Author Ben Leonard
New laws introduced by the British Government today mean that credit card companies will no longer be able to levy extra costs to those paying for items on their card.
Previously these credit card surcharges have cost UK consumers millions of pounds. These surcharges, which can be as high as 20 percent extra, totalled a whopping £473m in 2010.
The rules will apply to any UK company which is selling to UK consumers. These new government laws are expected to go into effect in January.
Why remove these charges?
The new law is an implementation of an EU directive – the second European Payment Services Directive – which bans surcharges on Visa and MasterCard payments. This directive was to be enforced by 2018. However, the UK government went one step further by also banning surcharges on American Express and PayPal too.
Whilst announcing the ban, the economic secretary to the Treasury, Stephen Barclay, said that the change in law was “about fairness and transparency”.
“Rip-off charges have no place in a modern Britain and that’s why card charging in Britain is about to come to an end,” he said
“These small charges can really add up and this change will mean shoppers across the country have that bit of extra cash to spend on the things that matter to them.”
Many campaigners welcomed the move, including UK finance – the British financial trade association.
Gareth Shaw of consumer group Which? said:
“This welcome news is long overdue. Which? has been campaigning for an end to unfair card surcharges for years now, and triggered the process of reform with our super complaint back in 2011.
“Previous action to protect consumers from excessive card surcharges has been difficult to enforce, leaving consumers paying over the odds just for paying by card. These new rules will finally put an end to this unfair practice.”
Guy Anker, the managing editor of the MoneySavingExpert.com website, said scrapping these charges was good news for millions of consumers but warned:
“We expect some companies will raise prices for all to compensate for the loss, which could hit those who currently pay in cash or by debit card.”
“With the cost of living rising anyway, people shouldn’t be hit with unexpected fees. While it will make it easier for consumers to compare prices, we expect some companies will raise prices for all to compensate for the loss, which could hit those who currently pay by cash or debit card.”
Who is applying these charges?
Plenty of UK businesses are adding additional fees to those who pay on card. Often, these businesses add the surcharge by way of the fees they incur for allowing card payments.
Businesses can sometimes face costs that include a merchant service charge, as well as the hire payment for the chip and pin machine, authorisation fees, a minimum monthly service charge, set-up fees, chargeback fees and a fee to register as compliant with the Payment Card Industry.
Just Eat, the takeaway food app, charges 50p per credit card transaction. Two-thirds of Just Eat customers paid on a card last year, and roughly 13 percent of Just Eat’s revenue came from card fees.
In the wake of the news, Just Eat’s shares dropped by more than 6 percent. This was the worst drop in shares for the company since January. However, by the end of the day, they had recovered to trading just under 1 percent lower.
The UK airline industry is also notorious for adding card fees onto final bills and was one sector that was specifically mentioned by the UK government whilst introducing the ban.
Flybe is by far the worst airline, charging an extra 3 percent on transactions. British Airways and EasyJet charge 1 percent on credit card transactions, while Ryanair and Norwegian both charge 2 percent.
Will this affect the government?
It’s not only private businesses that will be affected by this change in the law. Some government departments are well known for adding surcharges to payments collected by card.
The Driver and Vehicle Licensing Agency adds a flat fee of £2.50 to all vehicle tax payments that are made on a credit card. Last year, it was estimated that the DVLA makes roughly £8.5m a year from these charges alone.
HM Revenue & Customs are also well known for adding fees on cards. If you pay a tax bill with a credit card, HMRC can add anything from 0.374% to 2.406% onto the tax bill. The range depends on whether it is a personal or corporate card.
Some local bodies also impose surcharges on customers when paying on a card. Hammersmith and Fulham Council add an additional 1.25% when paying with a credit card, while Richmond upon Thames adds 1.65%.
When asked about these charges, both councils said that they do not profit from these fees. However, all government bodies will be unable to continue this practice from the 13th of January.
Will companies be affected?
Some analysts have predicted that this decrease in revenue for some businesses will lead to an increase in prices across the board. Whilst large businesses, such as global airlines, will be able to absorb the costs in order to stay competitive, smaller companies will not.
These smaller companies will find themselves under greater pressure and may have to increase prices in order to maintain their cash flow. This was probably the reason that smaller companies like Just Eat saw a drop in their share price.
“Maybe they will bump the price up,” said James Daley, the managing director of Fairer Finance, which has been campaigning for the change.
“That’s fair game. You have to take customers’ money somehow. And it’s not reasonable to add that cost on at the end of the process. Why not put it in the headline price?”
However, analysts at Barclays announced that the new law was simply an implementation of an EU directive, so the drop in share price for Just Eat was “unwarranted” and that Just Eat’s business model was not directly affected by the legislation.