Comment: Who pays to pay? The ban on surcharging

In July 2017, the Government passed legislation to ban all retail payment surcharging as part of its implementation of the Second Payment Services Directive (PSD2), which will come into force on 13th January next year.

This marks a significant departure from existing law and incoming PSD2 requirements.  Currently, retailers are allowed to charge customers for particular payment methods provided they only pass on the direct costs borne by them. Under PSD2 (the European Directive that will regulate the provision of payment services from 2018), it was thought that retailers would continue to be allowed to charge customers for the costs of accepting payments, provided those costs did not relate to payment cards whose fees are regulated via Interchange Fee Regulation. This carve out was in itself significant – all four party card schemes such as Visa and MasterCard are regulated by the Interchange Fee Regulation – but as the fees passed on by card issuers were strictly controlled, there was limited benefit in allowing surcharging in these cases. Nonetheless, the Government's shift to an absolute prohibition across all retail payments is surprising given the spectrum of costs incurred by merchants for accepting non-Visa/MasterCard payments.

Allowing surcharging under PSD2 was considered to be a pro-competition issue between payment providers. In choosing a payment instrument, cost is rarely a factor for consumers.  Indeed, consumers often don't realise their use of a payment card actually entails a cost, and that cost is passed onto retailers. In many cases consumers are incentivised to premium card products through reward or benefit schemes (i.e. vouchers, rebates and chargebacks) – these incentives are not free to provide and generally result in higher charges being passed onto retailers. By allowing surcharging, a mechanism was provided to pass that cost back to the individual consumer that received the benefits rather than passing those costs onto all consumers through higher retail prices. This principle has been supported by other regulatory measures such as prohibiting 'honour all card' rules and requiring merchant acquirers to provide unblended fees to retailers.

Balanced against these objectives, the Government has been troubled by alleged sharp practices by retailers, either by surcharging consumers a fee that goes beyond costs incurred, or a concern that additional payment charges adversely affect price transparency. These issues have long been cited by consumer rights groups and are a frequent frustration for consumers, particularly when they are incurred on large purchases where the surcharge can be significant. However, rather than considering further measures that could address each of these specific issues, the Government has proposed an all-out prohibition.

Although a ban certainly addresses these concerns, it is less straightforward whether it will actually deliver overall consumer benefits. If retailers are unable to surcharge, the choice is either to absorb the costs themselves, pass them onto customers through higher prices or be more selective in the payment methods they accept. This is most material for small retailers that don't have the bargaining strength to negotiate low acquiring fees and so absorption of costs is significant, but it has relevance throughout the sector. Higher retail prices would mean that all consumers pay for the benefits enjoyed by a narrow class of consumer that use premium payment cards. Alternatively in an environment sensitive to price rises, it may mark a shift in payment methods retailers are willing to accept. Beyond standard four party scheme cards (for which surcharging would have been banned anyway), low cost payment methods are likely to become a more attractive component in any retailer's payment strategy.  In that respect, PSD2 has further relevance for retailers by creating a regime that enables payment via 'payment initiation service providers' – essentially direct bank transfers that avoids costly acquiring fees.  

However the future pans out, it is unlikely that banning surcharges will be without consumer impact.

Christopher Ratcliffe is a senior associate in the financial services regulatory group at international law firm Taylor Wessing.