Credit card rewards are likely to fall and businesses could hike their prices when Australia ends debit and credit card surcharges in October.

The reforms announced by the Reserve Bank on Tuesday will have ripple effects across the whole payments system. Here’s what you need to know.

Why are surcharges being banned?

Surcharges were originally encouraged by the RBA in 2003, when most Australians paid in cash. They aimed to encourage customers to use cash, which was cheaper to process, and cover the cost of credit card payments systems.

The system is no longer fit for purpose, the RBA has found. Australians are giving up handling cash, but surcharges have grown more common and started covering unrelated costs, with the share of businesses that are surcharging doubling to an estimated 16% in the last six years.

Nine in 10 consumers told an RBA survey they weren’t always sure when they were being surcharged, seven in 10 said they wanted the practice to end, and six in 10 said they would prefer to see all-inclusive prices instead of separating the card surcharge.

Will consumers benefit from the changes?

Yes and no.

Consumers will enjoy more transparency around prices, with no more checkout surprises. But some might be financially worse off because businesses and banks could hike prices or find other ways to charge customers for the lost card surcharge revenue.

Sign up for the Breaking News Australia email

Consumers will no longer have to pay a surcharge when they tap or swipe their card and will instead pay the price on the menu or the shelf – nothing more.

Visa, Eftpos and Mastercard are expected to ban businesses from surcharging at the RBA’s direction. Consumers pay about $1.6bn a year in surcharges.

Shoppers will be more likely to pay with credit or debit instead of cash, as they will no longer be charged extra for their card, the RBA said.

But while the Albanese government said the changes would “help with the cost of living”, consumers should not expect to recoup the charges. The loss of surcharge revenue could be balanced out by other changes – including menu price hikes (see below).

Credit card holders will probably face higher fees, according to the Australian Banking Association, which represents the biggest lenders.

“Consumers face the possibility of higher card fees, higher rates and shorter interest-free periods,” the association’s chief executive, Simon Birmingham, said on Tuesday.

This is the point of the reforms, the RBA says:the existing system put unfair costs on lower earners who mostly don’t use credit cards and miss out on their associated rewards systems.

What will change for businesses?

The reforms will hit businesses’ bottom lines, wiping out their surcharge revenue, while reducing, but not eliminating, the fees they have to pay for payment systems.

Menu and shelf prices will have to rise, the RBA says, adding about 0.1% to inflation.

Some businesses told the RBA hiking their prices could scare off customers. Cafes and restaurants, some of the biggest surcharge users, are among those most vulnerable to a looming reduction in household spending.

Businesses could instead switch to a cheaper payment service provider. The RBA found fewer than one in 10 businesses switched providers in 2024-25 and concluded it was important to encourage more switching.

Banks may also lose customers to other payments players like Square and Tyro, both of which welcomed the reforms. Tyro’s chief executive, Nigel Lee, said while banks were losing revenue, Tyro would lose costs as well, meaning the changes were neutral.

How will it work?

The central reform involves lifting the ban on“no-surcharge” rules for Visa, Eftpos and Mastercard, from 1 October. The RBA expects the three networks to respond by preventing merchants from applying surcharges – if they don’t, the government can legislate a specific ban on surcharging.

The second part involves cutting interchange fees, which banks and payment services impose on businesses when moving money between the customers’ and businesses’ banks.

Credit card interchange will be capped at 0.3% of transaction values, well below its current average of nearly 0.5%. The RBA expects the new cap will mean a more balanced market: some big businesses are charged less than 0.2% but small ones are charged up to 0.8%, which will no longer be possible.

The RBA will also lower the cap on debit interchange at 8c (or 0.16%) per transaction, which is not far above its current level. Credit will still be more expensive than debit, but not by as much.

The third part of the plan will kick in on 1 April 2027. Payment providers will have to publish their fees, a move designed to encourage businesses to shop around for the cheapest provider.

Banks and other payments providers will also have to show they are passing on the interchange fee reductions, the RBA said. The fees charged by Visa, Mastercard and Eftpos were of particular concern: the RBA raised concerns their “opaque and complex” fees could be “inefficiently high in the absence of meaningful competitive pressures”.

Who will pay for the changes?

Banks will foot the bill directly. The RBA expects the large card issuers will lose $660m in annual revenue, mostly from credit card interchange fees.

Smaller payments players, such as Square and Tyro, welcomed the reforms. Lee, the Tyro CEO, said while banks were losing revenue, Tyro as an intermediary would face lower revenue but lower costs as well.

Everyone else could still lose out, businesses are warning.

Angel Zhong, a professor of finance at RMIT University, said banks could absorb the hit to their profits but would more likely recover the lost interchange revenue by hiking other business fees or shrinking credit card rewards.

“They can be creative in terms of how they charge other areas of the banking services,” Zhong said.

Changes in banks’ fees could affect all businesses, even those that don’t already surcharge, and banks’ reactions would not be clear until October, Zhong said. NAB said on Tuesday it was considering its next moves, while ANZ, Westpac and Commonwealth Bank did not respond to questions.

Consumers could face even higher prices if banks unexpectedly increase businesses’ costs, the Council of Small Business Organisations Australia has warned.

“Banning surcharges before businesses can see lower fees and understand their costs is putting the cart before the horse,” said the council’s chair, Matthew Addison.

Businesses are also worried they won’t be able to surcharge costly American Express cards. Issues around networks like Amex, buy-now-pay-later services, mobile wallets like Apple Pay and Google Pay as well as e-commerce platforms are set to be addressed in forthcoming RBA consultation later this year.