The Truth Behind Credit Card Surcharges

6. March 2018.

Just days before the U.K. banned businesses from passing on credit card transaction fees to shoppers, food delivery company Just Eat introduced a blanket “service charge” for all orders—whether shoppers pay by credit, debit or cash.

Consumer advocates and media criticized the move as circumventing the new rules. But on closer inspection, who could blame Just Eat?

To accept payments by credit card, sellers of goods and services have to hand over about 3 percent of their sales—a significant chunk for those with low margins—to Visa or MasterCard to cover processing costs. Just Eat and other businesses should not be forced to absorb these costs when consumers are the ones choosing to use credit cards for convenience or rewards, such as points and airline miles.

Ironically, the U.K. Treasury had touted the policy as ensuring consumers “that there won’t be any nasty surprises, and they won’t be penalised for wanting to pay in a particular way.” Yet in fact, the policy only creates more surprises as it prompts businesses to circumvent the ban by raising prices across the board—or simply renaming the surcharges, as Just Eat did. These types of workarounds cannot be policed. After all, how can regulators prove a business increased its prices explicitly to make up for the fees it otherwise would have collected?

Clever workarounds aren’t the only problem with misguided surcharge bans. Some businesses and government agencies are actually doing away with credit card acceptance altogether. As Financial Times reported, HM Revenue & Customs, the U.K.’s tax, payments and customs authority, stopped accepting credit card payments in response to the rules, forcing taxpayers to forgo the convenience and rewards of their cards. The Federation of Small Businesses rightfully called the action hypocritical, noting the government expects small businesses to be able to absorb the costs of accepting credit cards while opting not to itself.

Surely this is not the sort of relief shoppers in the U.K. were hoping for in a modernized payment system.

Worse yet, the misguided ban on surcharges is likely to prove most damaging to low-income consumers, who are more likely to pay with cash. In the case of Just Eat, its new “service charge” means cash payers are effectively subsidizing credit card users. This wasn’t the case when the company was allowed to pass along processing costs specifically to credit card users.

The economic impact of such a trend has shown to be quite damaging. In the United States, where businesses were prohibited from applying credit card surcharges until 2013, households using credit cards were subsidized to the tune of $1,133 per year, according to the Federal Reserve Bank of Boston.

Both the U.K. and the U.S. would be wise to emulate the Australian framework. In Australia, the removal of no-surcharging rules in 2003 has led to a significant reduction in credit card processing costs as consumers are able to comparison shop payment methods, according to the Commonwealth Consumer Affairs Advisory Council.

The global patchwork of regulatory approaches is proving that condescending, nanny state regulators do more harm than good when they presume to tell consumers which payment methods are most cost-effective and convenient for them.

It is important to look past shallow talking points that say bans on credit card surcharging are consumer-friendly. The U.K. ban will only serve to lift profits for card companies at the expense of small businesses and consumers.

Evan Weese is the marketing lead of CardX, a Chicago-based provider of credit card acceptance solutions.

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