Several U.K. businesses have shifted their stance on credit card acceptance in the wake of a new EU law that became effective Jan. 13 — with some providers putting an end to their credit card acceptance altogether.
Other merchants have tacked on an across-the-board service charge to all customers—regardless of how they pay; and still others have raised prices or are likely to do so to help defray the added costs they are now shouldering since they can no longer pass on the cost of credit card transactions to customers.
“It’s very unlikely that merchants will just assume the cost themselves,” says Alison Donnelly, director and head of advisory at fscom, a financial services compliance company in Belfast.
The changes come after the Payments Services Directive II—known as PSD2 for short—went into effect in Europe following several years of planning. A portion of PSD2 relates to credit card surcharging, which had previously been common in EU member states among airlines, theater and concert booking sites, take-away food apps, local councils and government offices.
In practice, the prohibition of surcharging covers about 95 percent of all card payments in the EU, according to a European Commission fact sheet from January that predicted consumers would be able to save more than €550 million annually as a result of the new ban, which affects online and in-store payments.
The merchant backlash
Merchants have responded to the surcharging ban in a variety of ways. On Jan. 8, a few days prior to the legislative change, Just Eat, a global marketplace for online food delivery, introduced a 50 pence service charge for all orders, whether customers pay by cash upon delivery or card in advance. Previously the charge was applied only to debit or credit card charges.
The company didn’t think it was fair to charge only certain customers since there’s a cost to administer every order, not just ones paid via card, according to a spokeswoman. The company had already been discussing how to rectify this disparity and would have instituted the service charge regardless of the legislation, she says.
Her Majesty’s Revenue and Customs Office (the U.K.’s version of the IRS) stopped taking personal credit cards altogether as a result of the surcharging ban. Corporate, business and commercial cards are not affected by this change and HMRC continues to accept other types of payments such as debit cards and direct debit, according to a spokesman. Personal credit cards account for only 0.8 percent of payments to HMRC by volume and 0.2 percent by value, the spokesman says.
Some travel agencies in the U.K. have reportedly stopped accepting credit cards as a result of the ban. Others have reportedly added handling fees added to every transaction in an attempt to preserve their margins, which are already compressed. There’s also scuttlebutt that some companies are quietly raising prices to help offset the greater costs of credit card acceptance.
To be sure, it’s unclear whether U.K. legislators will seek to revisit the law once the country leaves the EU next year.
Donnelly of fscom doesn’t think the rules are likely to change, noting surcharging is a low priority among other things that need attention. In many cases, the costs are hidden and most customers won’t notice a large difference, which is why there has been no real negative outcome from this so far, she contends.
“I just don’t think there has been a lot of uproar about it,” she says.
A global perspective
Nonetheless, there’s precedent for countries around the world changing their policies related to credit card surcharging, and some industry participants hope the U.K. will ultimately follow that lead.
Jonathan Razi, chief executive and founder of CardX, an outspoken proponent of giving merchants the option to pass on credit card fees to customers, says it’s inequitable to force everyone to pay more in fees to cover the cost of those who opt to use credit cards. It’s also unfair to the masses, he says, when merchants decline to accept credit card payments at all.
“Then everyone loses because it means less consumer choice,” says Razi, whose company provides a turnkey solution to businesses for passing on the credit card fee to consumers.
Razi, who keeps close tabs on developments related to surcharging bans, notes that the U.S. has had a fairly complicated history with surcharging and the issue remains in flux in certain states due to litigation.
There was a federal "no surcharge" provision in the Truth in Lending Act until the 1980s, meaning businesses could not pass on the cost of credit card acceptance to customers. Once the provision in the Truth in Lending Act lapsed, businesses had the option under federal law to pass on the fees to consumers. Ten states took up the issue and created bans on surcharging. Those state laws have since been challenged and continue to be challenged in the U.S. because of a U.S. Supreme Court decision on the matter.
Federal courts in California and Florida have ruled—based on the Supreme Court decision—that no-surcharge laws are illegal restrictions of protected speech, meaning merchants can pass on the costs of accepting credit cards to consumers. There are pending court challenges to the anti-surcharging laws in Texas and New York, Razi says.
Merchants in states where there aren’t laws pertaining to surcharging must first notify the card brands if they want to surcharge. Merchants must also provide certain consumer disclosures and adhere to limits on much they can tack on. Surcharges are prohibited in the U.S. on debit and prepaid transactions.
In Canada, contracts with the card associations currently permit merchant surcharging in select categories, such as education, government, and property management, says Razi, whose company also does business in Canada.
However, as the result of a 2017 settlement, the card brands will modify their rules in the coming months to allow all merchants to surcharge, Razi says.
Australia, meanwhile, instituted a ban on surcharging many years ago, but those restrictions were lifted in 2003. Although merchants are allowed to surcharge, the country last year enacted a law that says excessive credit card surcharges are illegal. Businesses are now prohibited from charging more than the amount it costs them to take card payments — about 1.5 percent for a Visa or Mastercard, or just 0.5 percent for a debit card.
Razi says these other models are more effective than an outright ban.
“When merchants pass on the credit card fee, they inform consumers about the cost of using credit cards and give consumers the incentive to switch to a lower-cost form of payment, like debit or check, when the transaction cost becomes too high. This makes payments more transparent and fair for everybody,” he says.