Rob Straathof, CEO at Liberis, considers the government’s ban to all credit and debit card charges and how many small businesses’ can best embrace this change.
As of January 2018, businesses are no longer able to charge their customers extra for paying by credit or debit card. The government’s latest plans to ban surcharges means good news for consumers who now are able to use their cards as a payment method without facing additional fees – but what does it mean for many small businesses?
Why were some businesses charging extra for card payments?Until recently, businesses were able to pass the costs of processing a card transaction on to their customers. This is known as a surcharge. When a credit or debit card transaction took place either in a shop or online, the retailer would pass a percentage of the money to the company that organises the card transaction – commonly MasterCard, Visa or American Express. Hence why businesses utilised surcharges to cover the costs associated with accepting the payment and the platform used to transfer the money.
What benefit could the ban bring?Consumers may experience a big difference in savings particularly on large transactions. Some businesses have been known to charge up to 3 per cent as a surcharge, e.g. some airlines, and adding these costs onto your final bill. According to the Treasury, in 2010 consumers spent £473 million on card charges alone. Without this charge consumers can choose to save or opt to spend a little more on the things they want.
Cards have now overtaken cash as the primary form of payment. According to research conducted last year, 45 per cent of customers would walk out of a store if they were unable to pay by card. The study suggests people paying by card are more likely to impulse buy and may convert quicker. What’s more, those who do convert are likely to spend more. With the surcharge removed and less inhibition around spending, small businesses could see the average card spend increase where consumers are saving all round.
In short, the ban could see many happy spenders, however, consumers are concerned they may see a rise in prices for goods and services to accommodate this change.
What is the effect on businesses?For larger companies, the impact will be greater, particularly for those dropping their surcharges down to zero. This brings the fear that companies may increase prices to tackle this change – this could potentially see many unhappy customers and complaints.
The concern however for many is that banks tend to charge smaller businesses higher rates for processing card payments. Under the Consumer Rights Act, businesses could previously pass on these charges to their customers.
The Federation of Small Businesses (FSB) chairman Mike Cherry said: “Removing their freedom to share the burden of card payment fees will give them yet another outgoing to worry about.”
So, if small businesses cannot absorb these costs themselves, it could affect their profit margins rather quickly. This could even mean businesses refusing to accept card payments from customers using more expensive cards (i.e. credit cards) and losing out on potential sales.
How small businesses can embrace the change?It’s important for small businesses to look at the bigger picture and not overlook the opportunities that come with this change. Embrace the surcharge ban and prepare for the influx of happy spenders.
Understand that the purpose of removing the surcharge is ultimately to make credit and debit card transactions easier and fairer for consumers to conveniently use this payment method. So, although many cash-based businesses may be resistant to accepting card payments in light of the new surcharge ban, it seems there could be more gained from making the investment to accept card payments. With this ban in full effect, we could be rapidly moving into a cashless future so it’s important to stay ahead if businesses want to prosper.
For businesses concerned with the potential impact of absorbing the costs themselves for card payments, remember that it’s the mix of cards that shoppers use that costs the business. Debit cards typically have a cheaper rate than credit card transactions. The charges that businesses pay for card payments can differ greatly and the impact on businesses’ is largely dependent on their card acceptance profile.
Eliminating card payments should not be the solution but businesses also need to consider the effect that a price change may have on sales. It could be easier to absorb costs rather than risk losing sales. Business owners could look into a business credit card for a short-term solution if they are concerned with temporary cash flow problems. This will allow you to keep the business operating as normal whilst you evaluate your future plans.