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How will the card surcharge ban impact your small business?

It’s now illegal for businesses to add surcharges to credit and debit payments – here’s how can you ensure you don’t lose out as a result

Following the introduction of new UK legislation and pan-European regulation on 13 January 2018 it is now illegal for businesses to add surcharges to credit and debit card payments anywhere in the European Economic Area (EEA).

The ban was introduced to put an end to the unfair or hidden charges consumers could be subjected to at the point of purchase. In many industries, transaction costs – which can exceed 3-5% – are passed onto the customer.

Part of the European Payment Services Directive 2 (PSD2), the regulations will aim to increase competition in the payments industry, improve protection and introduce common standards.

How will the card surcharge ban affect small business?

Businesses are now unable to pass the transaction processing charge from card payments onto their customers and will have to find alternative ways to cover this cost.

Payments made with corporate credit or debit cards do not fall under the ban, though merchants who accept payments from these sorts of cards – such as business-to-business (B2B) companies – are not allowed to charge anything more than the cost of processing payments.

Pranav Sood, Director of Business Operations and Strategy for GoCardless, comments: “While the ban will affect anyone taking credit or debit card payments from personal cards, the impact will differ between businesses: those hardest hit are likely to be smaller merchants or those in industries that typically operate with low margins, who will struggle to absorb processing costs.”

Next steps for small businesses?

You might be wondering what your best option is to cover the charge? You could increase the price of a product or service to cover the charge, though it could breed resentment among customers who notice.

This has been seen with the likes of Just Eat – who introduced a much-derided 50p service charge to all orders – and large organisations like HMRC, which said it will no longer accept payments from personal credit cards three weeks before the self-assessment deadline.

With card payments accounting for the vast majority of retail payments in the UK (75% in 2016), it would be unwise to remove the option of credit card payments all together – as seen with some operators in the travel industry.

So, what are the alternative options?

 Alternative payment methods for small businesses

Card and cash aren’t the be all and end all of payments – there are a variety of alternatives you could introduce for customers.

Direct debit, which made up 20% of all 122 billion cashless payments taking place in the EU in 2016, is one such option. In the UK alone, direct debit volume hit 4.2 billion in 2017.

The other impact of PSD2 is expected to be improvements in the way bank-to-bank payments are made. For example: allowing new Payment Initiation Service Providers (PISPs) to trigger ‘push’ payments from a customer to a merchant account. These have lower transaction and failure rates.

Some analysts have predicted that bank to bank payments could grow to account for 20% of consumer spending away from existing card schemes.

“In the wake of the surcharge ban, the benefits of bank to bank payments are becoming increasingly obvious for businesses. Particularly for those who have been heavily reliant on card payments in the past,” says Pranav Sood.

“The surcharge ban is already making its mark on the payments industry but whether it marks a significant movement away from card payments, or just an increase in market share for alternative payment methods like Direct Debit, remains to be seen,” says Pranav.

“We advise businesses to look at their options and explore the new payments landscape – there are lots of alternative payment methods out there that you might find are better suited to your business needs.”

GoCardless gives start-ups and small businesses access to online direct debit. It’s free to set up and you pay just 1% per transaction with a cap of £2 (and no hidden charges). Find out more.

Henry Williams
Henry Williams

Henry has been writing for since 2015, covering everything from business finance and web builders to tax and red tape. He’s also contributed to many of our industry-renowned annual indexes, including Startups 100 and Young Guns, and created a number of the site’s popular how to guides. Before joining the team, he reviewed films for a culture website, and still harbours ambitions of being a screenwriter.