The UK government has announced that interchange surcharges on credit card transactions will be banned from January 2018, including those made on American Express credit cards, Paypal and Apple Pay. Charles Wheeldon looks closer
Credit card surcharges range from as little as £0.50 ($0.64) to sometimes as high as 20% of a total transaction, and are a favoured tactic for generating extra revenue, in particular for budget airlines, food delivery apps and ticketing services.
From January 2018, any organisation caught charging customers for card payments will be ordered by authorities to repay the fees and face substantial fines.
Some of the worst offenders currently charging people for using their credit cards are actually government agencies and local councils. Small convenience stores are also notorious for charging a fee for using any type of card for smaller purchases.
Low-cost airlines are particularly fond of applying charges for credit card use, with Ryanair adding 2% and EasyJet 1%. Online travel agents and flight resellers typically charge a fee of around 2%, regardless of the airline being booked. Empire cinemas charge a £0.70 “card-handling fee”, while food delivery app HungryHouse charges £0.50 on credit card transactions.
Local authorities and government agencies also charge fees for credit card use. In London, Hammersmith and Fulham council charges 1.25 %, while Richmond upon Thames charges 1.65%. Other examples include HMRC, which charges between 0.374% and 2.406% for using personal or corporate cards to pay taxes, while the DVLA adds a flat fee of £2.50 to vehicle tax payments that are made by credit card.
While the UK ban complies with a 2015 EU directive, the government is to go further by banning charges for American Express cards and users of services such as Apple Pay and PayPal, which typically apply a higher fee than the likes of Visa and Mastercard.
The January ban builds on the 2015 EU directive which capped the interchange fee paid by merchants at no more than 0.3% for credit cards and 0.2% for debit cards.
The EU pointed out at the time that the surcharges, which are only supposed to reflect the cost of processing payments, generated €13bn ($15.2bn) a year across Europe. In the UK the surcharges were estimated to have raised £473m in 2010, according to the latest figures available from the government.
The interchange fee cap is regarded as a win for consumers, due to the unusual nature of the credit card market. As the EU noted when it introduced the cap: “Usually, competition leads to lower prices since companies compete by offering lower prices than their competitors.
“In the case of interchange fees, the opposite occurs. Since issuing banks benefit from interchange fee revenues, card schemes compete for the issuing banks by offering higher interchange fees. These fees are a cost for retailers which increase the price of their products. Interchange fees are therefore, indirectly, paid by consumers.
“Consumers and retailers are often unaware of the level of these fees.
In addition, cardholders are encouraged through rewards offered by their bank to use cards that generate higher fees for the bank. This has consequences for both retailers and consumers,” the EU continued.
“If a retailer refuses commonly used cards, there is a risk that consumers would choose to go to its competitors. Individual retailers tend thus to accept high costs for card payments to keep and grow their sales.
“Retailers recover higher costs due to ever-increasing interchange fees by increasing retail prices. As a result, the prices increase for all consumers, including those who pay cash or use cheaper payment cards, because the higher fees of more expensive cards are spread out and passed on to all.”
A STING IN THE TAIL
Andrew Hagger, consumer finance expert at personal finance consultancy Moneycomms, says: “It is a good move, although long overdue. But there is the downside, as this revenue that companies have been used to getting will disappear, so what do they do? They will likely look to recoup it elsewhere.
“I do not think they will take it lying down, so it could mean an increase in the cost of services. It is a bit of a sting in the tail for the consumer.”
The Economic Secretary to the Treasury, Stephen Barclay, quizzed about the imminent ending of credit card charges, said:“Rip-off charges have no place in a modern Britain and that is why card charging in Britain is about to come to an end.
“This is about fairness and transparency, and so from next year there will be no more nasty surprises for people at the checkout just for using a card.”
The new rules will also ban small convenience stores from charging customers for small payments by card, meaning they may raise the limit for spending on a card to £10.
Mike Cherry, national chair at the Federation of Small Businesses said: “Smaller businesses often have more in common with consumers than with large firms.
“Many find themselves on the receiving end of surcharge fees on a daily basis when paying suppliers such as transport providers but also public agencies such as HMRC, which adds on a charge for those who want to pay their taxes by credit card.”
Lu Zurawski, head of consumer payments EMEA at ACI Worldwide says: “The rules unveiled by the treasury are a welcome step designed to bring more transparency into the payments process and above all puts the consumer at the heart of it. This is not just a ‘cards versus cash’ debate – the announced legislation, which includes a ban on payment surcharging, is far more profound in terms of its impact on UK banking.
“The rationale on surcharging aims to make it easier for consumers to compare prices of actual goods, without then needing to re-evaluate their choices when presented with extra charges later.
“The legislation makes it easier for consumers to pay online without being dependent on plastic cards. For example, new inexpensive types of payment – like transfers from accounts initiated on mobile phones – are encouraged,” Zurawski continues.
“On balance, it is a sensible outcome. As well as eliminating the much-reviled surcharges, it provides more choice to consumers in how they make payments. Citizens who prefer to pay by electronic payment means are no longer disadvantaged. Meanwhile, if a retailer accepts cash, citizens are free to pay by notes and coin. Consumers gain the upper hand in deciding how payments are to be made.”
The proposed legislation has also caught the eye of David Parker, CEO of Polymath Consulting, who comments that a side-effect of the proposal could be that loads onto prepaid cards and wallets could have the effect of treating the card or wallet as a merchant, which would mean that the new rules may also apply to them.
The key would be whether the card-load fee is a charge for a service provided, or whether it is a surcharge.
Parker has worked out that in the UK alone 45% of UK general-purpose reloadable cards currently charge a fee for loading the card via credit or debit cards, and 49% of all travel and foreign exchange cards charge a fee. The fees on some cards areas are as low as 0.5%, while on others they are as high as 4.95%.
Some of the charges are the same whatever method of loading is used; however many charge a different or higher fee for credit or debit cards.
Parker says: “While many cards offer free debit loads they still charge for credit cards loads. They will either have to stop accepting these loads or remove the fees to comply with the new requirement. Following on from the reduction in interchange imposed by the EU, this is another hit to the incomes of many prepaid card programmes.
“The UK prepaid market is particularly hard hit by the new directive, given that UK consumers love paying with debit and credit cards,” Parker adds. “There is far higher use in the UK than in other European markets, where other forms such as direct bank transfer are more common.”