Ban on surcharging for card payments

If you currently apply surcharges to consumers for paying by particular payment methods (most commonly for payments by credit or debit card), this will be against the law from 13 January 2018.

Currently, retailers are allowed to charge additional amounts to customers for particular payment methods provided they only pass on the direct costs borne by the business.

This change will affect a wide range of businesses including some airlines, theatre and concert booking sites, take-away food apps, local councils, HMRC and the Driver and Vehicle Licensing Agency.

Why is the ban being introduced?

This is the latest in a series of efforts to improve transparency and fairness in how customers are charged for using debit and credit cards. In 2015 the European Interchange Fee Regulation imposed caps on interchange, which is the amount paid by a merchant’s card acceptance provider (acquirer) to the customer’s card issuer each time a payment transaction occurs.  This is charged back to the merchant by the acquirer as a component (along with processing costs, terminal fees etc.) of the Merchant Service Charge which is negotiated directly between the acquirer and the merchant.

Since 2015, there has continued to be inconsistency between EU Member States as to whether merchants can pass on the interchange cost to their customers by way of surcharge. In some countries this is prohibited, whilst in others it is not, and indeed in some countries, merchants profit from surcharges.  These inconsistencies have been highlighted as cross-border e-commerce continues to grow.

This change is being brought in a result of the second Payment Services Directive, implemented in the UK in the Payment Services Regulations 2017, but note that the Government has opted to extend the ban beyond credit and debit cards, to include all types of retail payment instruments (including under three party card schemes).

What exactly does the ban extend to?

Specifically, if both a merchant and the consumer are based in the European Economic Area (EEA), then applying surcharges to the following will be banned:

• payments made via credit or debit card (or any other device);
• online payments; and
• credit transfers and direct debits.

The ban will not apply to cash withdrawals via ATMs, and nor will it apply to transactions made using ‘commercial cards’ (for example a corporate credit card) or to payment methods which are designed to be used for payment of business expenses only. This means, for example, that merchants can continue to apply to surcharges for card transactions where the cards have been issued to employees or to partners or to the self-employed for business expenses only (and where the transactions made with such cards are charged directly to the relevant business, company or public sector entity). However, any such surcharge must not exceed the cost incurred in processing the payment.

If only one of the merchant or the merchant’s customer is based in the EEA, a surcharge can be applied, but the fee must not exceed the cost borne by the merchant for use of that specific payment method.

Are minimum spends for using a card or other payment method banned?

No.

How will the system be policed?

Trading Standards officers at local authorities will be responsible for responding to complaints about businesses which continue to impose card surcharges after 13 January 2018.

What next?

Businesses applying surcharges have to act before 13 January 2018. They will have to make changes to their processes and to their commercial models, so this issue must be considered and addressed as soon as possible.

In particular, businesses must decide how to treat existing customers and new customers. Practices for new customers will be relatively straightforward to formulate and implement, however the treatment of existing customers requires deeper consideration as there are more issues to consider.