· In short: Australians are losing nearly a billion dollars a year in card surcharges, which can be substantially reduced when least-cost routing is properly implemented.

· Least-cost routing, or LCR, is a Reserve Bank scheme aiming to cut card payment processing fees for businesses and see savings passed on to consumers.

· What's next? RBA governor Michele Bullock has threatened to mandate LCR if the industry does not meet the target of 80 per cent uptake by the middle of the year.

Like many Australians, Alex prefers card over cash to pay for his lunch.

He has just paid 21 cents in surcharges for a banh mi and a cup of coffee.

From there, the fees keep accumulating.

"It depends on what I buy, but roughly around $200 a year in surcharges, which is substantial," the IT professional from Melbourne told The Business.

"I have a home loan, so every dollar counts … it all adds up and you get less in your pocket."

Analysis based on data from the RBA reveals Australians are losing $960.26 million a year in surcharges when they pay with their cards instead of using cash.

Surcharge is legal but consumers not coping well

Unlike in the UK and the European Union where card surcharges are banned, retailers in Australia are allowed to recoup their payment costs through surcharging their customers, as long as they are not making a profit out of it.

Alex said he had noticed more businesses had started surcharging in recent years.

"We're moving more towards a cashless society. There are even places that don't accept cash anymore, so what options do you have?" he asked.

"Occasionally I checked with the merchants how much they charge, and they point to a small sign with a percentage fee, but it's really hard to work out how much that is for your purchase."

Small businesses struggle with payment costs

It can be confusing. And while tap-and-go is easy, it can often mean you pay more in surcharges.

Most debit cards — which is the most frequently used payment method in Australia — are dual-network cards, meaning they have a Mastercard or Visa logo on the front and eftpos logo on the back.

If you insert or swipe your card on the terminal, you can choose the cheaper eftpos network. If you tap your card, the transaction will be automatically routed to the more expensive Mastercard or Visa network.

Larger businesses such as department stores and supermarkets do not surcharge because they can absorb the payment costs.

But smaller businesses which pass on the payment costs to consumers say they have been hit hard by high inflation and rising costs.

"Businesses are suffering a cost of doing business crisis," Luke Achterstraat, CEO of the Council of Small Business Organisations Australia (COSBOA), said.

"Small businesses in Australia, of which there are 2.5 million, are really struggling to turn a break even, let alone turn a profit."

A cheaper way of paying, but the take-up is sluggish

According to an RBA report, for a business, an eftpos transaction costs an average of 30 cents for a $100 purchase, or 0.3 per cent, while it's an average of 0.5 per cent for Visa and Mastercard debit transactions.

Mastercard and Visa credit card transactions cost 0.9 per cent while American Express and Diners Club cards are the most expensive networks with an average cost of around 1.3 per cent and 1.7 per cent, respectively.

To help cut card processing costs for businesses, who can then pass the savings on to consumers, the Reserve Bank has introduced an initiative called least-cost routing, or LCR, which means terminals in businesses will automatically default to the lowest-cost card network to process their debit transactions.

In theory, it should put downward pressure on payment costs, and the flow-on effect should be smaller surcharges for consumers.

But, so far, only 64 per cent of business terminals are enabled with LCR. The RBA has said the take-up is "disappointingly" slow.

Payment analysts say the hold-up lies with the banks because they make less money out of least-cost routing.

"They make more out of Mastercard and Visa than they can make out of eftpos," Brad Kelly, managing director of payments consultancy Payment Services, said.

"Simply put, there's no incentive for them, so they all drag their feet until they're made to."

Banks accused of 'exploiting' the gap

Mr Kelly said banks and payment providers were "gouging" merchants by charging them a flat rate, but not all payment types cost the same amount to process.

"They're being opportunists and they're taking advantage of a situation that we have, which is unique in Australia, which we have a very, very low-cost debit network called eftpos, which competes with Visa and Mastercard.

"They're taking these cheap eftpos transactions, loading them up to 1.5 or 2 per cent, and then subsidising Visa and Mastercard and American Express. So it's a cross-subsidy.

"They're exploiting it. The cost to merchants and consumers is well over a billion dollars."

The flat rates offered by the big four range from 1.1 per cent to 1.4 per cent. Australian payment services provider Tyro charges 1.4 per cent, while global giant Square charges 1.6 per cent. 

The banking sector argues some businesses prefer a flat rate for certainty and, ultimately, it's up to businesses to choose least-cost routing.

"The industry feels very strongly that businesses should be the ones who make the choice," Anna Bligh, the CEO of the Australian Banking Association, said.

"We've seen a 13 per cent drop in the last year in banks' fees and charges across the board. The bank fees and charges have been coming down every year for the last 10 years.

"And I do think that those businesses who want to reduce their fees should introduce least-cost routing. It's available, every bank offers it."

The Commonwealth Bank told the ABC that its flat rate (1.1 per cent) was a "simplified pricing option" and was "the lowest in market".

ANZ Worldline said it would continue to "prioritise" LCR for its merchants, while NAB said "LCR is not always the cheapest option for every small business".

Square told the ABC its pricing is "simple and transparent" and the flat rate includes extra services besides payment processing.

And Tyro said LCR was "automatically enabled for new merchants" and the majority of our merchants do not opt for a flat fee".

RBA threatens to mandate LCR

RBA governor Michele Bullock has threatened to mandate LCR by the middle of the year if the industry doesn't meet the target of 80 per cent by then.

The small business sector welcomes that mandate, saying the scheme will benefit both small businesses and consumers.

"Some of the feedback we've had from a small business in Tasmania was over $100,000 in a year that they've saved," Mr Achterstraat said.

"It's a complete no-brainer in this environment where the cost of doing business is quite high.

"We really need the payment providers and the banks to really promote these opportunities for least-cost routing, make it as easy as possible to opt-in."

But Ms Bligh said a mandate would be "overly simplistic".

"Businesses choose a package for a range of reasons and merchant fees is only one part of the package — the rental cost of the terminals comes into the package and a range of other services," she said.

"I do think we're going to continue to see growth in that least-cost routing space. But I don't expect you'd ever voluntarily get to 100 per cent because some businesses have parts of their package that they value higher than a slight reduction on the fee."