OFT investigation into the airline payment card surcharges: Q&As

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1. What are payment card surcharges?

The OFT has defined a payment surcharge (in its response to the Which? super-complaint in June 2011) as any charge: 

• which varies dependent upon the payment mechanism that the consumer chooses to use, and/or
• which is only added to the total price that the consumer has to pay once the consumer has selected the payment mechanism that they intend to use.

These charges are sometimes only introduced to the consumer at a late stage of the booking process.

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2. Why did the OFT investigate airline payment card surcharges?

The OFT opened an investigation in September 2011 into its concerns about the transparency and presentation of payment card surcharges.

At the time of publishing its response to a super-complaint from Which?, the OFT had announced its intention to tackle those individual retailers whose practices it considered were causing significant consumer detriment, by also taking action to seek to improve the presentation and transparency of payment card surcharges in the passenger transport markets.

The OFT focused on the airline sector as it was identified as an area where surcharges appeared most entrenched and widespread, both in terms of the level of the fees and the lack of transparency.

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3. What does the OFT mean by 'price partitioning' and 'drip-pricing'?

In December 2010 the OFT published its Advertising of Prices market study (pdf 839kb) which examined various practices that are used in the advertising of prices. These practices included partitioned pricing, where the price is separated into a base price and additional charges, and 'drip' pricing, which is the term given to a sales process in which price increments gradually 'drip' through during the buying process. The Advertising of Prices market study drew on research from the fields of psychology and behavioural economics and also involved a large consumer survey and work with focus groups.

The Advertising of Prices market study concluded that drip pricing:  

• reduces the extent to which consumers shop around because searching and comparing between full price offers is more difficult
• can affect consumer choices as by the time surcharges are revealed consumers have invested time in the transaction and feel committed to it. Consumers are then less likely to be willing to invest more time in comparing offers, particularly if there is an expectation of similar practices elsewhere, and 
• can affect consumers' purchasing decisions as consumers focus (or 'anchor') on the 'headline' price such that consumers then fail to adjust their assessment of the total value of the offer sufficiently as additional charges are revealed, therefore overestimating the total value.

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4. Why are companies allowed to impose surcharges for credit card payments?

Retailers charge different prices for different payment mechanisms to reflect their underlying costs.

This may benefit consumers by helping them make efficient choices between payment mechanisms. Many consumers often choose to pay by different payment mechanisms, for example, because they offer consumers the convenience of a credit facility or other benefits such as cashback or loyalty points.

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5. What do you mean by enforcement action?

Under Part 8 of the Enterprise Act, the OFT has powers to seek information and investigate businesses. Should the OFT consider it necessary, it may apply to the court for an enforcement order (similar to an injunction) to prohibit the business from engaging in the conduct of concern to the OFT.

Before seeking an enforcement order, the OFT is normally required to consult with businesses and allow them to respond to the allegations against them. Businesses are able to give binding undertakings to the OFT and the OFT may accept these in lieu of court action. If the undertakings are breached the OFT may apply to the court for an enforcement order.

We are pleased to have secured changes without the need to seek a court order.

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6. Does this mean ticket prices will rise?

It is a possibility airlines will increase headline prices to protect the revenue they will no longer receive from payment surcharges.

However, consumers will still benefit as they will be better able to compare the total price. This is expected to strengthen competition between traders, and this competitive pressure may in turn reduce total prices.  

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7. Why not force traders to reduce credit and debit card payment surcharges?

The OFT does not regulate prices. The Government has committed to introduce legislation to tackle 'excessive' surcharging. This is expected to address consumer concerns about the cost imposed.

The OFT enforcement action means that headline price will be achievable for the majority of consumers and that any credit card charges will be clear and transparent. We believe this will put pressure on traders to reduce these charges to the competitive level.

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8. Some airlines charge an 'administration fee', 'transaction fee' which seem to vary by payment method. Are these payment surcharges?

These may fall within the OFT's definition of a payment surcharge. If a company charges any additional compulsory fee for a particular payment method, and this is in addition to any charges included in the website headline price, the fee should not be described in any manner that suggests that it reflects additional costs incurred by the Company.

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9. Did the OFT look at other add-on charges like taxes and booking fees?

The OFT and the CAA have already taken enforcement action in the past to ensure that taxes and booking fees are included in flight prices, and continue to monitor airlines' pricing practices to ensure that they comply with the relevant legislation.

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10. Did the OFT look at baggage charges?

Baggage charges were not within the remit of the OFT's investigation. The OFT considers that any optional fees for baggage or other services such as priority boarding should be presented clearly and transparently.

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11. Is this enforcement action effective across the whole of Europe?

Other European Regulators have been taking action against these practices. For example, in Italy the AGCM (the Competition and Markets Authority) also took enforcement action against a number of airlines. The OFT has been working closely with the AGCM and liaised with other enforcement partners across the European Economic Area as part of its investigation.

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