In certain markets such as ticketing and passenger travel, it is vital to keep headline prices low to attract customers. Often this is done by imposing surcharges for booking tickets using debit or credit cards (payment surcharges). These fees and surcharges are generally added later in the booking process when the customer selects the method of payment they wish to use.

Industries such as the airline industry have, in the past, argued that as long as at least one payment method was available which did not incur these payment surcharges (e.g. visa electron card) the surcharges were an optional charge and so did not need to be included in the headline price of the product or service.

Payment surcharges are unpopular and the EU has now introduced a directive that will restrict the amount that retailers can recoup through these surcharges. The OFT has also started to adopt a more aggressive approach to payment processing surcharges under the current rules. Businesses which impose such surcharges would therefore be advised to review how these developments are likely to affect their pricing models going forward.

The Current Legal Framework

There are currently a number of laws and codes of practice in force in the UK which regulate payment processing surcharges by requiring information about these charges be provided in a clear and transparent manner.

Consumer Protection from Unfair Trading Regulations 2008 (CPRs)

The most important of these pieces of legislation is the Consumer Protection from Unfair Trading Regulations 2008 (CPRs). The CPRs ban a number of practices including:

  • unfair commercial practices (regulation 3), and
  • misleading practices, whether by action (regulation 5), or omission (regulation 6).

Under regulation 6 a commercial practice is a “misleading action” if it contains false information or information presented in any way that deceives or is likely to deceive the average consumer in relation to a range of matters, including the “main characteristics of the product” and or the “price or manner” in which the price is calculated.

In order to breach the regulations the practice must also cause, or be likely to cause, the average consumer to take a transactional decision he would not otherwise have taken.

The OFT, Local Authority Trading Standards and certain regulatory bodies can take enforcement action under the CPRs in line with their enforcement policies.  

OFT’s Approach to Payment Surcharges

In 2011, Which? submitted a complaint to the OFT about retailers in passenger transport markets imposing surcharges on consumers for paying by debit or credit cards where consumers have no practical alternative payment method.

Following the complaint, the OFT completed an investigation into this issue and issued a response to the complaint. In its response, the OFT stated that it was of that view that;

“where the headline price is unachievable for the majority of consumers, because the payment mechanism which incurs no surcharge is only available to a small minority of consumers, paying some form of surcharge is, in effect, compulsory”.

it also stated that it believed;

“a failure to provide upfront information on effectively compulsory charges can constitute a breach of the CPRs contrary to either or both of Regulations 5 and 6 of the CPRs  (and could also constitute a breach of Regulation 3 of the CPRs)..”.

Following the publication of its response the OFT opened an investigation into payment surcharges in the airline industry. On foot of the investigation 12 airlines gave formal undertakings to the OFT in the summer of 2012 that in future they would;

  • include debit card charges in their headline prices; and
  • present optional credit card fees clearly and transparently.

While the OFT focused on the airline sector in this investigation, it did state that it believed the same principles apply equally to all UK traders. It also specifically mentioned event tickets, hotels, cinemas and car dealership as markets outside the travel sector in which payment surcharges are particularly common.

Having set a precedent in the airline sector, it is likely that the OFT will set its sights on other sectors such as event tickets if it believes that retailers in these sectors are using booking fees in a manner that is likely to confuse customers.

Committee of Advertising Practice (CAP Code)

Another element of the regulatory framework in this area is the CAP Code. This is a set of advertising rules set down by the Advertising Standards Authority.

The advertising code contains wide-ranging rules designed to ensure that advertising does not mislead, harm or offend. Adverts must also be prepared in line with the principles of fair competition.

The CAP Code is a self-regulatory system but a breach of the code can lead to adverse publicity.

Of particular relevance to drip pricing is section 3.18 of the CAP Code which provides;

  • quoted prices must include non-optional taxes, duties, fees and charges that apply to all or most buyers.

New Legislation – The Consumer Rights Directive

At the moment there are no restrictions on the amount that a business can charge as a payment processing fee (provided that it meets the transparency requirements set out above). This will change, however, once the UK implements the Consumer Rights Directive.

Under Article 19 of the Consumer Rights Directive, member states must introduce legislation to ban businesses from imposing above-cost surcharges on any form of payment from mid -2014 (i.e. surcharges that exceed the costs the business incurs on a card payment).

The UK government has announced that it intends to be the first member state to implement this provision and intends to ban excessive surcharges on all forms of payment by the end of 2012.   

The government does, however, intend to allow businesses to charge fees to recover the direct costs they incur in processing the transaction.

What Your Business Needs to Think About

Given the recent developments in this area and the further changes due this year, any business which relies on payment processing charges as a source of income needs to make sure that it provides information about its payment processing fees in a clear and transparent manner.

Such businesses will also need to review how the new rules restricting above-cost surcharges on payment methods will affect their pricing model.