/ Money

Abolishing surcharges can’t come too soon

Stack of credit cards

Charges for paying by credit card are generally more reasonable now than in the past, but a Which? investigation found that they still vary a lot. Have you been stung by a credit card charge recently?

Being charged for using a credit card when making a payment is long-standing gripe for many consumers. As some of you will know, Which? has been campaigning against these surcharges for years.

We found that while some companies have cut their fees, we’re still finding others charging 2% or more – despite some of their costs being cut.

A brief history

In 2011, we made a super-complaint to the OFT against the excessive surcharges companies charged for paying by card. It resulted in the government banning companies from charging more than it costs them to process a card transaction.

And when we felt companies were still charging too much, we persuaded some of them to reduce their fees.

Why do companies charge at all?

Of course, there can be costs to a company for processing a card payment. These costs include an ‘interchange fee’ between banks, but last December these fees were cut for Visa and Mastercard. As a result, we expected the surcharges being passed on to consumers to be cut too. For example, Easyjet has cut its fees from 2% to 1%. But that doesn’t seem to be happening across the board.

It’s hard to know exactly what it costs every business to take credit card payments – and it might cost some companies slightly more to process credit card payments than others. But when customers can’t see what these costs are, they might question why one company charges 3.5% while another is only charging 1%.

This could soon be a thing of the past (mostly)

The UK government is planning to implement a new Payment Services Directive that will ban all surcharges for Visa and MasterCard debit and credit cards (but not American Express). The latest expectation is that it should come into force as early as 2017.

In the meantime, we’d like to hear from you. Have you come across any companies with high credit card surcharges recently?

Our full investigation into credit card fees can be read in the August edition of Which? magazine.

Comments
Profile photo of wavechange
Member

I welcome abolition or reduction of charges because I prefer to pay by credit card to benefit from Section 75 and other consumer protection as well as the delay before my credit card bill is paid.

If there is a credit card surcharge I pay by debit card. I do check if there is a credit card surcharge but in my experience, those charging a surcharge do make this clear.

Profile photo of John Ward
Member

I don’t see why there should be a surcharge to the customer for using a credit card. It doesn’t happen in shops and they also have a shopfront to support. The devil in this particular detail is the interchange fee charged by banks in addition to the merchant processing charge. I should like to know the reason why it should be percentage-based. There might be a good reason [e.g. it would otherwise be disproportionately high for low value purchases], but then I think a more appropriate level might be 0.5% rather than 1% or more, or perhaps the fee should taper. I avoid CC processing charges so far as possible but for many people there is virtually no alternative if they need to spread the cost of a purchase over two or three months. The S.75 protection that comes with a credit card payment is also a valuable safeguard, especially if dealing with an unknown company or if an expenditure is critical, but it comes at a price. The absorption of credit card fees in the overheads of retailers and service companies will impact on prices across the board for every consumer, of course. It would not surprise me if the banks took the opportunity to raise the interchange fee as it would then be well and truly concealed.

Profile photo of malcolm r
Member

To me the advantages of using a credit card are the interest free period it gives before having to settle, consolidating my payments under one account, and the protection it gives against a problem purchase. I have never yet had to use the latter but it does give confidence, particularly in choosing an online seller. However, the interest free and account administration costs money, and the credit card company makes a profit. So costs are involved that consumers end up paying.

I presume the seller pays a fee whenever a credit card transaction takes place. I make the assumption that for retailers and many others this is hidden in the price of goods and services that everyone pays, whether they use a card or not. For others a fee is disclosed that , with some, (my local authority, DVLA as examples) can be avoided by paying with a debit card.

So should we have full transparency – where all sellers disclose the fee. and for those who do not pay by credit card, why should they not see a slightly reduced price? I’d like to see someone show exactly where all the charges are in credit card transactions – bank, credit card company, retailer, service provider – and then have a reasoned proposal as to how these are best recovered, without those paying by other means not subsidising those who use a c c.

Profile photo of John Ward
Member

When credit cards were first issued in the UK in the late 1960’s they were seen by retailers as a boost to trade and a way out of their hire-purchase schemes with costly overheads, so they were happy to absorb the costs of card transactions. Shops that accepted credit cards were seen to have a commercial advantage over those that didn’t. It also improved mail order confidence. Not being a Barclays account holder I was not entitled to a credit card until the Access Card was introduced in around 1972. It arrived unsolicited as a sort of present from the Midland Bank with whom I had a current account. The Consumer Credit Act soon followed in 1974 in order to regulate the industry and it brought in the Section 75 default protection. In their early days, credit card payments were very much a manual operation requiring traders to take their payment slips into their bank for processing. Although payment processing for both traders and borrowers was heavily computerised it was much slower than modern systems [direct debits were slow to catch on and most customers settled by posted cheque or an over-the-counter payment using Bank Giro] and most back-office processes were paper-based. Despite enormous efficiency gains the fundamentals for the consumer haven’t changed much even though transaction volume and turnover have grown phenomonally so the costs of operating a credit card account remain significant. I would have expected the digital revolution and on-line transaction systems, together with the economies of scale, to have borne down on these costs and I agree with Malcolm – it would be very useful to have a breakdown of the costs and charges together with a justification in each case. We should not overlook the interest rates on deferred settlement which, in relation to base rates, are stratospheric; I expect they are profitable as well.

