High Streets Initiative 12 January 2018

How to embrace the surcharge ban as a micro business owner

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The surcharge ban on card payments comes into effect on 13 January

From 13 January, most retailers will no longer be allowed to add surcharges to the price of goods and services. Here, finance partner at law firm Blake Morgan, Richard Humphreys, explains what the surcharge ban will mean for micro business owners.

The banning of surcharging for customers paying by card will affect enterprises of all sizes, but micro businesses with tighter profit margins could stand to lose the most. Or could they?

While startups or entrepreneurs may be asking question such as ‘Will I have to increase prices to compensate?’ or ‘How can I reduce the impact?’, the truth is that these changes present an opportunity for micro business owners.

As newcomers to their market, micro businesses may not have the longstanding surcharging policies that many established larger businesses, such as airlines and events booking websites, are now having to review and incorporate into business models and pricing strategies.

In fact, having a clean slate could when it comes to surcharging could work to the advantage of smaller firms.

What’s changing and why

As of 13 January, most business owners will no longer be allowed to add a charge to the headline price of goods and services supplied to consumers (“surcharging”), if those charges are related to the use of one of a number of specific payment methods.

The change will impact micro firms which currently pass on charges that genuinely reflect their costs under the Consumer Rights (Payment Surcharges) Regulations 2012 (CCR’s).

The legal background to this change is the need for the UK to comply with the Second EU Payment Services Directive (PSD2), but the underlying reason for it is the clear level of consumer dissatisfaction with what have long been viewed as “hidden” charges.

Read more: Retailers fear squeeze from banks ahead of card payment surcharge ban

These hidden charges are fees which often only become apparent to customers after they have committed themselves to a purchase, even if it can technically be argued that they are not yet contractually bound.

Much of the publicity on this issue has focussed on the longstanding retail practice of recharging the fees which businesses are themselves charged for, allowing their customers to pay by credit card.

Since April 2013, business owners have been prevented from recharging more than they are charged themselves. Now, the CCR’s have been amended to introduce a surcharge ban which goes far wider than this.

Indeed, the extent of the new ban is wider than that set out in PSD2. It covers a range of payment methods, including debit cards, direct debits, online and telephone banking transfers and similar arrangements, such as PayPal.

Areas excluded from the new rules

The only common consumer payment methods which are not affected by the new surcharge ban are cash and cheques.

Commercial payment methods are not subject to an absolute ban, although they will now be caught by an excessive surcharge ban similar to that which already applies to consumers if they involve a “payment service”.  Again, the main exceptions to this will be cash and cheques.

As a result, it will still be permissible to surcharge transactions which involve commercial payment methods, but care needs to be taken when doing so. It isn’t the nature of the underlying transaction that makes the difference – it’s the nature of the payment method.

Read more: Ongoing card surcharging sees high street shoppers cancel transactions worth £10bn

For example, if an individual makes a purchase with a credit card, the fact that this may be a genuine business expense will be irrelevant, the ban will apply if they use a personal card, but will not if they use a business card.

Furthermore, the ban does not outlaw any form of surcharge, only one imposed for the use of a particular payment method. Accordingly, an administrative booking fee which is payable by all customers regardless of the means of payment will be unaffected.

It is likely that some micro business owners will try to rebrand their existing surcharge arrangements and extend them to cover a wider range of transactions. Again, care will be needed.

Embracing the changes

Here are some key points for micro business owners and entrepreneurs to consider ahead of the surcharge ban.

(1) Consider carefully whether it is necessary to increase prices, and the potential fall-out for a relatively new business where consumer confidence is potentially more fragile. Where at all possible, build the annual costs into your overall business costs and margins.

(2) Surveys have shown that up to a third of small business customers would walk away from a purchase if they were faced with card surcharges. Retaining and building your customer profile on the basis of fair pricing could in fact boost your profits in the long-term and enhance your brand’s reputation.

(3) Embrace card technology – people paying by card are more likely to spend.

(4) Consider using a card payment system that does not leave you to having to deal with the different charges demanded by each card.

(5) Many micro businesses may have a £5 or £10 minimum spend before they will accept a card payment. This will not be specifically illegal under the new directive, however, as more consumers switch away from using cash, consider carefully the long-term impact of this on the business.

(7) Owners may also want to review this practice, as debit cards are now charged as a percentage of the transaction value, the same as credit cards, thereby reducing the impact on profit margins for small value items.

The future

Micro business owners should consider the future perceptions of surcharging by consumers.

For example, a flat “booking fee” may not be caught by the new regulations, but it is likely that any such form of surcharging will become increasingly unacceptable, unless signposted so as to make it impossible for it not to be clear to any consumer from the start.

Micro business and startup owners will also need to bear in mind the increasing number of overlapping regulations in this area, including wider restrictions on “unfair trading”. Sooner or later, the inherent risks involved in any form of surcharging arrangement will outweigh the commercial benefit involved.

Richard Humphreys is a partner in the banking and finance team at law firm Blake Morgan

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