Pandemic losses make merchants more receptive to credit card surcharging
Advocates of allowing merchants to add a surcharge to defray the cost of credit card interchange have had to overcome network bureaucracy, state laws and even ingrained habits among the merchants themselves.
But the strain of the COVID-19 pandemic may be the final push merchants needed to accept the option of adding a surcharge for card payments or a discount for using cash. Acquirers or independent sales organizations may also integrate the practice into their sales strategy, industry experts say.
"Surcharging has been around for a long time, but many people didn't understand it and it was very onerous on the merchant to be able to get themselves compliant and registered," John Barrett, executive vice president of Payroc, said this week at the virtual Mobile Payments Conference. "In recent years, the technology has changed, so it is easy for a merchant to get registered and compliant, and the legal landscape has changed."
Even though the card networks lifted their ban on surcharging in 2013 as a consequence of a decades-long antitrust lawsuit and eventual 2018 settlement, merchants weren't quick to hop on board.
After all, many states still banned it, regardless of what rules the card networks had. Today, only Colorado, Connecticut, Kansas and Massachusetts still ban surcharging.
Retailers ultimately were given the right to include a surcharge when a customer presents a credit card, as long as signs at the point of sale make the practice clear and that merchants don't charge more than 4% or what is needed to cover the credit card interchange fees.
During the pandemic, those fees are more crucial than ever.
"With COVID-19, you have situations with all kinds of merchants just struggling to survive," Barrett said. "They are looking for revenue, looking to lower expenses, so everybody is more receptive to this type of solution."
In that regard, acquirers should be positioning surcharging as an "alternative payments solution that is a win-win," Barrett added. "It's a win for the merchant, as it is zero cost to accept credit cards; but it is also a win for the acquirer because the margins are generally higher and more consistent than with other pricing models."
It helped greatly after merchants accepted a 2019 Supreme Court stipulation regarding posting the total dollars and cents that would be added to a transaction, after the court agreed the card networks had no right to dictate how merchants word their explanations to customers.
Verticals that are likely more receptive to surcharging would include the B2B space, in which many industries already understand the concept of passing along costs; or charity, in which many donors are not going to balk at donating a few more dollars when using a credit card. In addition to those areas, there are a vast number of consumers who prefer to use cards out of fear that cash use could expose them to the coronavirus and other germs.
"In today's environment, everyone is a prospect for surcharging," Barrett noted.
As such, surcharging likely isn't a dealbreaker for most consumers. "If the consumer balks at using the credit card, then the merchant can explain there are other payment options to offer, such as debit," Barrett said.
With the backdrop of COVID-19, surcharging has essentially become "an important tool in uncertain times," said Jonathan Razi, CEO of CardX, a company that provides the compliance technology for adding surcharging to a merchant network.
In many ways, as the surcharging option has become more common, technology providers and acquirers alike can focus more on competing through added features rather than pricing.
"There are a few main ways it will be important to win the features conversation," Razi said. "Delivering new technologies, new conveniences for merchants and new market opportunities will be" key.
Automatic compliance for e-commerce payments, new funding technologies, seamless reconciliation and expanding into markets with new surcharging rules should all become parts of the acquirers' playbook, Razi added.
Depending on what sorts of products a merchant offers and what type of demographic is served, the option of a cash discount will remain a part of a business strategy.
While a surcharge is added to the cost of a credit card transaction, a merchant generally displays a cash discount through signage showing the price for a cash transaction versus a card transaction. The practice is most common at gas stations, and has been for several years. A cash discount is not a price change taken at the point of sale, as adding a surcharge would be.
The concepts of surcharging or cash discounts have taken some time to take hold within the merchant community and their customers.
It was not an easy sell to merchants years ago, Payroc's Barrett noted.
"We went from very few [surcharging] sales in our initial days, to where today we are at around 30% of our new sales being a surcharging or cash discounting solution," he said. "That gives you an indication of the trend taking place in the market, and I would just say if you are an acquirer you are doing yourself a disservice if you do not have something like this as part of your sales strategy."