Profile photo of wavechange
Member

I would like to see new credit card holders required to set up a direct debit to pay off their card balances at the end of the free credit period. I suspect that this could save many customers from getting into the habit of living in debt and paying high monthly interest rates.

Thanks for the history, John. I had not realised I had obtained an Access card so soon after they were launched. I remember when the card was put onto a manual machine that transferred the embossed information onto a form with duplicate sheets, one of which was given to the customer. Chips and pins were from the fish shop and haberdashers down the street and security codes were something used on bike locks. There are still a few of the manual card machines in use.

Member

I do not mind paying the cost of any fair or actual Credit card transaction but what gets up my nose is the charges of Travel firms who will charge you 2% fee or similar of your total travel transaction that then ups your costs and in no way is a true reflection of the actual Credit Card transaction cost, more a case of putting extra profit into the coffers of the Travel company. That really needs to be looked into and rectified by law if necessary.

Profile photo of John Ward
Member

If the travel company is having to pay the bank interchange fee of at least 1%, plus the merchant processing charge at whatever rate that is, you can see where the 2% comes from. As I wrote above, I think it is far too high but until the interchange fees are reduced this problem will remain. The travel industry does not endear itself to its customers but, still, we wouldn’t want to book a holiday with a firm operating on a knife edge. Credit card payments to the travel operator, though, are gilt-edged as they are real money in the bank with no risk of default or bad debts and for many holidays they are received some time before any payments are made to the airline and hotel.

Member
Derek Conway says:
22 July 2016

Its only a small thing but when visiting my local fish and chip shop very recently I ordered a take away fish and chips Total £9.90 I wanted to pay by my contactless visa debit card. The assistant showed me a small notice behind the counter. It said that any payment by card under £15.00 would be subject to an 80 pence surcharge. That meant that they wanted almost 8% extra on my £9.90 portion of fish and chips. Hunger overcame my decision to walk out.

Member
Jane Griffiths says:
23 July 2016

Cottages.com wanted to charge me 1.99% for a UK holiday cottage. I paid by debit card instead!

Member
Martin Passchier says:
23 July 2016

A local taxi company in Northampton charges 10% for all credit card transactions!

Member

I had to pay for something that cost £17 but I found that if I wanted to pay with my credit card the cost would have been £22.50. Debit Card was used to pay the £17 Well known company no names

Member
Derek Sutton says:
28 July 2016

Credit card surcharges should not be allowed as separate items. Every company has overheads and how they manage them and pass them onto the consumer is a matter for them only. The consumer doesn’t need these itemised – just a final price.

I have just purchased travel insurance from Aviva and they make a CC surcharge with a £1 minimum. The policy document describes it like this :-

“The total premium (£52.07) includes Insurance Premium Tax at the appropriate rate, where applicable. Also included is a non-refundable credit card charge of 0.50%, equivalent to £1.00.”

Since when is 26p equivalent to £1.00 ?

Profile photo of malcolm r
Member

Derek, as I see it a credit card fee is like a “service charge”; separate from what you are purchasing. They will never be properly and fairly controlled if the are not transparent, and that means showing them separately in my view. They should simply reflect the costs of processing the transaction. What is to hide?

Furthermore I consider that if we choose to pay by other means – cash for example – any hidden credit card fee should be removed; why pay for a cost we have not caused?

Profile photo of DerekSutton
Member

But there’s a cost to using cash as well. Should we pay more for shopping or eating in a restaurant in winter as they cost more to heat ? Of course not. The cost of handling a cash transaction is an overhead. I don’t want to know about how efficient (or not) they have negotiated their contracts. I just want a single price. I accept that they try to pass it off as a service charge but it’s no more so than their electricity or gas bills.

Profile photo of John Ward
Member

But there are two prices, Derek – one for people who wish to pay with cash [which is legal tender and cannot give rise to handling charges] and a higher one for those who wish to pay by credit card which imposes significant external handling charges on the supplier. There is no charge for payment by cheque because it is considerably more convenient and secure than cash payment and therefore a cheaper process.

Profile photo of DerekSutton
Member

John, I found this info which may surprise you.

http://www.cardswitcher.co.uk/2014/09/cost-common-payment-methods/

Member

We’ve just been on holiday in the UK and been stung with a 50p cost for using a (debit) card for a tourist boat-trip. The boat owner was using a standard contact-less machine and we were paying over £20 for the trip.

