Banning card surcharges will make paying simpler – but not necessarily cheaper

From October 1, 2026, Australians will no longer pay a fee for debit, prepaid and credit payments using eftpos, Mastercard and Visa cards. The Reserve Bank of Australia estimates the change could save consumers around $1.6 billion a year.

The case for change sounds simple enough: One price, no add-ons, no surprises at the end of a transaction.

But credit card companies, banks, restaurants and others are already warning they could raise fees and prices in other areas once card surcharges are banned.

That means we could see costs shifting, rather than falling.

How a card payment actually works

Most people experience paying by card as a direct exchange with a shop. Behind that tap, several other parties are quietly collecting their share before your money reaches the shop.

When you pay at a cafe, your bank approves the transaction and releases the funds. The cafe’s bank receives that money on the business’s behalf. Between them sits the card network – usually Visa or Mastercard – routing the payment from one to the other.

Then there’s the payment service provider, the company behind both the software processing the transaction and the physical device you tapped your card on.

Each of them charges for what they do. When a business applies a surcharge on card payments, it’s trying to claw back some of these costs.

The single largest charge is the interchange fee, currently capped at 0.8 per cent of your purchase for credit cards and 0.2 per cent for debit cards, paid to banks.

The Reserve Bank regulates most of these fees (other than the payment service provider fees) and its October changes aim to bring down those costs.

(These changes won’t apply to American Express cards or ‘buy-now pay-later’ like Afterpay, which will be looked at in a separate public consultation starting in mid-2026.)

What’s changing from October

From October 2026, surcharges on most debit and credit card transactions will be banned.

Interchange fees paid to banks will be capped below their current levels. For credit cards, those fees will drop from 0.8 per cent to 0.3 per cent.

And for debit cards, the fee will drop from the current rate of either 10 cents or 0.2 per cent, down to either 8 cents or 0.16 per cent (whichever is lower).

That’s expected to cost banks an estimated $660 million a year.

The Reserve Bank (RBA) decision was based on a clear principle: What the price tag says should be what the customer pays, regardless of how they choose to pay.

The RBA said they were responding to “strong feedback” from a public survey, which found three-quarters (76 per cent) of people wanted surcharges to end.

Which consumers look set to pay more

The RBA estimates a surprisingly low share of merchants – just 16 per cent in 2024/25 – add surcharges for card payments. But that’s doubled since 2022, making it harder for consumers to avoid unexpected, costly surcharges.

The central bank acknowledges that from October, businesses that have had surcharges “may increase their advertised prices to cover the cost of accepting card payments”. But it expects those price rises “to be negligible”.

In practice, the RBA is saying that if you pay a card surcharge at your local cafe today, expect its prices to rise slightly in October, once surcharges are banned. If you always pay by credit card now, you might not notice any difference then.

But if you’re in the minority of Australians who pay with cash, or insert a debit card into the eftpos machine to pay lower surcharges, you could end up paying slightly more at some businesses from October than you do now.

The Australian Restaurant and Cafe Association has said: “We expect menu prices will increase on October 1 and for any business that does not pass costs on, their profit will drop. Consumers will now pay $5.10 for a coffee that used to cost them $5.08, and the biggest losers are cash payers.”

Australian banks have also said they may have to make up their losses with higher card fees, higher rates or shorter interest-free periods.

Lessons from overseas

The European Union and United Kingdom banned card surcharges back in 2018, arguing it would save consumers money and avoid nasty surprises at the checkout.

Past studies from the Netherlands showed that when extra card fees are removed, people are more likely to pay by card. Widely-cited research by economists David Evans and Richard Schmalensee explains that in payment systems, when pricing changes like this, the costs don’t disappear – they just move around.

The real lesson from what the EU has done is that beyond banning surcharges, you also need to give people better options to avoid card payments completely.

Other countries like India, China, Brazil and Singapore have already made it easier to pay without a card than Australia.

Hard choices for smaller businesses

The RBA’s move to cap interchange fees should ease some cost impacts, both for consumers and for business. The RBA estimates businesses will save $910 million through lower interchange fees.

For larger businesses, the new interchange cap is largely beside the point. Their transaction volumes already gave them the leverage to negotiate rates directly with card networks – well below the ceiling the RBA has now set.

According to the RBA, 89 per cent of large businesses are not surcharging customers now.

The RBA says most small businesses will be better off from October, as 85 per cent of small merchants don’t add a surcharge now.

For smaller businesses that have had surcharges – like a local pharmacy or independent grocer – the good news is their overall card fees will now be lower. But they won’t vanish entirely.

That leaves them with limited choices: absorb a hit to margins, or lift prices.

What to expect in October

From October, paying by card will feel cleaner. One price, no additions. That will feel like a genuine improvement.

But a simpler checkout is not necessarily the same as a cheaper one.

Whether shopping actually becomes less expensive is a different question – partly depending on whether you’re someone who’s been avoiding surcharges by paying with cash, but also on how banks and businesses respond by raising other prices.

About the author: Vibhu Arya is a PhD student at UTS Business School of the University of Technology Sydney and Wen Helena Li is a senior lecturer at UTS Business School of the University of Technology Sydney.

• This article is republished from The Conversation under a Creative Commons license. Read the original article.

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