Interchange and assessment fees were a fixture in UK news in mid-July as the UK Treasury declared merchant surcharges illegal, beginning January 2018. 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 ban also opens up the possibility that some merchants will raise prices on all payment types in order to recoup processing fees, an action which could lend ammunition to fresh legal challenges.
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. While a ban on surcharging under Payment Services Directive 2 (PSD2) was already imminent for cards affected by the EUs recent Interchange Fee Regulation (IFR), the UK government opted to extend the ban to all retail payments. This ban also includes transactions processed by government agencies.
US and Australia: 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 model under PSD2, other countries, such as Australia and the US, have taken completely different approaches. 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, now limiting them to the actual transaction cost.
In the US, the ability to surcharge is 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 – subject to a number of restrictions. This agreement; however is also subject to state laws. Ten US states ban card surcharges; although these states often permit merchants to charge a higher price for card transactions if they describe it as a cash discount rather than a surcharge – a practice which has provoked here-to-fore unresolved challenges on constitutional grounds.
Potential lawsuits
Just two days after the ban was announced, the British Competition Appeal Tribunal rejected a GBP 14 billion class action lawsuit against Mastercard 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 Tribunals denial of the suit. 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 and could reopen the door for a new challenge.
About Ryan Tuttle
Ryan Tuttle is a consumer finance analyst at Euromonitor International. His work at Euromonitor focuses on global trends and developments in cards, payments, and lending. He has a master’s of public policy degree from Oregon State University and a bachelor’s of environmental studies degree from Gonzaga University.
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