Some UK and Europe merchants say a two-year-old ban on additional charges imposed on card payments, or surcharges, will hurt profits but payments analysts say it may, now, be an opportunity for new transaction methods.
Alternative payment methods like direct debit or other contactless payments making their way in the UK and Europe markets after Covid-19 may be an alternative, experts and analysts say. Stephen Jones, chief executive of banking-and-financial-services-sector trade association UK Finance said the pandemic’s effect may accelerate the already booming habits of contactless payments and remote banking more than previously. The Office of Fair Trading (OFT) says a ban imposed Jan. 13, 2018 is necessary because surcharges aren’t usually transparent and are revealed to card users during the checkout process only. The European Payment Services Directive 2 prohibited the adding of surcharges to credit- and debit-card payments anywhere in the European Economic Area. The OFT said surcharges may be potentially misleading to consumers but they were a common way to offset operational fees imposed by credit card companies which can cost merchants thousands of pounds a year.
Surcharges are fees added to consumers’ card transactions. According to OFT, while the surcharges are small in relation to a transaction, UK consumers still paid around £300 million in surcharges in 2009. HM Treasury estimated consumers spent £473 million on surcharges in 2010. The UK Cards Association, a trade association for 300 providers of finance, banking and payments services, compares surcharges with what the travel industry, like airlines, often applied as “drip pricing” – an additional cost not disclosed to shoppers until payment.
Business Travel News reported British Airways was adding surcharges to corporate-card transactions in the U.K. applied to bookings made via a global distribution system at 1 percent, Air France–KLM S.A. at 2 percent and Norwegian Air Shuttle ASA, or Norwegian, at 3 percent, each.
Surcharges, however, remain permissible for corporate and non-EU cards. The allowable surcharge depends on several factors - card type, cardholder country of origin and interchange and acquirer fees, for example. According to Unified Payments Group, LLC's founder and President Dan Hatcher and chief executive officer John Perez, the current US payment regulations allow surcharges for commercial card payments. But experts say controlling surcharges is necessary to protect consumers and establish fair competition in the Europe payments industry.
The ban on surcharges for EU card payments may force merchants to rethink ways they can cover these expenses, according to many. Just Eat Ltd., an online food takeaway company in Britain, introduced a 50 pence service charge on bills a day before the ban went into effect. There was a backlash from customers – a “rip-off”, they said. They also accused it of “dodging” EU rules, according to The Guardian newspaper.
Alternatives to cards
The restriction highlighted the most important strategic and commercial elements, according to a report from international consulting company Oliver Wyman. The ban on surcharges has led some analysts to predict momentum for bank-to-bank payments. Direct debits were preferable - based on the Oliver Wyman report - because of their lower operational costs and failure rates compared with cards.
According to the European Central Bank, direct debits were 20 percent of all 122 billion cashless payments in the EU in 2016, UK Finance reported direct debit transactions in the UK were 4.4 billion in 2018 with an overall value of £1,327 billion. This is forecast to grow to 4.7 billion payments in 2028. In 2019 contactless payments rose 16 percent to 8.6 billion, according to data from the banking lobby group UK Finance. Direct debits are among the contactless payment methods that have seen an increase as a result of the increase of online and mobile banking services, it said. Information technology service management company GoCardless predicts the regulations will lead to instant “push” payments via payment initiation service providers from customers’ to merchants’ accounts - with low transaction fees and failure rates. Pranav Sood, director of business operations and strategy for GoCardless, says the effects may differ but the prospect of bank-to-bank payments is now more clear - particularly for those who previously relied mostly on card payments.
Unstoppable credit and debit cards
In spite of the ban debit and credit cards may still rule the faster-payment sectors. Users have been increasing in the past few years in the UK and Europe. Based on UK Finance’s 2019 report, throughout the previous year the use of debit cards in the UK grew 14 percent - or up to 15.1 billion payments made. It projects even greater growth after the pandemic. Debit card payment volumes are forecast to reach 22.3 billion payments in 2028 - accounting for more than half of all payments in the UK. The same report showed credit cards in 2018 saw an increase of 4 percent - or 3.2 billion payments made over the previous year in the UK.
However, the effect of regulatory changes - and other economic complexities - on the volume growth of both debit and credit cards remains to be seen, experts said.
A strategy for the anticipated outcome of the ban is important for businesses and merchants to remain profitable, Fintech Times wrote. According to the news outlet, because the ban doesn’t apply to corporate and non-EU cards, merchants will need technical support to avoid overcharging and violating the law and incurring fines. Merchants could recoup an average of 1.77 percent from total transaction values, according to an analysis of more than 3.5 million corporate transactions conducted by UK-based payments company APEXX Global.
APEXX data demonstrates the travel sector lost almost £18,000 for every £1 million in revenue because merchants were "afraid" of overcharging on surcharge fees and misunderstood the regulations, according to the Fintech Times February 2019 report. Merchants imposing surcharges were likely to undercharge and were ultimately unable to recover the permissible amount, it said. APEXX’s Surcharge Inspector monitoring tool can help merchants counterbalance extra fees within an “acceptable rate”. The APEXX Surcharge Inspector lets merchants inspect processed transactions and provides an immediate calculation for the maximum permissible amount. It says it ensures all surcharges are “well-recovered” and within EU regulations and its product typically offers a return on investment of 20 times.
GoCardless's Pranav says the surcharge ban may leave a mark on the payments industry but asks if this is a significant shift from card payments or an increase in market share for alternative payment methods.