The surcharge ban isn't a saving. It just moves the bill onto everyone

The points were never free

Somebody paid for those frequent flyer points, and it was not the person collecting them. Every time a premium rewards card was tapped, the merchant’s bank handed a fee to the cardholder’s bank, and a slice of that came back to the customer as airline miles or complimentary travel insurance. The merchant recovered it from prices, or from a surcharge. So the bill landed on everyone who shopped there — including the pensioner paying cash, who collected nothing.

That is why the news that the Commonwealth Bank has wound up its Qantas Frequent Flyer association, and that major banks are trimming perks and lifting card fees ahead of 1 October, is not a scandal. It is the reform working. A customer of forty years describing his letter as a Dear John note is the sound of a cross-subsidy being switched off. If none of this hurt anyone holding a rewards card, the interchange cut would not be doing anything.

The saving that isn’t one

The harder question is the other half of the package. From Thursday, businesses cannot add a surcharge to card payments on the eftpos, Mastercard and Visa networks. Consumers are said to be spared about $1.6 billion a year in surcharges. But a surcharge is not a cost. It is a cost made visible. Ban the line item and the cost does not evaporate; it goes into the price of the coffee, the taxi fare, the swimming lesson. The swim-school operator quoted in the coverage says plainly that he will put his prices up. That is the mechanism, not an exception to it.

So the $1.6 billion is a transfer, not a saving. Before, card users paid it. Now everyone pays a share, spread across the base price — including customers on debit and cash, who impose lower costs on the merchant and now subsidise those who impose higher ones. The only genuine reduction in resources consumed by the payments system is the interchange cap falling from 0.8 to 0.3 per cent, and that shows up as lower bank revenue, which the banks are already recovering through higher card fees and thinner perks.

Australia just gave up its best idea

The right to surcharge was this country’s distinctive contribution to payments regulation. Other jurisdictions capped fees; Australia capped fees and let merchants price the difference, so that an expensive card cost more to use than a cheap one at the point where the decision was made. Imperfect, often abused, but it was a live price signal in a market notorious for hiding prices.

Now there is no signal. A customer tapping a high-cost premium credit card and a customer tapping eftpos face the same price at the counter, even though one costs the merchant several times more to accept. Over time that pushes volume towards the expensive rail, which raises average acceptance costs and forces the regulated cap to do more work. The Reserve Bank has replaced a decentralised pricing mechanism with an administered number — and an administered number has no way of telling you it has drifted. It will be right on the day it is set and slowly wrong thereafter, and nothing in the market will report the error.

The case against this argument

The best defence of the ban is that surcharges were never a real price signal in the first place. You learn the surcharge after you have ordered, queued and committed; you cannot walk out over thirty cents. Small merchants on blended payment plans frequently surcharged at rates bearing little relation to the cost of the specific card, and a flat fifty cents on a three-dollar coffee is a rate no regulator would have approved if it had been written as a percentage. On that reading, abolition simply moves the cost to the menu price, where competition between merchants — which is real — disciplines it.

That case is strong, and for small transactions it is probably right. But it is an argument that surcharging was badly policed, not that it was the wrong instrument. The proportionate remedy for surcharges above true cost is enforcement and a cost-based ceiling, not abolition. And the defence is weakest exactly where the money is largest: on a car, a tax bill, a tradesman’s invoice, the customer has plenty of time to choose the cheap rail and now has no reason to.

What is left to hold the number honest

Having removed the market’s ability to price card acceptance, the Reserve Bank owns the price. That is a defensible choice, but it comes with obligations it has not yet visibly accepted: to show that the interchange cut actually reached merchants rather than being absorbed by the intermediaries that sit between the card networks and the corner shop, and to show what merchants are really paying once surcharging is gone and the only bill is the one their acquirer sends them.

Banks will comply with the cap. Whether small merchants — the ones on blended plans who were over-surcharging because they were being over-charged — see 0.3 per cent instead of 0.8 is a separate question, and nobody in the payment chain has an incentive to answer it.