Does the surcharge ban go far enough?

By Emma Lunn

This month has seen the long-awaited ban on credit card surcharges finally come into effect. But does it go far enough?

Although the ban gives consumers recourse if they've been overcharged, there's plenty of ambiguity in the ban, experts say -- and, possibly, enough leeway to allow businesses to continue overcharging customers.

Background on the ban
Since 6 April,  businesses have been banned from charging hefty surcharge fees to customers paying by debit or credit card. In the past, retailers (especially online ones) could tack on extra fees for the "convenience" of paying by card. Often, these fees would come as a surprise to consumers at the end of a lengthy online booking process. The fees varied, but the Office of Fair Trading (OFT) estimated that, in 2010, UK consumers paid around £300 million in surcharges.

Holiday companies and budget airlines have been among the worst offenders for hiking up card fees, according to consumer advocacy group Which? In fact, some airlines charged a fee per passenger, or per leg of the journey, despite the fact that they only had to process one transaction.

The new rules
The new ban limits surcharges to the actual cost of processing the payment. In other words, companies may only charge for the extra costs they incur for letting customers use their cards -- and no more. surcharge-fees

"The new ruling states that companies should not charge customers more than it costs to provide the payment service [and] not to use this element of charging to generate profit or margin," says Andrew Hagger, personal finance commentator at MoneyComms.

Not all organisations are affected by the ban straight away. Micro businesses and start-ups are exempt until June 2014. Also, certain types of charges are not affected. "Administrative" charges and any charges that don't directly relate to your mode of payment are not banned.

The true cost of processing a debit card payment is about £0.50, while credit card charges should be no more than 2% of the transaction, according to the OFT.

It's important to recognise that these are not official caps -- and that whether a merchant is overcharging will be decided on a case-by-case basis. According to a government guide on the enforcement of the ban, consumers who feel they've been overcharged can report infractions to Trading Standards (Which? has provided a form to do so).

If there's reason to believe that a company is overcharging consumers, the Trading Standards enforcers can then pursue the company in the civil courts. During the proceedings, the company's card processing costs will be analysed, and, if it's determined that the surcharge exceeds actual processing costs, the company will be ordered to change its ways.

Customers who want refunds, the government guide notes, can also go through the civil courts themselves and attempt to get their money back. Going to court to get up to £300 (which would cover most surcharges) would cost £35 in court fees, however.

Does the ban go far enough?
Because of the somewhat convoluted enforcement of the new rules, companies may find some wiggle room -- and insist that their processing costs are so high that they need to charge higher surcharges.

One criticism raised by Zilvinas Bareisis, senior analyst at research and consulting firm Celent, is that the new rules allow too much leeway for merchants to decide what they consider processing costs -- and to justify charging more. In a blog on Celent's website, Bareisis points out that the OFT has outlined some costs that could be used to justify higher surcharges. These include the "merchant service charge," which merchants pay to their bank for the privilege of processing cards; the cost of card terminals and point-of-sale devices; and processing fees for reversing or refunding a payment. In other words, to find out if a company is actually overcharging, enforcers would have to dig deep into the records showing how much it is paying to process payments. And the company, meanwhile, could trot out an array of costs to defend its higher surcharges.

Just two weeks after the ban came into effect, Which? is already receiving complaints about companies charging  more than 2% for credit and £0.50 for debit. One listener who contacted Radio 4's Money Box programme reported that he paid £688 for flights with Jet2 and was told he'd have to pay an extra £27.52 to pay by credit card. This equates to 4% of the transaction value.

Another concern, says Hagger, is that even if the new rules do stop excessive surcharging, companies may "look to recoup this lost revenue through other means."

"It may mean consumers being charged higher prices for the goods themselves, although at least this is more transparent," Hagger says. "But on the other hand it also could mean higher booking fees, admin fees or postage costs to make up for the enforcement of lower card [processing] charges."

See related: Government pushes forward on surcharge ban, OFT demands credit card surcharge transparency

Published: 26 April 2013