AHA Voice: The hidden surcharges emptying your wallet

The old-fashioned wallet, and the physical cash inside it, is becoming an increasingly rare sight in hotels and accommodation venues.

The use of cash had been slowly declining for years, but the COVID-19 pandemic supercharged the use of digital transactions.

When businesses temporarily stopped accepting notes and coins, it changed patron behaviour. People quickly got used to tapping a card, phone, or smartwatch, and the habit is here to stay. The Reserve Bank of Australia estimates Australians now use cash for only 13 percent of transactions, down from 27 percent in 2019.

The convenience of electronic payments is great for the customer experience – it’s quick, easy, and you don’t have to visit an ATM – but it comes at a cost.

With the increase in digital transactions comes a rise in credit card and EFTPOS merchant fees, and this is particularly true for hospitality.

Pubs, for example, have a high turnover of hundreds of small transactions each day, most of them done with tap-and-go cards.

The RBA estimates the average cost of processing payment methods to be less than 0.5 percent for EFTPOS, between 0.5 percent and 1 percent for Visa and Mastercard debit cards, and between 1 percent and 1.5 per cent for Visa and Mastercard credit cards.

So, for example, on an $11 pint of beer at the pub, the total amount you'll pay with a 1.5 percent surcharge will be $11.17. A fraction of this money goes to the business’s bank account, a little goes to the payment network (most often Visa or Mastercard), but the majority goes to the payment platform or bank for processing the transaction. And these small amounts add up fast.

The Federal Government estimates major banks and card providers netted $4 billion in the past year from surcharges. The surcharge rate is determined by the merchant service fee, which is negotiated between the merchant and their bank.

Larger merchants, such as supermarkets, department stores, and energy companies, can negotiate low rates. But smaller businesses, with less negotiating power, are stuck with higher service fees.

High merchant fees eat into profit margins, and businesses need to find a balance when passing these costs on to customers.

Least Cost Routing (LCR) provides potential to bring down payment costs for debit card transactions, and the RBA has been very vocal in calling on banks and payment providers to offer LCR to merchants.

In the past, customers would insert their debit card into a terminal to make a payment and were asked to select which network to use via CHQ or SAV buttons, or the international network by pressing the ‘Visa Debit’ or CR button.

When a customer makes a contactless payment by tapping, the transaction is automatically routed to the default network programmed on the card, which is typically the more expensive international network.

The Reserve Bank of Australia estimates Australians now use cash for only 13 percent of transactions

LCR essentially sets the default to the cheapest network.

Hotels should be actively inquiring with their banks about LCR options and whether it is right for their business. They should always review surcharge rates, negotiate, and shop around where possible.

As the cost of living crisis deepens, the RBA has brought forward its review of surcharging and plans to release a consultation paper by the end of the year.

The RBA review will look into whether surcharging should be banned altogether, as it is in Europe and the UK.

This would force small businesses to absorb the costs and pass them on through general pricing, rather than the current model of adding them on top of the price of the product.

The rationale is that it allows a clearer price-on-price comparison, which may make sense for large retail, but not for hospitality.

The AHA and our sister organisation, Accommodation Australia, support the status quo. We support transparency because we want customers to see exactly what they are paying and why.

We don’t want the person behind the bar blamed for the increased cost of a schooner when the venue has no control over it and doesn’t gain extra profit.

For the consumer, the easiest way to avoid any card surcharges is to dust off the old wallet and pay for everything using cash.

By Stephen Ferguson, CEO, Australian Hotels Association