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Merchants are pushing back on a European Parliament charge to fully prohibit surcharging, despite it having been largely banned in the Payment Services Directive (PSD2).
Despite being largely unaffected by the European Commission's Payment Services Package last year, surcharging has become a contentious issue among stakeholders, including merchants and payment schemes.
Merchants use surcharges to offset processing costs for various payment methods, and despite efforts by card schemes like Visa and Mastercard, surcharges are prevalent in the US, Canada and Australia.
In the EU, however, fees from these schemes are regulated under the Interchange Fee Regulation (IFR), which prohibits surcharging for all cards within the IFR's scope across the European Economic Area (EEA).
A total of 16 member states, including France, Italy and Belgium, have, over the years, opted to ban surcharging altogether.
In spite of this, lobbyists say that merchants feel disillusioned that the IFR did not have the desired effect of lowering their card fees
"Surcharging has become a top concern for merchants nowadays,” said Niklas Sandqvist, a payments consultant working with the Norwegian trade association, Virke. “It is concerning that the topic hasn't been discussed much, and merchants have not been very present in the dialogue.”
Under ongoing negotiations for PSD3/PSR, the European Parliament is pushing for a complete ban on surcharging to streamline regulations and provide clarity across the EU's single market.
“We were particularly concerned when Parliament voted for a strengthened surcharging ban, which we had said was counterproductive,” said Sandqvist. “The situation has gone from bad to worse due to this."
However, the Parliament’s action has also been welcomed by some, including Elie Beyrouthy, vice president of government affairs at American Express.
"We firmly support this approach, as it aligns with our stance on advocating for a surcharge ban throughout the trading bloc,” he said.
Beyrouthy stated that consumer sentiment strongly supports this move, as it promises simplified and favourable regulations.
“For merchants and their employees, the current surcharging rules present an additional challenge. It's confusing for staff to work out which cards to surcharge and which they cannot, and consumers similarly dislike the notion of added costs,” he said.
His colleague Hendrik Frank, director of government affairs, suggested that a “peculiar consequence of PSD2” is that certain payment methods, such as Visa and Mastercard, have become de facto obligatory for merchants to accept.
“While merchants are effectively required to accommodate these payment methods, which they are legally prohibited from surcharging, payment methods that represent a choice for merchants often incur surcharges,” Frank said. "This leads to limited consumer choice and competition [in] the European market."
However, merchant advocates have arrived at a different conclusion.
"This is a very bad idea. The narrative that a surcharge ban keeps consumer prices low and increases competition is completely false,” said Atze Faas, payments advisor at EuroCommerce.
"If you take away the cost part of a cost/benefit trade-off, you can only compete on value,” he said. “The payment options with the highest fees will fill their pockets, with which they can strengthen their position even more.”
According to Faas, companies like PayPal and Amex will benefit, and merchants will be forced to absorb the costs, which he said won't lower consumer prices.
“This situation arises from a historic mistake of not surcharging for the past decade, which gave consumers the false impression that payments are free,” he said.
“If we had started educating consumers about payment costs earlier, we wouldn't be in this position now."
Merchant lobbyists say that calculating payment costs is a complex issue and argue it is tricky to collect data on the cost of payments from merchants.
Therefore, when assessing the implications of a surcharging ban, it is hard to work out how beneficial or impactful it has ultimately been.
"One of our struggles is providing evidence-based proof of rising payment costs, which is difficult to collect due to confidentiality clauses and competition law prohibitions to share prices of payments,” said Sandqvist.
Faas said that it is similar to the introduction of plastic bag fees: once introduced, people started bringing their own bags, and those who could manage without a bag did so.
"If you pay today with a cost-efficient method and the next person in line pays with Amex, the cost for the merchant would be significantly higher due to the Amex payer,” said Sandqvist.
“The consumer who paid with the cost-efficient payment method ends up covering part of their costs since the merchant cannot differentiate based on the payment instrument,” he said.
Sandquvist continued that consumers remain unable to work out the incentives for different payment methods.
“The only negotiation tool for merchants is to accept or deny the payment instrument,” he said. “The purpose of surcharging is primarily as a negotiation tool for merchants, indicating high costs from some payment methods. If the payment method is valuable enough for the consumer, they would be willing to pay the surcharge."
Surcharging has remained a contentious issue in the EU, as evident from the merchant and payment scheme perspectives.
As the EU readies itself for a new Parliament, and a new Commissioner responsible, only time will tell how the final text of the PSR will actually approach the issue.
