Retailers rail at plastic fiasco

Rules for credit card transactions cause cash-flow problems for small firms

Paying with plastic has, in the 30 years or so since the inception of the credit card, become an essential part of the ordinary shopper's armoury. Whether the purchase is big or small, the flexible friend has become used to taking the strain.

Paying with plastic has, in the 30 years or so since the inception of the credit card, become an essential part of the ordinary shopper's armoury. Whether the purchase is big or small, the flexible friend has become used to taking the strain.

Small businesses, however, are becoming less and less enthusiastic about credit cards. Indeed, they are developing a strong hankering after the days when cash was king.

Retailers have tried to deal with the high commission rates charged by the card companies by setting a minimum amount for a single transaction - say £10 or more. Unless they do that, they argue, it won't be worth their while doing business.

But pub owner Tim Proctor has more reason than most to complain about the downside of credit cards. For him they create serious cash-flow problems. So much so that when earlier this year a credit card transaction that had not been credited to his account led, in turn, to his bank bouncing the cheque he had sent to Customs & Excise for his quarterly VAT payment, he incurred a £680 surcharge for late payment.

Mr Proctor runs a pub in north Essex that is thriving on the back of the boom brought to the area by the expansion of Stansted Airport. Yet bouncing cheques have become the bane of his life.

Much of his takings of about £500,000 a year come in the form of credit card transactions - and there is a three-day delay between the customer signing the payment slip and the sum being credited to his own bank account.

Nor is he the only one who is dismayed by the practice. Stan Mendham, chief executive of the Forum of Private Business, claims it is one of the most contentious issues for his members. "They are frantic about it," he says, adding that he thinks it "appalling" that an electronic system should take three to five days to clear payments other than cash and cheques paid into a business's home bank branch.

While accepting that the situation can be even worse in other parts of Europe, he wants to see Britain emulate Sweden, where cheques are typically cleared on the same day.

The situation was one of the issues highlighted in the Cruickshank review of the banking industry, which reported to the Government in March. The report stated that the main problem was that the payment schemes were "run in the interests of the banks that own them". Among its concerns were anti-competitive restrictions on access, anti-competitive and inefficient wholesale pricing and poor transparency.

Following the publication of the report, the Competition Commission is investigating the supply of banking services to small businesses. Card operators have attracted the attention of competition authorities on both sides of the Atlantic.

Meanwhile, Mr Proctor, who runs the Cricketer's Arms near Saffron Walden, intends to keep complaining. When he discovered the cause of his problem earlier this year he was shocked. His view that credit card transactions had traditionally been treated as cash - and therefore were not covered by the clearing system - is countered by NatWest. A spokeswoman said that slips from the manual devices known as "zip-zap machines" were treated as cheques. The confusion arose from the fact that such payments appeared in the business's account as uncleared funds, in other words credited to the account but not available for use. Whether or not a business would be able to write a cheque against such funds would depend on that business's relationship with its bank manager.

The British Bankers' Association, however, said that when a retailer or other business presented the payment vouchers to their bank, they were treated as cleared cash.

Even if that is the case with old-style machines, these are increasingly being replaced by credit-card payment terminals, and people such as Mr Proctor find it hard to understand why it should take as long with the new facilities to clear an authorised credit-card payment as it does a cheque. After all, his terminal is now linked electronically to the credit card provider, which would be expected to make it easier to transfer the money to his account immediately. "The computers run 24 hours a day, seven days a week," he says.

A spokesman for the Association for Payment Clearing Services, which operates the clearing system for Britain's banks and building societies, confirmed that such delays were not uncommon, even though the computer links enabled banks to access businesses' terminals at night and arrange for the funds to be transferred accordingly. The actual payment period depended on the deal that the retailer negotiated with the individual card issuer, he said. The key card payment system operators in Britain are subsidiaries of NatWest and Barclays.

The spokesman stressed that whatever the payment period, the retailer generally received the money long before the customer actually paid his or her credit-card bill.

All that is little consolation to Mr Proctor, however. He suspects nothing less than a conspiracy. Having successfully enticed businesses like his to accept credit cards by making the terms attractive, the powers-that-be have changed the policy to gain the use of the money before crediting businesses' accounts, he says. To add insult to injury, the card issuers now require businesses to rent the terminal, pay for the cost of the phone link between them and the terminals, and even pay for the paper that produces the payment slips when previously the vouchers were given to them, he adds.

Nor is this the only way in which Mr Proctor feels aggrieved by the clearing system. Even banking cash is more complex than he had previously thought. The NatWest spokeswoman says a business proprietor paying cash into his or her account would "get value" for it on that day. In other words, cash paid in should be available for use then. But Mr Proctor says that when he wanted to make his VAT payment he paid in £2,600 in cash to cover it. But this did not help - because paying in an amount on a certain day did not mean that it will be credited that day.

In Mr Proctor's view, computers are - again - to blame. "It's as if at about 8.30 in the morning, the bank's computer decides what it will pay against the account," he says, adding that if the account appears to be overdrawn the cheques are automatically dishonoured, regardless of whether any money has been paid in on the day.

NatWest claims that whether cheques are honoured in such a situation again depends on the relationship between the bank and the business. However, Mr Proctor says his bank manager is sympathetic, but can do nothing about a national policy. "It's hard enough to run a small business without this," he says.

Then he adds, reflecting on on the Kafka-esque nature of the merry-go-round: "Cash is not cash and today is not today."