Interchange and assessment fees were a fixture in UK news in mid-July as the UK Treasury declared merchant surcharges illegal, beginning January 2018. Heralded as a common sense move by many commenters, the ban does, however, beg the question of whether merchants will raise prices to cover card fees. The decision charts a contrasting course to that of both the US and Australia, which have both made headlines in recent years over challenges to surcharging laws but permit the practice, subject to limitations. The move may also prove valuable ammunition in the future for litigants looking to take up the charge of a recently rejected interchange fee lawsuit in the UK.
Going beyond PSD2
Surcharging – the merchant practice of attaching fees to card transactions – is a contentious issue. For merchants, it represents an opportunity to pass along the cost of card transactions that would otherwise eat into profit margins. For consumers, it is an added cost that can be confusing and at times excessive. In some cases, surcharges can far exceed the actual cost to the merchant of processing transactions, and can serve as a barrier to card usage. While a ban on surcharging under Payment Services Directive 2 (PSD2) was already imminent for cards affected by the EU’s recent Interchange Fee Regulation (IFR), the UK government opted to extend the ban to all retail payment methods. This ban also includes transactions processed by government agencies. Merchants – now barred from surcharging, but still responsible for interchange fees and assessments – may respond by raising prices, a move which would affect all payment types.
Australia and the US: Surcharging context
The option to implement card surcharges has a long history and is far from universally settled. While the EU has taken steps toward a more unified approach under PSD2, other countries, such as Australia and the US, have taken completely different approaches. Interchange fees in the UK are significantly lower (capped at 0.3% for credit and 0.2% for debit under the IFR) when compared to Australia (which caps interchange on credit cards at 0.8%) and the US (which often features credit card interchange rates well in excess of 3%), but still represent a cost to consumers.
In Australia, surcharges have long been a point of conflict. In the early 2000s, the Australian government began allowing card surcharges, but was forced to set stricter standards for large retailers in 2016 and other merchants in 2017 to curb excessive fees on cards issued in Australia, limiting them to the actual transaction cost.
In the US, the situation is considerably more complicated. Merchants accepting cards are not only subject to government regulations, but also to differing agreements with the card networks. In 2013, a settlement with Mastercard and Visa went into effect which allowed merchants to apply a surcharge to certain transactions up to the actual processing cost as long they also apply it to American Express. This change does not, however, apply to American Express, so merchants that accept all three of these networks are left unable to apply surcharges.
In addition to card agreements, 10 states in the US ban card surcharges. In many of the states with anti-surcharge laws, merchants are permitted to charge a higher price for card transactions; however, they are prohibited from describing it as a surcharge but must instead describe it as a cash discount. Earlier this year, the law in the state of New York was challenged in the Supreme Court on First Amendment grounds, however the issue has been returned to lower courts for further litigation and no changes have been made.
IFR and interchange lawsuits
The timing of this announcement is intriguing, given that the British Competition Appeal Tribunal just two days later rejected a GBP14 billion class action lawsuit against Mastercard that centred on merchants passing along interchange fees to consumers that paid in cash. Difficulty proving that merchants passed on fees was a major reason for the Tribunal’s denial of the suit. The elimination of surcharging in the UK should thus prove an interesting study in merchant behaviour. While in some cases these costs may be more or less in line with the costs to handle cash and other payment types, some merchants may nevertheless choose to raise prices in order to bear the burden of interchange fees, leaving January 2018 as a key date in future arguments over interchange fees.