The law of entirely expected consequences case study: payment surcharges

Our Prime Minister, Mrs. Theresa May, went a bit Trump and tweeted. Cool. And here it is.


 The odd thing about this is that every single part of it is manifestly and demonstrably untrue. I’m genuinely baffled as to why Mrs. May (who spent 12 years working at the Association of Payments and Clearing Services, the precursor to UK Payments) should make such a transparently false claim to obtain credit for something that she should be against. To be clear: the charges were not hidden, the ban is not only on credit and debit card surcharges, and it won’t help millions of people to avoid rip-offs. Let me explain, starting with what I saw on 13th January when I went to pay for a flight on British Airways…

My first "no surcharge" purchase

Now normally when I use my BA Amex card to book a flight, I have to pay a credit card surcharge. I don’t mind paying the surcharge because I want the protections that the use of credit cards give me as a consumer and also because I want the frequent flier points I get for using this card. As of 13th January, I don’t. I get all this stuff for free because “new rules which will come into effect on 13 January 2018 will mean you cannot be penalised for choosing to pay by card, either online or in-store”. Happy days. Thank you Mrs. May!

Unfortunately, the entirely predictable result of this ban on card surcharges is that prices will go up.  For the press to say that ban has “backfired” because “consumers face higher prices and new ‘service charges’ as retailers and businesses plan to circumvent the Government’s ban” is laughable. The ban has worked entirely in accordance with the laws of economics.

To see why, let’s go back to Mrs. May’s odd social media message. First of all, the ban on card surcharges is not because of Mrs. May or the British government. It is because of the European Union’s Second Payment Services Directive (PSD2), although in the UK the government has gone further than PSD2 by, essentially, banning surcharges for all electronic payments not just the “four party” schemes. Thus it was the EU that banned “credit or debit card” surcharges, not the British Government, it is indeed the British Government, rather than the EU, that is making poor people pay for my air miles.

Now, just a quick recap of Economics 101. If the government passed a law that (for example) health care is free, that wouldn’t mean that doctors would start working for nothing. It would mean that doctors would have to paid in some other way (out of general taxation, for example). Similarly, passing a law that retailers cannot surcharge for cards doesn’t mean that everyone at Barclaycard is now working for free. Yes, the government has stopped retailers for charging for cards, but that does not mean that the costs are not going to go away. Chip and PIN terminals, 3D Secure gateways and Section 75 chargeback guarantees don’t grow on trees. What will happen?

Suppose you are an online merchant selling, oh I don’t know, let’s say Dungeons and Dragons miniatures. Let’s say your card service comes from a top quality merchant service provider who charges you 25p per transaction. From 13th January…

  1. Well, they could stop taking cards. But that would mean they lose business.

  2. They could have a loyalty scheme (spend £50, get £5 off your next purchase) but only for people who pay with cash.

  3. If half their sales are cash and half on card, then they could put the price of the average basket up by 10p. This is a nice simple solution and it’s good for me, since the customers who pay with cash are now subsidising my John Lewis cashback (since I’m only paying the extra 10p not the full 25p).

  4. Or they could try it on and add a service charge of 25p to all orders. This is what, for example, Just Eat have done.

But why should these dastardly people be allowed to get away with any of these options? Why shouldn’t they be forced to simply accept lower profits and a reduced standard of living as suggested by The Daily Telegraph which is upset that “retailers and other companies are planning measures to ‘sneak’ around the rules“. The dastardly plots unveiled by The Telegraph, precisely as you would expect from an analysis of the environment, are those that I outlined above: refusing card payments, increasing prices and introducing new ‘service charges’.

This is ridiculous from The Telegraph. Refusing to accept cards because the government has made it uneconomic is not sneaking around the rules, it is responding to the rules. And unless The Telegraph is proposing to step in and pay the cost of accepting cards for all merchants, neither is increasing shelf prices. In fact, I absolutely guarantee that prices will rise in accordance with basic laws of economics that The Telegraph should be familiar with. Unlike government ministers, apparently. The Economic Secretary to the Treasury, Mr. Stephen Barclay, said “these small charges can really add up and this change will mean shoppers across the country have that bit of extra cash to spend on the things that matter to them”. How? I have no idea. The UK travel industry, for example, pays around £150m per annum in card charges. Who does Mr. Barclay think is going to pay for the cards, terminals, fraud, bad debt, guarantees and all the rest of the infrastructure in the future? 

The result of banning card surcharges (ie, price-fixing for payment services) will be two-fold. First, it will push retailers into having their own apps that exploit open banking and use instant payments instead of cards. I can assure you that I won’t book a holiday or buy an expensive sofa this way: I want the legal protections that come with credit cards. However, the costs of accepting cards gives these merchants plenty of margin of to play so they will be able to incentive customers away from the existing rails. Second, it will transfer money from poor consumers who are trapped in the cash economy to people like me with cashback and airmiles cards. As the media have belatedly noticed (having not asked me about it in advance) “even those paying cash are set to lose out, as some companies – including food delivery firm Just Eat – plan to apply the cost increases to all customers

The outcome, as it happens, may be even more perverse. Since debit cards cost merchants less than credit cards, consumers switching to credit cards to get the rewards will mean the merchants overall bill for accepting cards will go up! This will hit hard in travel, for example, where “removing the surcharge will result in a significant shift away from payments by debit card and bank transfer so the increase [in extra costs] will be greater than the current credit card surcharge”. Not my words. “Greater than the current credit card surcharge”. So prices will rise by more than the current surcharge, despite Mr. Barclays’ odd prediction that shoppers around the current will have “that bit of extra cash”. No, shoppers around the country won’t. But certain shoppers (eg, me) will, because it the cost of the flight goes up by £1 but I would have had to pay a £2 service charge to use my rewards card before, I’m now saving a £1 and still getting the rewards.

I have long maintained that if you are going to regulate anything in this field then what you should do is require retailers to make the costs of payment choices clear and then let the market do the work. If the government wants to take action, it should adopt my plan to minimise the total social cost of payments and make debit cards the “zero”. In other words, companies should not be allowed to surcharge for debit cards and banks should be required to provide zero interchange debit cards as a condition of holding a retail banking licence. If companies want to surcharge for payment instruments that have a higher overall total social cost (cheques, cash, credit cards, charge cards, cowrie shells or euros) then that’s fine. And there would be a logic to it, unlike the current situation. Meanwhile, “consumer experts have called for regulatory enforcement to ensure businesses cannot dodge the rules“. 

This is absolutely hilarious. Who are these experts? What Soviet-style commission is going to take control of the taxi company’s pricing policy and decree what level of service charge, if any, is to be allowed? The whole situation is nonsensical. If the government, merchants or anyone else thinks that the costs of accepting cards are too high, then they are free to create an alternative that is less expensive. And if merchants want to know how to create an alternative lower cost option for customers *cough* open banking *cough* then they should feel free to call me and I’ll put them in touch with the right people (hint: Consult Hyperion).