The $1b hidden cost of going cashless

But less cash in customer pockets means less profits for small business owners, like Ms Salamon.

Ms Salamon said her Newcastle cafe incurs roughly a 1.4 to 1.5 per cent charge on each tap and go transaction. The fees sit around $550 per month, which is a week's worth of employee wages at the cafe.

"It's not an exorbitant amount on a single transaction, but it does start to add up with numerous daily purchases," she said.

She said as a new owner taking over an established business, she did not want to rock the boat and put prices up. She said LightSpeed, the point of sale service provider, suggested a customer surcharge to offset the merchant fees but she was hesitant.

"I was worried it would promote a profit over people type of thing," she said. "I wasn't comfortable how it might reflect our reputation in the community."

Australians are paying almost $1 billion a 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. "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 Salamon said after two months of ownership, a customer surcharge is something that plays on her mind.

She said right now merchant fees are a loss for her and she might reconsider surcharges next financial year.

Ms Salamon said she doesn't think there is enough transparency about how the fees are calculated. "We are already paying services and fees for the EFTPOS subscription, why does each transaction fee come with a high rate?" she said.

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," he 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 2023. The RBA has warned in the past it expected providers to make progress on enabling LCR for merchants, and would explore regulation if progress was not made this year.

Australian Small Business and Family Enterprise Ombudsman, Bruce Billson, said around $800 million of additional charges were being imposed on small businesses in Australia because the least-cost routing had not been activated. He said more work needed to be done to educate 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."

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

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