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When surcharging was allowed by the RBA in 2003, it was for the right reasons: to encourage cheaper forms of payments, and to make payments fairer.

Surcharges are what economists call a “price signal”, a way to change consumer behaviour. When consumers chose to use a type of payment that costs the business more to process, such as a credit card, surcharging means the business can pass on the cost of accepting that payment through a separate fee.

The idea was that if a retailer tells the shopper it will cost more to pay on credit, they’ve got the incentive to use a cheaper form of payment.

As well, allowing surcharging was aimed at reining in a hidden subsidy for the generally wealthier shoppers who used credit cards to amass reward points.

Before surcharging was allowed, these shoppers had an incentive to use credit cards to rack up points, but the cost of those points was being spread across all shoppers (including generally less wealthy consumers who used cash or debit cards).

Fast forward two decades, however, and the regime is not working as intended, thanks to some major shifts.

Most obviously, surcharges feel impossible to avoid. Why? Because use of cash – which is surcharge-free – has collapsed. And even if you want to use cash, it’s harder to find because so many ATMs have been removed.

Payments expert Lance Blockley, managing director of The Initiatives Group, points out that in 2003, cash was used for more than 60 per cent of transactions in the economy, and cards were in the minority.

Fast forward 21 years, and we’ve gone in the opposite direction. Card payments dominate, and cash is used in about 10 per cent of transactions, or less. These trends look set to continue as ATMs are removed, branches are closed, and people live more of their financial lives online.

The costs of handling cash – such as trucks and depots – are also being spread over a smaller number of transactions, putting a strain on the whole cash distribution system.

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“Cash is in the tiny minority in terms of transaction volumes, and, in proportion to this activity, the cost of moving cash around the place … has gone through the roof,” Blockley says.

Another big issue, the RBA says, is that shoppers don’t always know if they’re going to be hit with a surcharge, or how much it will be.

Tap-and-go payments are hugely popular because they save time, but their rise has also meant that you often don’t know the dollar amount of the surcharge until after the payment has been processed.

In other cases, merchants are probably overcharging – something the competition watchdog wants to crack down on.

Finally, payment businesses including banks have introduced changes that undermine the intent of surcharging.

Payment companies have increasingly offered systems for merchants that whack the same percentage surcharge on all payments – credit or debit. These are simpler for the merchant and therefore appealing. But because they charge people the same fee for using debit or credit cards, they no longer reflect the higher cost of paying on credit.

In economist lingo, they dampen the price signal to consumers.

The RBA says some payment companies are also charging merchants higher fees – which end up being passed on directly to consumers as surcharges – for things unrelated to card payments, such as inventory management services. Once again, that’s now how the regime was meant to work.

So, what to do?

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The RBA has raised a bunch of ideas. These range from a simple ban on all card surcharges, to more of a selective ban on just debit card surcharges, to a cap on surcharges, or a tightening of the rules in other ways.

Importantly, it will also look at other ways of bringing down payment costs. Without getting too far into the weeds, this should include putting downward pressure on “interchange fees” – fees paid by the merchant’s bank to the shopper’s bank every time you make a card payment.

Banks and global payment giants were quick to stake out their positions last week, making the point that electronic payment systems have costs attached to them, which is fair enough.

But it’s also clear that the current regime isn’t working as intended, because it’s no longer sending consumers a useful signal to use cheaper payment methods.

Ross Gittins is on leave.

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