High Streets Initiative 7 September 2017

How the card payment surcharge ban could impact independent businesses

Hamburgers with moblie phone
Takeaway delivery apps have long been accused of charging extortionate card payment surcharges

Following the government’s announcement that all retailers will be banned from charging fees for credit or debit card payments from January 2018, Mark Latham, director at Handepay, asks what the impact of the new ruling could mean for the UK’s independent firms.

The surcharge ban on debit and credit card payments has polarised many independent businesses. Some fear that the ruling will have a knock-on effect, resulting in a financial squeeze as retailers attempt to absorb the typically high costs that many card terminal providers charge.

Meanwhile, other retailers think that the new government directive will ultimately help to restore their reputation among consumers, as retailers will have no choice but to stop implementing much-loathed added payment charges.

Given that the surcharge ban is unprecedented, it’s difficult to understand what effect this decision is likely to have on the UK’s independent business community, but it is important to try and predict how it might impact them and advise accordingly.

This becomes particularly relevant in an increasingly cashless society, in which removing a possible barrier to the use of cards and embracing digital payments is surely a positive step.

Simply put, the government’s surcharge ban will put an end to a practice that was penalising consumers for making card payments, and in turn alienating independent businesses.

I for one can’t stand the extra costs that are so often applied to card payments and come as an unpleasant and unexpected surprise to customers when they’re notified of them in the final stages of a transaction. Often, they are completely unnecessary and bear no relation to the costings of the purchased product.

Certain sectors have long been the worst offenders of this practice, including airlines, concert booking sites, takeaways apps and some local councils, which have been known to charge three per cent or more on top of the cost of an item or service.

Under the Consumer Rights Act, businesses have, up until now, only been permitted to pass on charges that genuinely reflect their costs. Namely, the amount the bank charges to process a credit or debit card payment. My primary concern is that independent businesses will find themselves paying more than they should for card processing.

Companies could become trapped in an impossible financial situation if card acquirers fail to address this balance. The ideal solution would be to provide equitable pricing for both small and large-scale businesses.

Currently, the majority of contactless transactions are authorised offline by a payment terminal communicating with the card chip, rather than going online and sending an authorisation request message to the issuer as per regular chip and PIN transactions.

However, as of October this year, Visa is set to force all contactless transactions online for authorisation, and there’s a concern that some card acquirers will seize the opportunity to implement authorisation fees on contactless transactions, even though there’ll be virtually no additional cost at their end.

Businesses would have no choice but to pay these fees, resulting in increased card acceptance costs for companies. Everyday transaction costs could double, which would cripple smaller businesses more than larger retailers, who don’t pay authorisation fees.

It seems almost inevitable that some small business owners will react by raising their standard prices to cover the cost of processing debit or credit card payments, or stop accepting cards all together. This is unfair on businesses that have always opted to absorb the cost themselves and would represent a real regression for the independent sector, which has worked tirelessly to re-establish itself post-recession.

This is why it’s vital that independent businesses make sure they fully understand exactly what they’re paying their merchant services provider for. When it comes to card processing costs, savvy retailers should take the time to shop around to see if they could be getting a better deal elsewhere.

Factors to think about include finding a provider that doesn’t add crafty fees onto your monthly bill. You need to find a provider that has a transparent pricing structure in place and offers the services, support and equipment that’s right for your company.

Common extra charges to look out for include authorisation fees and joining fees. Some merchant services providers charge their customers for either PCI DSS compliance or non-compliance. Premiums can also be added to certain types of transaction, such as ‘card not present’ payments.

A straightforward rule of thumb to find out if your business is paying too much for merchant services

Find a recent monthly statement, and subtract your monthly terminal rental fee. When you’re just left with your processing costs, divide this amount by your monthly turnover, then multiply by 100.

If you find that your total is above 0.7 per cent, you could seriously benefit by switching to a better deal. To put things into perspective, a business with a monthly turnover of £10,000 should be looking to pay no more than £70 each month on their card processing costs.

As this is only a rule of thumb, it could differ slightly depending on your business’ average transaction value and blend of credit, debit and commercial cards. At the end of the day, it’s important for all independent businesses to take the time to review their merchant services costs.

The card payment surcharge ban should be welcomed, but it must be coupled by provisions that mandate fair play from the card acquirer’s side. If not, smaller independent businesses will end up in a difficult position, which undermines the significant benefits for those who’ve embraced digital innovation.

Mark Latham is director at Handepay, a merchant service provider offering bespoke services to businesses.

Why UK shoppers are ready to avoid cash-only high street businesses

This article is part of a wider campaign called the High Streets Initiative, a new section of Business Advice championing independent and small retailers by identifying the issues that put Britain’s high streets under pressure. Visit our High Streets Initiative section to find out more.

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