Credit and debit card charges banned – its effect on small businesses

Bilal Khizar // 27 February 2018

New legislation introduced in January bans firms from charging fees for credit or debit card payments. The legislation aims to protect consumers who have been paying surcharges when buying goods or services.

These rules stem from the EU Payment Services Directive – laying out the changes EU governments must make. However, the new rules will be written into UK law and will continue even after Brexit. The changes aim to enhance “fairness and transparency”, according to Stephen Barclay, the Economic Secretary to the Treasury. He argues that the new rules ensure there is less ambiguity when paying at the check-out using a card.

The current legislation only prescribes that companies charge for the actual costs of processing a debit or credit card payment, and nothing more. The UK Treasury estimated that payment surcharges had cost British consumers £166 million in 2015; some have even claimed that businesses have been known to add charges in excess of the costs required to process a payment. The new rules are enforced by Trading Standards who have the power to take action against traders who breach the new regulations. Further to this, customers are entitled to a refund regarding any unlawful surcharge they have paid and allow them to take legal action to recover any lost amount.

Certain companies’ business models have relied heavily on transaction charges. Those who have profited include Just Eat, whose payment card and admin fee revenue accounted for 13% of its total revenue. In response to the new changes they have added a 50p card surcharge and 50p service charge on all orders. Consumers now stand to lose even more than they previously did with the fees in place; Just Eat insists this decision “ensures fairness for all”. Previous offenders include the Driver and Vehicle Licensing Agency (DVLA) which added a £2.50 fee to vehicle tax payments made by credit card, raking in over £8.5 million a year. However, the new rules ensure that there is no charge for anyone using a personal credit card.

Smaller firms who currently rely on charges in place will look to recoup fees using alternative methods. Many see an unwanted choice in either accepting the new rules and losing out or passing the costs onto consumers in other ways. An alternative to credit card transactions is for companies to start charging new admin fees to all customers, regardless of whether they pay by cash or card. Some even say that smaller companies will stop accepting credit cards altogether. The Federation of Small Businesses (FSB) warned that “many small firms will struggle to absorb the costs associated with card payments” which means that costs will be added on to goods and services offered by smaller firms.

However, Lorence Nye, policy adviser at the FSB, argues that the new changes will “drive more innovation and new kinds of payments that allow them to reduce costs”. There is substance to his claim as banks across Europe have launched peer-to-peer payment apps that allow consumers to bypass credit card networks and pay directly from their bank accounts. Such examples include Pingit, which was launched in the UK, and Payconiq, launched by ING in Belgium. However, widespread adoption of these systems by both consumers and retailers is yet to be seen, and there are costs associated with their deployment.
 
The question also arises to the added effect these changes will have on consumers. The Blue Cash Everyday Card from American Express, for example, allows consumers to earn 4% cash back when they buy groceries; the Amex EveryDay Credit Card also offers 2 points for every pound spent on the card. Consumers will lose out on the benefits usually available and will be less incentivised to use their credit cards or cashback cards. An argument arises that consumers should be able to decide whether they want greater benefits from the purchases they make or if they are happy to forgo their benefits so that they avoid card fees.

EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).