I don’t carry that much cash anymore, so had to pay up knowing full well the boat-owner is not being charged anywhere near that much for the transaction. 🙁

Member
Eve Fletcher says:
13 August 2016

I have just renewed my car tax and DVLA wanted to charge me £2.50 for using a credit card on a £30 fee! I presume/hope that it’s £30 whatever the cost!
I know that companies negotiate with there suppliers and the % for using a credit card are way less than they charge the customer

Profile photo of malcolm r
Member

It is a little old now but a freedom of information request to DVLA brought the following response (extract):

“1. How much does it cost the DVLA to process a credit card payment?
The average cost to the Driver and Vehicle Licensing Agency (DVLA) for processing a credit card payment for Vehicle Excise Duty (VED) paid online ranges from £1.87 to £4.65. The cost incurred depends on the type of payment card used and the amount of VED collected…………………………… The decision to introduce the charge was made following a full public consultation with the flat fee being preferred to a number of other options, including a percentage charge.”

whatdotheyknow.com/request/62016/response/155743/attach/2/FOIR2316.pdf

Profile photo of John Ward
Member

For a £30 payment [and since S.75 protection is not a factor] I would use a debit card for which there is no transaction fee.

Profile photo of malcolm r
Member

From the same source DVLA say:
“2. How much does it cost the DVLA to process a debit card payment?
The average cost to DVLA for processing a debit card payment for VED paid online ranges from £0.15 to £0.27. Again, the cost incurred depends on the type of payment card used and the amount of VED paid.”

Member
Paul S says:
12 September 2016

I’ve just been angered by this too. A £2.50 fee on £20 car tax if I wanted the convenience of paying by credit card.
Could Which try challenging the FOI response?
(a) the response is 3 years old and as the report above says, generally transaction charges have reduced
(b) how come DVLA are saying their minimum charge is £1.87? I don’t believe tis can be accurate, unless they are being ripped off by the credit card companies
(c) it would be good to ask for an analysis of charges by transaction amount and volumes – this could easily demonstrate that the ‘average’ of £2.50 is unreasonable

Profile photo of wavechange
Member

Many years ago a Hi-Fi dealer offered me a rather good price and I asked if he would like paid by credit card or cheque, bearing in mind that my cheque guarantee card covered only part of the payment. He asked for a cheque, explaining that he was charged for credit card transactions and had already given me a generous discount. Ever since then I have been aware that companies are charged a fee when we use credit cards.

Over the years, some small businesses have been grateful for me paying by debit card or cheque rather than credit card, but I am increasingly being told that it makes little or no difference to them. I’m surprised.

Member
lydia pollock says:
21 August 2016

just tried to purchase a ten thousand pound car and told me had to be 2.5% fee which came to an extra £249 when i asked for it to be waiverd they said reduce it by a hundred wasnt happy didnt pay it went back and found this article on only costs 0,4% to process so i would have still been charged £149 they said taking hundred off car and couldnt do anything as the bank charges this liars. pulled out of deal and asked on chat what policy was on paying card got a call to say it wasnt a credit card fee it was admin fee and would be charged it even if i payed by debit card only way to not pay admin fee is to pay by cash or bankers draft

Profile photo of John Ward
Member

I can only imagine that the admin fee for processing a debit card payment must be because the funds will not actually reach the seller’s account for two or three working days. The seller will have costs in dealing with cash or a banker’s draft which both need to be physically deposited at their bank and have security implications. A bankers’ draft has to be paid for in advance in cleared funds by the person requesting it and there is an arrangement fee on top. There are no additional costs with cash but notice would normally have to be given to withdraw a large amount.

Member
Castle says:
21 August 2016

Could you have paid a deposit by credit card and the balance by cash or bankers draft.

Profile photo of John Ward
Member

That would be a good move, Castle, as paying at least £100 on a credit card would give S.75 protection to the whole transaction.

The advantage of paying the entire sum by credit card, as Lydia wished to do, is that the cost to the purchaser can be spread over a period [subject to interest] and paid off in varying instalments to suit the borrower’s cash-flow. I think Lydia did well to negotiate the CC payment surcharge down from 2.5% to 1.5% but whether it is worth paying £149 in this case for the benefit of using a CC is questionable, especially as CC interest rates are also high. Sometimes, walking away from a purchase is the best thing, especially when it is no longer the bargain you first thought it was.

Member
Emma says:
24 August 2016

I have just booked a flight plus hotel deal with Expedia, and the flights were with BA. After putting in my credit card details I got a message saying BA had added a £10 fee for the payment option, and I was able to amend the card details to pay by debit card instead, which removed the fee. I think £10 is outrageous and urge Which? to challenge BA on this.

Profile photo of John Ward
Member

Emma – do you know how the charge is calculated? Is it a flat rate for any amount of credit card payment or is it a percentage of the amount payable? £10 is 2% of £500 so if your flights cost no more than that the charge is excessive. If you read the Intro article you will see that Which? has been campaigning vigorously against high surcharges for CC payments with some success. It reports that the “UK government is planning to implement a new Payment Services Directive that will ban all surcharges for Visa and MasterCard debit and credit cards (but not American Express). The latest expectation is that it should come into force as early as 2017“. I hope Expedia was telling the truth and not adding some padding of their own.