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This article was first published in the March 2012 issue of e-finance & payments law & policy
Paying to pay – UK government to ban excessive surcharges for debit and credit card payments
At the end of this year the UK government will ban retailers from imposing fees for debit and credit card transactions which exceed the actual costs of handling the payment. While the details of the ban are yet to be finalised (crucially, it is not yet clear how the "actual costs" of handling a debit / credit card payment will be calculated), the ban is, in any event, likely to shake up the retail marketplace, particularly in sectors such as travel, where the addition of a credit / debit card surcharge (often based on a percentage of the transaction value) is commonplace.
In this article Robert Blamires and David Naylor, of Field Fisher Waterhouse LLP, examine the implementation of the ban, and consider its likely impact on retailers.
Background
In March of last year the consumer body Which? submitted a super-complaint(1) to the OFT, asking the regulator to investigate excessive credit and debit card surcharges. In particular, Which? asked the OFT to look into: the manner in which businesses communicate the existence and amount of any surcharge; the proportionality of surcharges to the actual cost to businesses of processing the payments in question; and, finally, whether businesses ought to offer a reasonable, practical alternative which avoids any surcharge.
OFT Investigation
The OFT's investigation focussed on the passenger transport sector but drew on a survey it carried out in 2007 into retailers' surcharges(2), which revealed that:
- 81% applied no surcharges at all;
- 14% applied surcharges to credit card payments; and
- 6% applied surcharges to debit card payments.
The survey also revealed that the amount of the surcharge ranges from less than 1% of the transaction value to over 3%, and surcharges for payment by debit card tend to be lower than for payment by credit card. (Which? estimates that the cost of processing a credit card payment is, at most, 1.8% of the value of the transaction, and that the cost of processing a debit card payment is no more than 16p).
The OFT's investigation found widespread evidence of "drip-pricing" practices, where a headline price is presented at the outset, and then extra charges (including debit / credit card surcharges) are added as the customer proceeds through the purchase process, rendering the final cost opaque until the consumer has invested time navigating through the purchase process(3), The OFT has previously(4) highlighted concerns with this practice on the basis that it changes consumers' shopping behaviour by: rendering comparisons between different retailers' offerings more difficult (therefore reducing the extent to which consumers shop around, particularly once they have invested time on one retailer's purchase process); and fixing consumers' minds on the headline price (so that they fail to assess the true value of the offering based on the actual total price). In the OFT's view this practice is exacerbated in the airline industry by consumers' perception that, if they take too long with placing an order, the available price might increase (therefore they are likely to feel under pressure to place an order and are less likely to shop around).
In addition, businesses take a variety of approaches to these costs, for example: some absorb the costs entirely while others, such as low cost airlines, apply significant surcharges; and some charge a fixed fee of a few pounds per transaction, while others apply a charge which varies according to elements of the transaction (5). For the OFT this further inhibits consumers' ability to accurately compare offers between retailers.
The OFT's investigation concluded that:
- transparency of the application of debit and credit card surcharges could be improved by OFT enforcement action to ensure compliance with the Consumer Protection from Unfair Trading Regulations 2008 (which prohibits the omission or ambiguous or untimely presentation of "material" information during consumer purchases);
- surcharges can only be regarded as optional where a reasonable proportion of consumers can choose a payment method which enables them to pay the headline price without incurring a surcharge(6);
- a ban on debit card surcharges would provide consumers with a cost-free option to avoid surcharges associated with any other form of payment, and therefore the OFT did not need to reach a conclusion on the marginal cost of processing different payment mechanisms (although the government did not adopt this approach, see further below).
Government response
The government did not adopt the OFT's proposal to ban all surcharging for debit card payments, choosing instead to ban, for all forms of payment mechanism, surcharges which exceed the actual costs to the retailer of processing the payment.
The government's approach reflects the new EU Consumer Rights Directive(7), although the government has opted to implement the ban on excess surcharges ahead of the deadline for implementation of the Directive as a whole (October 2014). The ban is therefore expected to be in place by the end of this year and to extend to most retail sectors, not just transport.
Impact
Crucially, the meaning of "excessive" and which costs will comprise the "actual cost" of processing a payment (and therefore be allowable as part of the calculation) are currently unclear. The actual cost to a business of processing card payments is both difficult to calculate and varies between different businesses (so a simple cap on processing fees is not an option). One of the variables is the bank's processing, or "merchant", fee, which is negotiable, and therefore varies from retailer to retailer(8), with big retailers (such as large supermarket chains) being able to negotiate lower merchant fees than smaller retailers (such as independent shops).
What is clear however is that the ban will have a significant impact for retailers in any sectors where surcharges are common, such as the airline industry (the OFT, basing its calculations on 10 major airlines operating in the UK, estimated that in 2010 UK passengers spent around £300 million on payment surcharges). Businesses in these sectors are likely to look to replace debit / credit card surcharges with increased charges elsewhere, for example airlines might look to adopt / increase charges for reserved seating, priority boarding, reissuing boarding cards and/or luggage. (One airline already argues that its administration fee relates to costs associated with its booking system, and is not a surcharge on the payment mechanism, and another has already (in response to the OFT report) replaced its booking charge on debit card purchases with a flat fee of £9).
The government will shortly publish a consultation on its implementation of the ban, with a key issue likely to be covered being which payment processing costs retailers will be allowed to include in the calculation / what constitutes the actual costs of handling a payment. The OFT has already expressed concern that these costs should be defined tightly, while retailers will inevitably put forward strong arguments for using a broad definition, which enables them to include as many costs as possible in the calculation. While the results of this debate will play out over the course of this year, retailers in all sectors would be wise to keep news of the "paying to pay" issue firmly on their radars.
Robert Blamires, Senior Associate
David Naylor, Partner
Field Fisher Waterhouse LLP
(1) Certain consumer bodies, designated by the Secretary of State for Business, Innovation and Skills, can make super-complaints to the OFT when they think that a feature, or combination of features, of a market is, or appears to be, significantly harming the interests of consumers.
(2) As part of a Competition Act investigation into the charges that credit card networks levy on retailers, available at: www.oft.gov.uk/OFTwork/competition-act-and-cartels/ca98-current/interchange-fees.
(3) In some cases the OFT found that consumers had to navigate through 7 or 8 web pages before the applicable surcharge was added to the headline price of the retailer's offering, see table 6.1 of the OFT's Response to the Which? super-complaint, June 2011 (OFT1349resp), available at: http://www.oft.gov.uk/shared_oft/super-complaints/OFT1349resp.pdf
(4) In its market study report "Advertising of Prices", December 2010 (OFT1291), available at: http://www.oft.gov.uk/shared_oft/market-studies/AoP/OFT1291.pdf
(5) For example, some airlines apply a per passenger surcharge even if all passengers are covered by the same transaction.
(6) Regardless of whether a reasonable proportion of consumers actually choose this payment method.
(7) Directive 2011/83/EU of the European Parliament and of the Council of 25 October 2011 on consumer rights, amending Council Directive 93/13/EEC and Directive 1999/44/EC of the European Parliament and of the Council and repealing Council Directive 85/577/EEC and Directive 97/7/EC of the European Parliament and of the Council.
(8) Typically banks do not disclose these fees.
