Abolishing surcharges can’t come too soon

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.

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.

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.

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?

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.

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.

John, I found this info which may surprise you.

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

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

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.

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.”

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

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.

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

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.

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.