The new card rules do not stop businesses passing on transaction costs. They simply require the advertised price to be the price customers actually pay.
I seem to recall that somewhere in his weighty and hardly ever read tome, The Wealth of Nations, Adam Smith said something about the habit of merchants was to hatch plans designed to hoodwink the public whenever they (the merchants) got together. The response of the Australian small-business lobby to the abolition of credit card surcharges looks like it could be a manifestation of just this propensity.
The Reserve Bank of Australia’s (RBA) package of card surcharge reform took effect this month. Businesses are no longer permitted to add a card surcharge to your bill at the point of sale when you pay for goods and services by card.
The advertised price, the menu price as it were, will in future be the price you actually pay. Economists sometimes call the amount you actually pay the effective price. No more finding those pesky card charges added to everything you purchase by card at the point of sale – from your morning coffee to the flights and accommodation for your annual holiday.
This is perfectly sensible, if rather timid, reform. But instead of it being received as the small but positive improvement in financial transparency that it represents, it has been accompanied by an outbreak of what can only be described as an induced mass hysteria. The small-business lobby, almost overnight, turned this molehill into a mountain. The media loved it.
But first a few words about the card charges paid by retailers on card transactions are in order.
The charges to which a retailer is subject if they decide to accept card payments consist of a number of elements. There is an interchange fee paid by the retailer’s bank to the cardholder’s bank to cover the cost of the transfer of funds from the latter to the former. Then there are things called card scheme fees. I shall not mention how much it costs to acquire a physical machine to process a card transaction.
Card scheme fees are per-transaction fees set by card networks (such as Visa and Mastercard) and their level depends on all sorts of things – like whether the transaction is made in person or online, the kind of card involved (say ‘gold’ or ‘platinum’ rewards cards), the value of the transaction, and the size of the retailer involved.
All these charges are bundled together to form the total merchant service fee. Given the many sources of difference that go to make up the merchant service fee – which bank, which card network, what kind of card and the like – that fee can vary between 0.5 per cent and 2 per cent. That is, at a maximum, up to 10 cents on a $5 cup of coffee.
So why are small businesses up in arms about the new card surcharge regulations?
They imply that the government has ‘banned’ them from adding these charges to their bill for card transactions. They suggest that it is impossible to ‘pass on’ the card charge because they operate on razor-thin profit margins. They claim that they are now being ‘burdened’ by having to ‘absorb’ additional costs – to ‘pay for’ the cost of the RBA reform.
The problem is that not one of these claims has any merit.
A trivial but not irrelevant point is that it was not ‘the government’ that was responsible for the reform, it was the RBA. Nor is there any ‘ban’ on ‘passing on’ card fees to the customer. It is just that the fee must be incorporated into the advertised price of the good or service, not added to the advertised price at the point of sale. In short, the advertised price and the effective price must now be the same.
The most misleading claim of all, however, is that the slender margins under which some small businesses operate mean that they cannot add card costs onto the price without going broke. To understand the chicanery behind this claim, think of it this way.
On 30 September 2026 there were two kinds of small business. One kind added a card surcharge onto the transaction at the point of sale, the other kind did not. That is, the first kind of small business was already ‘passing on’ its card costs and the second was not. As of 1 October 2026, the first kind of small business can merrily roll along ‘passing on’ its card costs simply by blending them into its advertised prices, while the second kind of small business can merrily roll along as before.
Nothing need change. The first kind of business will be just as profitable and competitive as it ever was, as will be the second kind of business. Remember, that if the advertised price of your cup of coffee rises by more than 10 cents, and your retailer suggests that this is due to the ‘banning’ of the card surcharge, you are being swindled. Remember, too, that if the advertised price of your cup of coffee does not rise more than 10 cents, you have always been paying that thanks to the old card surcharge.
Into this febrile environment of mistaken perceptions steps the Australian Taxation Office (ATO). It ruled that as of this December it will no longer accept credit card payments for the settlement of tax obligations. Small-business representatives spat the dummy. Small businesses were being asked, they spluttered, to ‘absorb’ card costs while the ATO was refusing to do the same.
The sheer arrogance of this claim is mind-boggling. Any small business that previously added a card surcharge on purchases had always ‘passed on’ its card charges – and they can continue to do so. These businesses never ‘absorbed’ the card fee and they will not ‘absorb’ it after the reform. The unfortunate use of the word ‘absorb’ by the RBA did not help keep things clear – they meant ‘absorbed’ into the advertised price, not that card costs could not be ‘passed on’.
This outbreak of concerted deception by the representatives of small businesses has been helped by the extraordinary level of government incoherence that has surrounded card surcharge reform.
The prime minister’s social media accounts glibly chortled the other day how wonderful the RBA reform would be for everyone – posting that it would save them money. Given the obvious ignorance of what this financial reform was all about, the PM’s office would be well advised to ensure in future that the people they hire to pen those social media posts have at least taken a high-school class in economics.
Then, only a few days ago, there was the unedifying spectacle of three or four government ministers saying entirely different things about the ATO intervention. Sometimes it even seemed that one and the same minister was saying different things at the same time.
In the midst of all this chaos, enter the treasurer. He announced that there would be a delay to the ATO’s edict to allow for ‘further consultation’. It has to be said that if the government didn’t know what the surcharge reform was all about in the first place, it is hardly surprising that the rest of us have been taken for fools by the bleatings of the small-business lobby.
Of course, it is true that small businesses face severe cost pressures.
Their rents have risen, their costs of borrowing have risen, their energy bills are confronting, the costs of the goods and services they require for their existence are rising – and a few of them have cash-flow problems. My local coffee shop has even seen the cost of coffee beans skyrocket.
We are also told that when small businesses are faced with a large tax bill some may resort to expensive credit-card debt to solve their problem. The 5 per cent of small businesses that the ATO says pay their taxes with a credit card have presumably not heard of business overdraft accounts or paying by regular instalments (something which can easily be arranged with the ATO).
What is not true, however, is that small businesses are somehow alone in facing such problems. Everyone, everywhere, faces exactly the same cost pressures.
Ordinary Australian families face rising rents, their costs of mortgage borrowing have risen, their energy bills are confronting, the costs of the goods and services they require for their existence are rising – and not a few of them have cash-flow problems which lead them to resort to expensive debt arrangements (think: payday loans).
Yet as things now stand, 5 per cent of small businesses have been given a $200 million subsidy for six months by the treasurer – and this subsidy is being paid for by everyone’s taxes. A great swindle indeed.
Murray Milgate
Murray Milgate is a Life Fellow of Queens’ College at the University of Cambridge. He is co-editor and co-creator of the award-winning original New Palgrave Dictionary of Economics and of The New Palgrave Dictionary of Money and Finance. He shared the Columbia University’s Eccles Prize for Excellence in Economic Writing and his After Adam Smith (Princeton University Press) was the winner the David and Elaine Spitz Prize for liberal and democratic theory. His most recent book, The Fall and Rise of Keynesian Economics, was published by Oxford University Press.