians are paying almost $1 billion per year in card surcharges, research from Sydney-based payments consulting firm, Payment Services, and QI Insights shows.

For the average individual, that means an extra $140 out-of-pocket per year, just to be able to pay with their card or mobile wallet.

So who is this money going to? And does the decline of cash mean we are just paying more at the till?

Every time a digital payment is processed - whether you tap, swipe, key in a PIN, or use the wallet app on your phone - there is a cost.

But who is setting this figure?

If you take a look at your debit card, you'll likely see a few logos splashed across it: one for EFTPOS on one side, and one for Visa or Mastercard on the other.

These logos represent the different networks that will process the card transaction.

Swiping your card and selecting EFTPOS - Australia's local debit card network - tends to be the cheapest system for processing payments. But tapping your card at the terminal - while convenient - will tend to route the payment through the usually more expensive Visa or Mastercard network.

The banks and payment providers - who provide the point-of-sale machines used to process your card at the shops - will route through these networks and charge their own fees.

They offer merchants the option of a flat rate for all in-store card transactions. It is understood these fees are meant to cover things like the use and maintenance of the checkout terminal, the technology used, and fraud protection.

Brad Kelly - managing director of Payment Services - has accused the banks and payment providers of inflating their flat rates and pocketing the difference, noting the cost to process debit transactions via the EFTPOS network is less than 30 cents for a $100 transaction.

"That flat rate is inflated because debit's so cheap, and every month we do more and more and more debit [transactions] and less and less and less credit," he said.

But a spokesperson for the Australian Banking Association said: "Merchant fees have fallen by 13 per cent in the last financial year and they have been coming down every year for the last decade."

The only time the customer is really made aware of these fees, though, is if the business you are purchasing from applies a surcharge to recoup the amount. The surcharge can't be more than what it costs the business to use that payment method.

Around 7 per cent of card transactions had a surcharge applied to them in 2022, the Reserve Bank's consumer payments survey revealed. This was up from about 5 per cent in 2019.

Ms King said she wouldn't feel comfortable applying a surcharge if she didn't offer customers the option to pay with card or bank transfer, without the fee.

"It's just one of those things that it does add up and just with a small business, I guess," she said.

"Particularly with floristry, because it is a luxury purchase, I haven't had a single person ever in almost three years say anything ... it hasn't been an issue for me."

But the system is stacked against small businesses, Mr Kelly said.

"The top end of town, the supermarkets and everyone else, get to cut a deal direct with Visa, Mastercard or the bank," Mr Kelly explained.

"A small business can't do that, a small business has to take [whatever rate] they can get from their bank."

There is a push to reduce the cost of surcharges by using what's known as 'least-cost routing' (LCR).

LCR ensures the transaction is processed using the cheapest network, rather than whichever network the payment provider defaults to.

Whichever the cheapest network is can depend on the size of the transaction; Mastercard and Visa is usually charged as a percentage of purchase, whereas EFTPOS is often a flat fee.

LCR is available across the major banks and payment providers, and take-up has improved over the past year.

The Reserve Bank said 65 per cent of merchants had LCR enabled for card payments by the end of December 2023. The RBA has warned in the past it expected providers to make progress on enabling LCR for merchants, and would explore regulation if substantial progress was not made by the middle of this year.

Australian Small Business and Family Enterprise Ombudsman, Bruce Billson, said their research had found around $800 million of additional charges were being imposed on small businesses in Australia, simply because the least-cost routing had not been activated.

He said more work needed to be done to educate and empower small businesses to enable LCR.

"One of the things that we found in our research is that amongst those merchants who may have a least-cost routing option available, nearly half hadn't activated it. And for many it was because they didn't even know they had an option," Mr Billson said.

"And so one of the things that we've been urging is for the banks and other financial institutions who are the ones that have the direct relationship with the merchant, should be up and about informing the merchant about the choices and options that are available to them and then enabling the activation of least-cost or lesser-cost routing in the most convenient way they can."

Mr Kelly said the benefit of LCR still did not flow to the merchants - or customer - who were still paying a higher rate to their payment providers for all transactions.

"It's a loophole," Mr Kelly said.

"The cost to the bank being so low for a debit transaction, but it being marked up to several-hundred per cent is completely preposterous."

An Australian Banking Association spokesperson said merchants had plenty of competitive options around transaction fees.

"Australia's payments system is now highly competitive and merchants have plenty of choice of payment service providers to suit their business," the spokesperson said.

"It's merchants that decide the payment plans that suit their individual circumstances. Some businesses may prefer the convenience of a flat rate whilst others may choose to select the payments network."