Is It Legal to Charge a Credit Card Surcharge?

Is It Legal to Charge a Credit Card Surcharge?

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 legislation 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, that story probably sounds very familiar. The advertised price creeping up and up and up until you were hit with a final bill much higher than where you started.

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.

If I were to book a London to Edinburgh return rail ticket with one of the worst rail offenders 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!

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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.

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What is a surcharge?

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 about surcharges?

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?

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?

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?

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!

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  • Gareth Relph

    Given that processing charges for credit cards are now much lower I see no need for companies to recharge the fees onto customers so the sooner it is made illegal worldwide the better. I am sick of paying 20 baht in THailand everytime I use a debit card to pay and more for credit card use.

  • Lucinda Cole

    How does this effect small businesses who are charged for accepting credit card payments. We only ever charge customers the amount that we get charged and make no profit on it. Are we just going to have to accept the cost that we get charged if we can no longer charge customers, as if so then we might have to stop accepting credit card payments if its going to cost us money?

    • Correct – you can no longer surcharge customers as of Jan 18. You’ll need to build any costs of payment into your headline prices as you would do with any other business cost. You could stop taking cards but then you have to weigh this up against any potential lost sales because a customer couldn’t pay by card and also, accepting cash is not cost free either once you factor in bank costs, any lost cash, time costs of handling, etc.

  • Mike Morgan

    So…. The costs of debit cards went to a percentage of the transaction, which we had to bear, and now we can’t pass on the charge for credit cards which percentage is significantly higher. Our business model sells services at cost to employees and we charge the employer a fee for having our service. Therefore we have estimated that our merchant services charges are going to leap from circa £20K to over £50K. Our average transaction is £200 and we now get charged on a percentage model for debit cards which is great if you are selling newspaper but penalises those with a high transaction value. I thought the whole point was to stop processor charging and getting fat on interchange, bringing down costs to merchants and making it cheaper for consumers? Also you answer to the previous question suggest that where you can change margin then use this mechanism to cover the cost of the transaction. Great one for the all important consumer and in our case just an increase in our fixed costs. No one wins. We are considering applying a processing fee to all orders. Can we do this?

    • I sense your frustration at the EU interchange changes and yes whilst it has reduced credit card costs for most merchants, it has also vastly increased debit costs for a high number of merchants in your position with high value product. The problem with this and a lot of other legislation is it is written at 30,000 feet and whilst the overall impact is positive, there are large pockets of negative impact which is not given sufficient consideration or mitigation.

      Can you apply a processing fee to all orders? The legislation has not yet been published so I cant answer definitively. The intent of the legislation is to ban surcharging for any payment type. So, on the face of it, a charge which is applied to all product sales, irrespective of payment type would seem acceptable. It may be that you can’t call it a “processing fee” or link it to the payment. It is possible that when published the legislation will ban additional fees of any type that are not disclosed upfront. Why not just increase your headline price without layering on additional costs?

  • Elaine Fish

    Is this regulation covering services as well as retail? We provide a service to our clients and charge only what we are charged on a credit card transaction

  • Elaine, my understanding is the legislation does not discriminate as to what the payment is for, so all goods and services are captured and you can no longer credit/debit card surcharge for a service. What you need to do is build the previous surcharge into your headline pricing going forward, irrespective of the payment form.