Earlier this year William Xia, owner of Sourdough Cafe in Sydney, decided to do away with surcharges and minimum spend rules for card payments.
Four months later he’s absorbing the cost of processing an increasing amount of card payments, but has no regrets — sales are up and business is good.
“We have a lot more customers coming back to us,” Xia tells SmartCompany.
“Before, customers walked away so many times, and they didn’t come back … [now] we have a lot more customers coming back to us.”
After ditching the minimum, Xia explains cash has quickly become the exception rather than the rule at his cafe, with payments via phones and smartwatches becoming particularly popular in recent months.
“I wear a smartwatch, and I didn’t even know you could do that,” he says.
Xia is one of more than 500 small business owners who have ditched card surcharges and minimum spend requirements in recent months as part of a national campaign organised by finder.com.au.
Launched last month, the fee-free shop campaign has been designed as a push to get businesses on board with cheap and easy digital payments, amid an explosion in digital payments technology.
A Finder survey of 2,012 Australians recently found 94% think card surcharges are a rip-off, while more than two-thirds (68%) said they’d back out of a purchase if they discovered a surcharge.
As University of Tasmania retail expert Louise Grimmer explains, consumers are demanding better payment terms as not carrying cash becomes more common.
“When there were more of us using cash, businesses were able to charge a surcharge and on the whole many customers didn’t complain,” she tells SmartCompany.
“Now that most people don’t want to pay with cash … they expect to be able to pay with credit or debit card wherever they do business [and] the practice of charging a surcharge is seen as redundant.”
Business bears the burden
But as customers vote with their feet, small business owners are being asked to absorb card processing costs.
The Reserve Bank (RBA) estimates it costs merchants about 0.5% of a purchase to accept debit cards, 1-1.5% for credit cards and about 2-3% for American Express.
Xia says he’s paying about 1-1.4% of a $3 coffee in merchant fees, which he concedes is an impost on business.
“I see it as a balance … everyone is going digital and if we didn’t do it we’d fall behind,” Xia says.
Xia believes he’s made up for the increased costs with higher sales, having used the policy change as an opportunity to update his businesses’ payment systems.
The new technology has eliminated other costs, such as receipt printing.
“We were printing out thousands of receipts [each day], then we realised we could work around it and not print them,” he says.
Regulation changes the game
For Xia, making it easier for customers has been seen as a response to competitive pressures, but for others, it’s been a costly exercise in regulatory compliance.
Last year new regulations came into effect which made it illegal for businesses to charge customers surcharges that exceeded the cost of processing card payments.
The change has caught out a series of well-known brands.
Last month Fitness First paid a $12,600 fine after being issued with an infringement notice by the Australian Competition and Consumer Commission (ACCC) over its surcharge policies.
Others, such as Naomi Simson’s Red Balloon, have also been caught out, with the ACCC revealing earlier this year it has received over 3000 complaints about excessive surcharges since the rules came into effect.
Finder estimates surcharges for coffee purchased alone are collectively costing Australians $100 million each year, a figure it hopes to decrease with its campaign.
Despite concern business is getting the short end of the stick, Xia is encouraging others to jump onboard as cash becomes less prevalent.
He explains customers are leading the way, and business needs to follow.
“As a business owner, I want to encourage others.”
A spokesperson for American Express said that its merchant fees have recently been reduced to 1.5-2%.
This article was updated at 12:30PM on September 3 to include additional information about American Express merchant fees.