UPDATE: From 13th January 2018, due to new legislation it will be illegal for businesses to charge customers to use a credit or debit card.
I tried to pay for a packet of mints last week and was told I’d have to fork out an extra 50p if I wanted to pay by a card. Considering the mints were only 75p to begin with, I wasn’t best impressed.
If you’ve ever tried to pay for something cheap in a small shop, this is probably something you’ve experienced before too.
On the surface, it makes sense. Small businesses get a raw deal when it comes to payment processing and often lose a couple of percent of each transaction to card processors.
At low transactions values, fixed fee components have historically eaten up big chunks of their profit. That’s why some merchants whack on an extra 50 pence to any transactions under five pounds.
That all changed in 2013 when new rules came into force to govern surcharging. In this blog, we’ll look at how we got to the point where surcharge required legislation and discuss whether merchants can levy debit card surcharges under the new rules.
If you’re super busy and don’t have time to read the full article:
Yes, merchants can surcharge customers but you must charge no more than the cost of actually processing the payment.
What is a surcharge?
Okay, before we dig into the nitty gritty of surcharge legality, it’s probably a worthwhile working out a solid definition of what a surcharge actually is.
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.
For example, if a customer wants to pay a bill using a Visa debit card and it’s going to cost the merchant £10 to process that the payment, the merchant could add the £10 fee onto their bill.
At its peak, surcharging was big business and was employed 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.
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 could 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?
So, we have an answer. You can surcharge customers but only for the cost of actually processing the payments. Time to wrap up the article, right. Unfortunately not.
We know that you can only charge for the cost of processing payments but how much does that really cost? What charges can you include as a cost borne by the trader?
I need to employ a staff member to process the payment so can I include their salary? What about the electricity to power the card reader? What about the web design costs to build an eCommerce system to sell products?
As usually happens with financial regulation, a pretty straightforward answer has quickly turned opaque.
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 believe that indirect costs — for example, administrative overheads and such — do not count 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’s the background on surcharges but what does the future look like? Will surcharges stay legal in the UK?
In case you missed the announcement or our piece of analysis, there’s now a cap on interchange charges. This, in theory, should decrease payment processing fees for merchants to the point where they are a negligible cost of doing business.
With that in mind, I expect the EU or UK will probably introduce new legislation to fully eliminate surcharges on cards covered by the cap.
The reasoning goes that the cap reduces payment processing fees to a point where merchants can easily bear the cost themselves without passing the fee onto cardholders.
It is worth noting, however, that the interchange cap does not cover all cards. Cards that are not covered may still be liable for surcharges both now and in the future. 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 turnovers and, therefore, larger payment processing bills.
In one of our recent blogs, we spoke to Nik who owns a jewellery company. He told us that as the value of his transactions increase, two things happen. First, as often happens, Nik’s margin decreases. Second, his payment processing fees increase.
If Nik sells a £10,000 ring to a customer and they choose to pay using a credit card, Nik’s payment processing fees knock 25 percent off his gross profit!
Is that fair? Should Nik suck it up and accept it as a cost of business or are payment processors bleeding SMEs dry with sky high fees? Let us know what you think in the comments!