You head to the register at the cafe to pay for your lunch, swipe your card and suddenly realise you've been hit with an extra small but unexpected charge.

It might be listed on your receipt as a service or merchant fee, but either way it's because you've used a credit or debit card.

With the pandemic accelerating the use of cards instead of cash — only 13 per cent of Australians use cash, dropping from 27 per cent in the past five years — these extra charges have become mainstream.

However, as was highlighted by National Australia Bank chief executive Andrew Irvine during a parliamentary inquiry into bank charges last week, they are often applied, in varying amounts, by businesses for reasons not always in line with their original purpose.

Irvine slammed as "outrageous" a 10 per cent surcharge he was forced to pay when he recently bought a cup of coffee at a Sydney cafe. "I don't like the lack of transparency and lack of consistency," he said.

But most Australians are making these extra payments every day, without question. So how did this end up happening — and what can you do about it?

Card surcharges in Australia

At the start of this century, payments for goods and services were mainly made by cash, paper cheques, credit and debit cards.

The first two of these options would eventually be deposited into a bank account by the merchant who ran the business. The latter two would be processed by the bank or financial institution which would charge the business a merchant service fee.

For debit cards this might be a fixed fee. But for credit cards it would be proportionate with the value of the goods or services.

The Reserve Bank of Australia became concerned the use of credit cards was greater than that of debit cards and introduced surcharging in January 2003. The intention was to lower the cost to the merchant of accepting debit cards and change customer behaviour.

This has been achieved, as both the volume and value of paying by debit cards now exceeds the volume and value of paying by credit cards.

However, the reality in 2024 is that card surcharges have become commonplace, and in a wide variety of payment situations.

It's estimated to cost us billions

It is difficult to calculate the total cost of surcharging to Australian consumers since they became legal more than 20 years ago, because the rates charged vary widely.

But at last week's inquiry, Labor MP Jerome Laxale suggested it added up to $4 billion in the last year.

Surcharges can be imposed by small to medium enterprises such as your local cafe, doctor's surgery, your energy supplier, or when you use a card to pay your council rates.

As an example, my rates are payable by card, with a surcharge of 1.10 per cent for Mastercard and Visa credit, and 0.55 per cent for eftpos and Mastercard and Visa debit cards.

When surcharges can be applied

Many merchants charge the same rate for all their card payments and some fail to alert customers to the extra fee before accepting the payment at their terminal, which they are required to do.

Indeed, even on a receipt for payment, the surcharge can be described by the merchant as a "handling" or "merchant" fee.

The Australian Competition and Consumer Commission (ACCC) regulates surcharging and demands the merchant prove a surcharge is justified.

Furthermore, the ACCC says if there is no way for a consumer to pay without paying a surcharge — that is, they can't pay by cash or cheque — then the business must include the surcharge in the displayed price.

Penalties for misuse

The ACCC can take merchants to court to enforce these regulations and there have been some examples of this in recent history.

In July 2021, Nine Entertainment paid penalties totalling $159,840, plus $450,000 redressing customers, for charging subscribers and advertisers excessive surcharges.

The ACCC specifies that the surcharge must not be more than it costs the merchant to use that payment type.

As guidance to the merchants, it also offers the average costs for different payment types: eftpos less than 0.5 per cent, Mastercard and Visa Debit 0.5per cent–1per cent and Mastercard and Visa credit 1 per cent–1.5 per cent.

However, despite the ACCC setting guidelines for the amounts that can be charged, many surcharges are above this guidance and in some cases more than 2.0 per cent for all cards.

Some merchants do charge different surcharging rates, depending on the cards they accept, be it eftpos, Mastercard or Visa. In theory, the surcharge rate is meant to be determined by the merchant service fee, which is negotiated between the merchant and their bank.

Larger merchants, such as the supermarkets, department stores and energy companies, can negotiate low rates (reportedly as low as one cent a transaction). But smaller merchants with less negotiating clout will have higher service fees.

The arrival of new payment players, such as Square and Stripe, has offered businesses an alternative banker of card payments, which can then use surcharging as part of their merchant service fees.

Surcharging overseas

The European Union already has a long-standing ban on surcharging, while in the United States, surcharging is illegal in some states.

Other countries, including the United Kingdom, have tried surcharging on card payments, only to abandon them as it was rorted by some merchants and became an unnecessary expense for consumers.

A statement released by the UK Treasury when it banned the practice in 2018 described surcharges as "hidden charges for paying with a debit or credit card, which will help millions of UK consumers to avoid rip-off fees when spending their hard earned money".

What can you do about it?

Before surcharging was allowed by the Reserve Bank in January 2003, acceptance by merchants of payments was just another cost of doing business. And it seems many consumers have just accepted surcharges as part of their transactions.

There are ways to avoid them, the most obvious being to use cash. Using eftpos involves charges, but they are less than those imposed on credit and debit cards.

The Reserve Bank is working on implementing a so-called "least-cost routing" system that defaults to the lowest cost network when processing payments. Unfortunately, this is yet to be widely adopted by businesses.

Steve Worthington is an adjunct professor at Swinburne University of Technology. This piece first appeared on The Conversation.