Are Surcharges on Debit and Credit Cards Legal? The OFT investigates
The UK travel industry is under the scrutiny of the Office of Fair Trading (OFT) as the legality of surcharges levied on debit and credit card transactions is called into question.
Across the entire travel industry, the airlines are the worst offenders (and are taking much of the media flack!), but a ruling in this area could change booking processes in other areas of the travel industry.
Mark King from the Guardian investigates the issue.
The Office of Fair Trading (OFT) is to tackle “rip-off” surcharges levied on debit and credit card transactions by travel companies, particularly airlines which it said raked in £300m through this in 2009.
Following an investigation into the passenger transport sector, the OFT found considerable evidence of companies using “drip pricing” practices, whereby charges are added only after consumers have filled in a number of web pages during their purchase. It said this is “particularly prevalent” in the airline sector, but fell short of naming individual companies.
It has threatened passenger travel companies with enforcement action if they do not change such misleading debit and credit card surcharging practices.
Earlier this year consumer rights group Which? lodged a super complaint with the OFT to try and stamp out the practice, claiming that the actual cost to the retailer for processing card transactions was no more than 20p for debit cards and no more than 2% on credit cards.
It found that a family of four booking a return flight with Ryanair would be charged £40 to pay by debit or credit card; train booking site the Trainline added a £3.50 charge for paying by credit card; and Eurostar charged £4. London cab firms Dial-a-Cab and Radio Taxis added 12.5% to the cost of their fares for paying with a debit or credit card, and Addison Lee charged £4.40.
In early June, Monarch Airlines scrapped all debit card booking fees and said payments by credit card would trigger a flat fee of £10 a booking. Monarch chief executive Conrad Clifford said the charging shake-up was intended to provide an “upfront, transparent and simple to understand” policy.
The OFT is now calling on the government to ban debit card surcharges, but said companies could still impose credit card transaction fees as they are more costly to process, provided they meet minimum transparency requirements.
Cavendish Elithorn, senior director of the OFT’s goods and consumer group, said: “You can’t buy online with cash and people are frustrated about being asked to pay for paying. Consumers find it harder to shop around and find the best deal if they have to invest time and effort in discovering surcharges. This also weakens competition between retailers which is bad news for the UK economy.
“Many traders already meet the minimum standards we expect under the law and we have secured a clear commitment to change from others. However, we will take enforcement action against any businesses that do not respond to today’s announcement and instead continue to use misleading surcharging practices.
“We believe there is also a strong case for a change in the law so that the cost of using a debit card – the almost universal payment method for today’s online consumers – is always included within the headline price.”
Peter Vicary-Smith, chief executive of Which?, said the announcement was a “victory for consumers”: “Thousands of people have told Which? that hidden or excessive card fees are unfair, and we’re delighted that the OFT supports this view.
“We want to see the measures recommended by the OFT put in place as quickly as possible, and finally put an end to the practice of card surcharging. While we understand that some of the regulatory changes will take some time, we urge the OFT to take steps immediately to ensure that consumers know the true cost of their purchases upfront.”
But critics argued that the OFT had not gone far enough. Labour MEPs said the government should act under EU law to outlaw all unfair credit and debit card charges, not just those applied to debit cards. Catherine Stihler, Labour’s spokesperson in the European parliament on consumer affairs, said: “Consumer laws agreed by the European parliament last week make it clear that unfair surcharges for all means of payment must be made illegal in the UK before 2014.
“It is one thing to pass a genuine additional cost on to the consumer, it is quite another to use surcharges and fees as a means of making additional cash by misleading consumers. The government should act sooner rather than later and bring in legislation to challenge all rip-off card fees as a matter of urgency.”
Martin Lewis of MoneySavingExpert.com agreed, adding: “The OFT doesn’t have the power to force companies to actually change their pricing and make surcharges proportionate. What we need is a law that says for online transactions the core price advertised must be what you would pay by using a debit card.
“The current system of budget airline surcharges for both debit and credit cards is a scam – if charges are effectively compulsory, the budget airlines need to man-up and put them in the full price.”
An easyJet spokesman said the company would be unlikely to cease credit and debit card surcharges if its competitors continued to levy them. He said: “We’ve built our reputation on making airline prices simple and transparent. While we are happy to support a move toward making charges fairer – and legislation would be a step towards this – if we move unlitaterally we would put ourselves at a disadvantage. Many of our seats are sold by third parties and we would be at a disadvantage if they continued to add surcharges and we did not.”
What charges is the OFT targeting?
Some companies add surcharges to transactions when customers pay by credit or debit card. Often, these charges are not immediately apparent because if a company allows a niche payment system such as Visa Electron to be free, they can then legally exclude the surcharges from their core price. Worse, it often takes customers until the fifth or sixth web page in the booking process before they are presented with the additional fees.
Who is doing it?
Many companies charge customers for credit card transactions because they incur costs as a result (though the amount they pass on to customers varies wildly), whereas fewer impose debit card fees. Which? estimates debit card transactions cost companies no more than 20p, meaning any charge to the customer is clearly unfair. It is debit card fees the OFT is seeking to abolish.
Who are the debit card offenders?
Disneyland Paris charges UK customers a whopping £9 to pay by debit or credit card – arguably a tax on family fun with the summer holidays approaching. EasyJet charges £8 to pay by debit card unless customers use a Visa Electron card – highly unlikely as only 11% of the UK adult population owns one.
Similarly, Ryanair charges £6 for debit transactions unless customers use a MasterCard prepaid debit card, but less than 5% of the adult population has a pre-paid Mastercard.
By contrast, British Airways, Virgin Atlantic and Eurostar do not charge anything for debit card transactions. A Eurostar spokesman said: “Companies should not a charge a surcharge for debit card bookings and they must be fully transparent about any credit card surcharges they apply.”
Are credit card fees as high?
Which? claims companies incur costs of no more than 2% of the total transaction value for processing bookings made by credit card, so this surcharge is at least understandable if equally unwelcome. EasyJet slaps an £8 fee on credit card transactions plus a further 2.5% of the total transaction value (with a minimum charge of £4.95, whichever is greater) if customers use a Visa credit card, Mastercard, Diners Club, American Express, Carte Bleue or UATP/Airplus card. This is disproportionately high. By contrast, Ryanair charges £6, British Airways charges £4.50, Virgin Atlantic asks for 1.5% of the total transaction value and Eurostar charges £4.
Office of Fair Trading (OFT) Investigates Surcharges in the UK Travel Industry