UPDATE: From 13th January 2018, due to new legislation it will be illegal for businesses to charge customers to pay using a credit card. The change builds on existing legilsation that made it illegal to charge any more than it cost to process the payment.
“I was looking for a holiday and came across one that seemed to be a really excellent price. However, when I clicked through to the checkout I started to see more and more extra fees being thrown in. There were booking fees, credit card surcharges and who knows what else.
“By the time I was asked to enter my credit card number the price was nowhere near what it had been at the start — it was an absolute disgrace!”
If you’ve booked a holiday online over the past 10 or so years, David’s story probably sounds very familiar.
Travel agencies were some of the worst offenders for drip pricing, using low initial prices to bring customers in then adding on multiple additional payments to inflate the final cost.
One of the most common additional fees is are payment surcharges, which are theoretically charges to cover the cost of processing a payment.
However, many companies identified surcharges as a clear opportunity for profiteering and billed customers for amounts well in excess of the actual cost of payment processing.
Raileasy, a trail ticket booking website, was reported to bill customers for 4.5% of the final charge plus an extra £1 booking fee.
If I were to book a London to Edinburgh return rail ticket with Raileasy at a cost of £138, I would have to pay an extra £7.21 for the luxury of using a credit card — that’s an increase of 5.22% just for the luxury of paying!
That all changed in 2013 when new rules came into force to govern surcharging. In this blog, we’ll look at what got us to that point and discuss whether merchants can legally surcharge customers under the new rules.
Oh, and if you’re super busy and just want the answer:
Yes, merchants can surcharge customers but you must charge no more than the cost of actually processing the payment.
What is a surcharge?
Before we dive into the legalities of surcharges, it’s probably a good idea to get a solid definition of what they are.
A surcharge is defined as:
An extra fee charged by a merchant when receiving a payment by cheque, credit card, charge card or debit card (but not cash) which at least covers the cost to the merchant of accepting that means of payment, such as the merchant service fee imposed by a credit card company.
That’s reasonably straightforward and if used correctly, allows a merchant to pass on the full cost of a transaction to a customer.
For example, if a customer wants to pay a bill using a credit card and it will cost £10 for the merchant to process that credit card transaction, the merchant could pass that £10 fee onto the consumer using a surcharge.
In their heyday, surcharges were big business, used by hundreds of thousands of businesses across the UK.
In 2010, the Office of Fair Trading (OFT) estimated that consumers shelled out an unbelievable £316 million for surcharges. By 2013, the airline industry alone was charging £300 million in surcharges!
However, that all changed in on 6th April 2013.
What does the law say?
In a bid to limit excessive surcharge fees, the Consumer Rights (Payment Surcharges) Regulations 2012 set limits on the amount merchants can charge when their customers pay by credit or debit card.
Specifically, it says:
A trader must not charge consumers, in respect of a given means of payment, fees that exceed the costs borne by the trader for the use of that means.
The regulations came into force on 6th April 2013 and effectively banned merchants from charging any more than it cost them to process a payment.
We spoke to Luke Hutchings, a partner at commercial law firm, Taylor Rose TTKW about the legislation and what it means for both merchants and consumers. He said:
The Consumer Protection Regulations from 2012 banned traders from charging consumers more than the cost of processing a payment method. However, it’s still common practice among many businesses.
Essentially, the legislation prevents traders from overcharging for processing a debit or credit card payment when it only costs them a few pence to do so. Retailers and traders should, therefore, be discouraged from boosting their profits through such means. Businesses are encouraged to only pass on the true cost of goods to the consumer.
So, can you legally surcharge your customers?
Yes, you can but you must charge no more than the cost of actually processing the payment.
How much can I surcharge?
Another often asked questions centres on how the cost of processing a transaction is defined in the legislation. In other words, what can you include as “the costs borne by the trader”?
The following are all costs potentially involved in the processing of a payment:
- Credit card rate charged by the acquirer
- Payment gateway fees
- PCI compliance fees
- Authorisation fees
- Terminal hire
- Staff costs
What was quite a straightforward regulation has suddenly become very murky.
Helpfully, the Department for Business, Innovation and Skills (BIS) shed some light on this matter in a consultation on the regulations.
In that consultation, the BIS said they did not envisage that indirect costs — for example, administrative overheads and such — should not be counted as a cost borne by the trader for the use of a payment means and should instead be factored into the headline price of the product or service.
Only activities dedicated exclusively to card payments may be included when calculating a payment surcharge.
Will surcharges stay legal?
So, that is the background on surcharges. Now it’s time to look forward.
In case you missed the announcement, there is now a cap on interchange charges. This, in theory, should decrease payment processing fees for merchants. With that in mind, it’s widely expected that EU/UK legislation will be introduced to eliminate surcharges on cards covered by the cap.
The logic is that the cap makes payment processing fees low enough for merchants to bear the cost themselves without passing onto cardholders.
It is worth noting, however, that the interchange cap does not cover all cards and cards that are not covered may still be liable for surcharges. Commercial credit cards, for example, are not covered and may still incur surcharges.
Precisely what will happen remains to be seen but we will endeavour to keep you up-to-date and informed of all the major developments.
What do you think about surcharges?
As society moves towards a cashless system, more and more businesses will have to deal with larger card payment processing bills.
In our latest blog, we spoke to Nik who owns a jewellery company. As the value of his transactions increase, two things happen. First, Nik’s margin decreases. Second, his payment processing fees increase. If Nik sells a £10,000 ring to a customer and they pay for it using a credit card, his payment processing fees eat up around 25% of his gross profit!
So, should Nik pass that cost onto his customers or are payment processing costs just another part of doing business? Let us know what you think in the comments!