Banning the card surcharge didn't remove the cost.

Plenty of Australians are up in arms about the Albanese government's credit card surcharge changes. As I wrote back in August, they are right to complain: the RBA's reforms were unnecessary, and were guaranteed to have unintended consequences. That's because capping interchange fees and banning surcharges is a form of price control, and as we all know, price controls don't reduce costs, they simply redirect them.

The whole exercise is something of a pretence of knowledge: it assumes the regulator, the RBA, knows what the socially optimal level of interchange fees should be. Nobel Prize-winning economist Jean Tirole and co-author Jean-Charles Rochet studied the issue back in the early 2000s – when the RBA first regulated interchange fees – and concluded that "cost-based regulation of interchange fees relies on an erroneous, vertically organised, model of the payment card industry":

"[G]iven the profession's current state of knowledge, there is no reason to believe that the IFs [interchange fees] chosen by an association are systematically too high or too low, as compared with socially optimal levels."

It's not often economists get to see their warnings bear out in the real world so clearly, or so fast after the reform lands. In this case, there were two immediate responses. First was the redirection of a cost straight back to the government, with the Australian Tax Office (ATO) claiming it would cost taxpayers $200m a year in fees, so it banned credit cards outright.

That then triggered the small business lobby, some of whom use credit cards to pay their taxes because they're a good way to smooth volatile revenue against lumpy taxes: 55 days interest-free and a handful of Qantas points were close to the perfect package, at least until the government pulled the rug out from under them.

Enter Treasurer Jim Chalmers, who immediately caved by ordering the ATO to continue accepting credit cards. Pity the taxpayers who now have to pick up the tab; I guess in Jim's eyes they don't matter as much, because they're dispersed and not writing OpEds in newspapers, or giving interviews to reporters. Such carve-outs are a horrible way to conduct policy: the ban created a distortion, and now the political repair bill gets socialised. Given only what we've seen so far, the total deadweight loss of the reforms could be far in excess of the visible $200m taxpayer-funded Band-Aid for the ATO.

$200 million, by the way, which is a full 12.5% of the "$1.6 billion in card surcharges" each year that the Albanese government claimed Australians would never pay again, before a single retailer lifts menu prices or another bank enshittifies a credit card!

The second reality check came in the form of the humble coffee. It turns out that a decent number of coffee shops used the reforms as a trigger to raise their prices by around 10%, despite the surcharge rarely exceeding 1.5%. According to a community-driven surcharge tracker, 17% of the cafes it tracks now charge more for a flat white, by an average of 49c in October, and another 28% raised their prices in the lead-up to the change.

Few markets are more competitive than the local coffee shop, so it's not like they're colluding to fix prices. What's more likely is that coffee prices are relatively sticky due to menu costs. By that, economists mean businesses don't like raising prices if they don't have (e.g., due to printing menus, although it goes beyond that), sometimes "until the old price becomes completely untenable".

Removing the card surcharge instantly added it to a coffee shop's costs, and it was telegraphed months in advance. If you were a cafe that had been facing input costs – e.g. milk, beans, wages, rent – rising for months, but you hadn't raised your prices in a while, the reforms were a perfect opportunity to adjust your menu. So just like that, a $5.00 coffee becomes $5.50, a 10% increase that builds in the surcharge and any inflationary-driven price increases since the last menu update.

All in all, there's a good reason why Prime Minister Anthony Albanese was careful to say "from tomorrow, your morning coffee could be cheaper". Banning the surcharge didn't actually make your coffee cheaper, it just shifted some of the cost into shittier credit card options, some of it into your tax bill, and the rest into your coffee itself, regardless of whether you paid a surcharge before (pity the cash buyers).

And people wonder why Australia is in a productivity crisis...