06 February 2008

MLex: 'Surcharging' may be risky tool for card fee transparency

Competition Commissioner Neelie Kroes has suggested that allowing retailers to add a margin to credit card purchases could inject much-needed transparency into the costs of payments cards. But many think she is opening a can of worms by forcing the debate on a practice used variously and controversially by the likes of Ikea and Ryanair.

Although the commissioner is unlikely to be promoting 'surcharging' as a viable policy option in itself, she stated last month – in her first speech following December's prohibition decision against MasterCard's interchange fees – that it is an issue “that cannot be pushed into the long grass”.

Nevertheless, the commission's directorate-general for internal market seemed to have done just that last year when its directive on payments services permitted surcharging but gave governments the chance to ban it, if desired. 

But Kroes is keen to haul the issue to the fore again, if only as a means of exposing the price of a payments card transaction. She is also putting the onus on retailers, giving them a role to play now that the commission has concluded its MasterCard case.

In contrast, in mid-January, CEO of Visa Europe Peter Ayliffe said that “surcharging would be a complete disaster for the European payments structures” and it would be a “true tax on consumption”, echoing Kroes' own terminology on cards fees. 

While few would argue against greater transparency in card charges – most notably over the much maligned 'interchange fee' – the problem is that consumers are traditionally unaware that cash also brings with it costs: producing, distributing, collecting and renewing notes and coins. Research from McKinsey consultancy, according to Visa Europe, claims that handling cash costs each European about 200 euros a year. Conversely, the British Retail Consortium claims that handling cash is still cheaper than handling cards. 

In short, the argument from cards companies is that surcharging complicates matters for the consumer, leads to people using more cash, which is less efficient than cards, and ends up in margins pocketed by retailers. While Visa bans surcharging on its cards, rival network MasterCard doesn't.

The commission has noted in the past that surcharge bans by card networks may cause competition issues through restricting merchants from passing on costs. However, it closed its case against Visa in 2001 with 'negative clearance' on the grounds of there being a “lack of appreciable effects”.

In its 2006 response to DG Competition's sectoral enquiry, Ikea called surcharging a “last resort solution” for when card fees are “excessively high” or if “credit card usage is pushed in an artificial way”. It seems Kroes may have arrived at her last resort solution.

Ikea and Ryanair: how to surcharge?

Both times Kroes has spoken on surcharging, she has referenced Ikea in the UK. The Swedish furniture retailer introduced a 70 pence surcharge on credit card transactions in 2004 in an attempt to cut the 3.5 million pounds of card charges it pays every year. 

This flat-fee, held up as a prime example by Kroes, has successfully shifted consumer practices, seeing a near wholesale shift from credit cards to cheaper debit cards. Nevertheless, what Kroes fails to mentioned is the fact that Ikea subsequently felt the need to install an ATM in every one of its branches in the UK (now numbering 17). While debit card transactions – which are free at Ikea – increased, some argue that the roll-out of ATMs is proof that surcharging merely leads to a greater use of cash – and this runs counter to the aim of promoting efficient payments' systems.

While Ikea UK came up with its 70p surcharge by taking a percentage of the average basket of goods purchased, the model employed by others, most notably in the travel industry, seems less palatable.

Ryanair, which does not use an explicit 'booking fee' like some low-cost airlines, does, however, add fees for payments with credit and debit cards. The Irish carrier adds 4 euros per passenger for a one way flight, meaning that a Dublin-Frankfurt return trip would incur a fee of 8 euros. What is less explicit from this fee model is that booking the same trip for three passengers – although it may done on a single credit card transaction – incurs a fee of 24 euros. 

Ryanair charges a lower fee for debit cards (1.50 euros) and charges no fee for the use of Visa Electron (a type of card often used by students). What is less logical, however, is that if a consumer purchased a flight with Ryanair's own-branded credit card, she would still have to pay the 4 euro booking fee. 

Opponents think that surcharging, far from being for the consumer's benefit, has become integral to the business model of some companies. With many online travel agents it is more difficult to tell what – if any – surcharging takes place since it is often included in a catch-all 'handling fee'.

EU and national approaches to surcharging

In 2000, DG Competition commissioned two studies on surcharging when looking into the potential abolition of Visa's ban on the practice, stressing that it is not always positive for the merchants or the cardholders.

“The main conclusions of the market studies are that most merchants do not use their right to surcharge cardholders for the use of the card. It is not established that the abolition of the [surcharging ban] substantially improved the negotiating position of merchants, in particular not that it lead to decreased merchant fees. Cardholder's reaction to surcharging is in general negative,” states the commission with the caveat that these are the findings of an independent report. 

Of course, the payments industry has moved on in the last seven years but the issue continues to create controversy at national level, most recently both in Denmark and Ireland. 

The Danish government allowed surcharging on Dankort, the national debit card scheme, in January 2005 and this led to a 25 percent drop in card usage. The subsequent consumer uproar brought a U-turn and surcharging was banned on Dankort transactions. Opponents say that it created uncertainty among a vast number of cardholders even though the measure only applied to a minority of transactions. Supporters say that the Danish example is an anomaly.

There was also a virulent public debate in Ireland last year when an amendment proposed to consumer legislation would have banned the legal but uncommon practice of surcharging. The national competition authority made submissions to the ministry responsible to persuade the government not to restrict the use of a tool which could bring welcome and increased transparency into payments instruments. 

Surcharging is a blunt and imperfect instrument for introducing transparency to card fees, and one that can cast as much doubt on retailers as it does card companies. 

But it might just be the battering-ram needed to scare card companies into action. The MasterCard decision is a formal legal method to bring about fee reductions but the threat of surcharging could be the retail-led solution needed to make the legal arguments reality on the shop-floor.

In conclusion, Kroes is unlikely to be trying to solve the surcharging issue from a policy point of view but rather using it as a tool to force transparency into the card fee sector. Although card companies publish the cost of cards on websites, a note at cash-tills will be a far more direct way of exposing the level of the fees. But the contentious topic could have unwelcome side-effects for consumers and result in greater obfuscation if retailers view it as an additional way to increase margins.

By Lewis Crofts

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