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April 16, 2018

Merchant Surcharging: Winners and Losers

It isn't too often that we at the Retail Payments Risk Forum get to interact with card-acquiring stakeholders on such an interactive basis, so it was especially interesting—and valuable—for me to attend a lively session on surcharging at the Southeast Acquirers Association conference in March. I found the session to be quite informative about credit card surcharging and cash discounting programs that processors and independent sales organizations offer.

Incidentally, Jim Daly, senior editor of Digital Transactions, recently wrote an article for the publication—"Surcharging Is the Wave of the Future, ISO Executives Say"—on this very session.

Card brands have allowed merchants to levy surcharges on credit cards since 2013, after a legal settlement with merchants. Under the rules, merchants can charge what it costs them to accept a credit card. This rate, normally defined as the contracted discount rate, is capped at 4 percent of the transaction amount. Ten states have statutes prohibiting surcharging, but recent court decisions in some of those states have found the prohibitions to be unconstitutional. More legal challenges are under way.

While the panel at the conference was highly optimistic about the proliferation of these programs, their viewpoint is understandable since their companies offer these programs as revenue generators. Other industry stakeholders I have talked to since the conference have been less optimistic and view the potential as a niche market currently representing less than 1 percent of the U.S. merchant base.

In any case, I can understand why a merchant might want to pass that incremental cost on to me if my payment method costs the merchant more than other payment methods. It's my choice to use that particular method. Of course, the merchant who chooses to implement such a program takes the financial and reputational risk of driving its customers to other businesses that do not impose such a surcharge or that have a lower surcharge.

So how does the implementation of a credit card surcharge affect the various stakeholders of a transaction? Let's assume a merchant pays a 3 percent discount rate under its current processing agreement for accepting credit cards. In the non-surcharge environment, for a $45 transaction, the cardholder customer is billed $45; the merchant receives a net $43.65; and the merchant's processor collects $1.35, which is the 3 percent discount rate. In a surcharge environment, the cardholder would be charged $46.35; the merchant would receive $45; and the processor would collect the same $1.35. So the cardholder pays more, the merchant retains that extra money, and the processor maintains the same revenue amount.

Under the terms of the 2012 legal settlement, the merchant can assess the surcharge only on credit card transactions, not debit or prepaid cards, and must place clear disclosures for the customer at entryways and the point of sale. Additionally, the customer's receipt must have an itemized entry identifying the surcharge.

It will be interesting to see whether surcharge programs proliferate in the future, as the panelists forecast. What do you think?

Photo of David Lott By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

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