Britain Moves To Ban Surcharges On Card Payments

Merchants in Britain have lost the right to charge their customers surcharges on card payments. We go over the motivations behind this new legislation, and how it compares to the state of surcharges in the United States.

Credit card surcharges are a controversial topic in the United States. They're currently outlawed in a handful of states -- California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas -- although these bans have increasingly come under scrutiny. Most notably, the ban in New York was successfully challenged in the U.S. Supreme Court earlier this year, and sent for review by lower courts.

The same matter is being discussed overseas in Britain, with momentum in the opposite direction. The British government announced that effective January 2018 any extra charges added to payments made by card are to be outlawed.

Surcharges in Britain

Stephen Barclay, Economic Secretary to the Treasury, called these charges a "rip-off" and added that they have "no place in a modern Britain." The Treasury Department estimated that the total value of surcharges for debit and credit cards in 2010 was approximately £473 million. "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," Barclay said. "This is about fairness and transparency, and so from next year there will be no more nasty surprises for people at the check-out just for using a card."

This wasn't the first time the British government moved to limit these fees. In 2013 the government mandated that the surcharges be proportional to the interchange fees merchants pay their processing companies. As a result, certain businesses and sectors kept charging very high fees regardless. Ryanair, a popular British budget airline, for example charges a 2% fee on all credit card transactions. According to the Treasury, some merchants would charge as much as 20% on top of the regular asking price.

This move is building upon an European Union (EU) payments directive that banned surcharges on card payments with capped interchange fees, and was more similar to the 2013 restrictions the British government imposed. The EU's rules apply to Visa and Mastercard payments only. Therefore, it left charges on American Express and PayPal payments alone. The British government is taking things one step forward, and banning the fees across the board.

While some have praised the decision to ban surcharges, others warn of potential consequences to all consumers. One analyst told The Guardian he "expects 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."

This recent decision by the British government is sure to have a massive effect on merchants there, especially given the news that card payments have become more popular among British consumers than cash.

Surcharges in the United States

The persistence of credit card surcharges in the U.S. is partly an issue of free speech, since it limits how merchants are allowed to communicate their prices to customers. While surcharges are illegal in the states outlined above, giving discounts to customers who pay with cash is allowed. Even though U.S. merchants are free to set prices how they see fit, those in no-surcharge states are limited in how that price can be expressed. The Supreme Court found issue with this implementation, leading to their decision to have these laws re-examined.

In 2013, Visa and Mastercard closed a $7.25B settlement in an ongoing lawsuit regarding the interchange fees they charge merchants. As part of the agreement, merchants were permitted to impose surcharges on their customers to offset these charges. However, this was short lived, as a federal appeals court threw out the settlement in 2016.

Britain vs. the United States

The current state of surcharge laws in the United States differs from Britain's in part due to how interchange fees are regulated in each. Due to EU regulations passed in late 2015, Visa and Mastercard cannot charge British merchants more than 0.3% for accepting card payments. Part of the motivation behind the EU Parliament passing these laws was the belief that merchants were increasing their prices to account for the high interchange fees. Thus, by lowering interchange fees consumers would directly benefit from the change. In the United States, on the other hand, interchange fees on credit card payments remain relatively high with relatively few checks. Small business owners need to pay, on average, between 1.71% to 2.2%.

Robert Harrow

Robert is a Product Manager at ValuePenguin, covering credit cards and credit card processing. He graduated from Hunter College with a B.A. in Physics and a minor in Mathematics.

Comments and Questions