The UK Ban on Card Surcharges Does Not Go Far Enough

The UK government’s ban for merchants from imposing “excessive” surcharges when customers use their debit and credit cards to pay began on Saturday, April 6th. Card surcharges have become a hotly debated topic over recent years. Many consumers feel it is unfair that they have to go through a complicated checkout process only to find out that there is a hefty fee for the privilege to pay, often irrespective of their chosen payment method. The ban is designed to outlaw such practices. But I don’t think it goes far enough. Under the new rules, payment surcharges will have to reflect the actual cost to the retailer of processing the card transaction. Yes, it’s a step forward, as it should start differentiating between types of payments. Debit cards cost less for the merchants, so customers should expect to pay less. However, I think that the new rules leave too much ambiguity and leeway for merchants to decide what they consider processing costs. According to the government guidelines, “for card payments the attributable costs could include direct costs such as:
  • The Merchant Service Charge, which traders pay to their acquiring bank.
  • IT and equipment costs used for particular means of payment such as card terminals, for example point of sale devices.
  • Risk management – active fraud detection and prevention measures which vary depending on their business and whether transactions take place face to face or remotely.
  • Processing fees such as charges for reversing or refunding a payment.
  • Any operational costs that can be separately identified as internal administrative costs arising from activities dedicated exclusively to card payments. For example, where traders opt to buy in services from intermediaries who provide equipment, fraud detection and processing services (especially online payments) for card payments, they should be able to recover the costs they incur through a payment surcharge.”
While the government expects that “in many cases, these costs could be evidenced by invoices from equipment and service providers,” in practice, I believe it will be difficult to prove what the true costs are for individual retailers, and those that want to continue surcharging, will be able to hide behind the rules. Regular readers of this blog know that the US has recently allowed surcharging. And the rules are pretty clear and unambigous – Visa only allows surcharging on credit cards, and the surcharge amount must not exceed the cost of acceptance for the credit card which is capped at 4%. It is interesting that the US is allowing surcharging while the UK is banning it. However, it appears that the US permission is more restrictive than the UK ban. As a consumer, I prefer the US version.  

The Start of the Surcharging Era?

Do you feel annoyed when having decided what to buy, you get to the checkout only to find out that the price has increased because the merchant slapped an extra fee for paying by card? I know, I do. The card networks know that as well, which is why they have been insisting on a “no surcharge” rule – i.e. that the customer price should not be discriminated based on the choice of their payment method. The same product should cost the same irrespective of whether the customer chose to pay by credit card, debit card, check or cash. The rule has not always been observed in practice, particularly in many European markets, sometimes against explicit regulations of card schemes. The European budget airlines are notorious for charging hefty fees (way above any conceivable processing costs or interchange) for the privilege of paying by card, whilst typically the only way to buy a ticket is online and the only way to pay is by card – a practice that attracted widespread criticism from consumer groups and other industry bodies. Surcharging is more prevalent online, although my local deli shop charges me £0.35 if I pay by card (debit or credit.) Many merchants in Denmark also surcharge. However, the US merchants have so far been prohibited from surcharging. The first blow to the “same prices” principle in the US came from Durbin amendment, which stipulated that the merchants could discount for cash or debit card purchases. Then, as a result of the credit card settlement, the US merchants got permission from the card networks to surcharge consumers using a credit card from January 27, 2013. It will be interesting to see how many merchants do take up on their new right to surcharge. 10 of the US States limit surcharging by law: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas, so a large national chain operating across multiple states, may not be able to surcharge anyway. To avoid a “free for all” situation, sensibly, the card networks introduced rules for how surcharging should be implemented in practice, such as asking the merchants to notify the networks of their plans to surcharge 30 days in advance, requiring to clearly post signs in the stores to inform customers, and defining the surcharging limits. It remains to be seen how many merchants decide that surcharging is “worth the trouble.” Representatives from the National Retail Federation, retail trade association, were quoted this week saying that “while there conceivably could be exceptions, merchants in general have no intention of surcharging.” That may be true. What did surprise me was another statement from NRF: “The lawsuit sought to bring down swipe fees and the prices paid by consumers, not to increase prices. The card companies’ new surcharging proposal runs 180 degrees counter to the intent of the lawsuit.” Now, I may have missed something, but I always thought that it was the merchants themselves who have long lobbied for their right to surcharge. Now that the settlement is in place, they seem to be implying that it’s the card networks who are forcing the surcharging on merchants. Are the networks “damned if they do, and damned if they don’t?”  

Holiday Cheers for Consumers from the UK Treasury

Just before the country stopped to celebrate Christmas, the UK Treasury announced that the government plans to ban the ‘excessive’ fees for card payments before the end of 2012. Essentially, this is the ban for card surcharging, i.e. fees that get added to the transaction if the person chooses to pay by card. Unfortunately, in Europe surcharging is quite widespread. When I was regularly travelling to Denmark, I used to pay a fee for pretty much all card transcations. Here in England, consumers rarely get charged by brick-and-mortar retailers, but are quite often hit by charges from online merchants, especially the airlines and various ticketing agencies. As a consumer, I find it really annoying, as these fees are not made transparent until late in the checkout process. So, you think you are getting a good price, only to find out that you’ve been slammed with an extra fee just to pay by card. The surcharges have already come under scrutiny. Earlier this year, Which?, a consumer group, complained about the surcharges which prompted an investigation by the Office of Fair Trading (OFT). The European Union also has approved the new rules giving the European shoppers more rights when returning goods or paying by card, but the rules are unlikely to be implemented until 2014. So, the latest announcement by the UK Treasury expected to come into force by the end of 2012 is a welcome step towards limiting surcharging and increasing price transparency. It will be interesting to see how this will be implemented – what level will be deemed as “excessive”, how the compliance will be monitored and how any breaches will be penalised. There is a clear difference between a small mom-and-pop store charging £0.35 to recoup their additional cost of a card transaction and the likes of Ryanair, a so-called “budget” airline, charging £12 per person for booking a return flight. The other question, of course, is that of the alternatives – at a physical store, I can perhaps pay cash to avoid card fees, whereas online, the card is often the only payment method available. The Office of Fair Trading report has been arguing that the fees should not be applied to at least debit cards, as they represent the equivalent of cash in the digital world. The Treasury’s proposal seems to go one step further and limit the fees to credit cards as well. Will it reduce the ultimate price consumers have to pay? Possibly not, as the retailers can easily just add the today’s fees to tomorrow’s prices. Yet, it would be a big improvement, as consumers could more easily shop around and compare prices knowing that they wouldn’t be charged for the privilege of parting with their money. Given the background of all the gloomy reports about recession, rising unemployment and other bad news, the Treasury announcement should bring the holiday cheers to the UK consumers.