If merchants in the U.S. took a cue from their counterparts in Australia and began making consumers pay a surcharge for credit card transactions, it would attract more backlash than revenue.
In addition to enraging consumers, such a move would also bring unwanted scrutiny from lawmakers, said Adil Moussa, payments strategic marketing analyst at Omaha, Neb.-based Adil Consulting.
About four years ago, regulators in Australia capped interchange and also allowed merchant surcharging. Merchants took that opportunity and ran with it, causing the Australia Central Bank to take a closer look at the potential monster it had created.
In a series of Acquirer Strategy reports outlining the potential dangers of surcharging, Moussa said Australia went through some bumps in its early days of merchant surcharging, but things eventually calmed down and it has become an accepted practice among nearly half of the country's merchants.
"The whole premise behind my reports is that we should have some restraint and internal oversight as an industry in the U.S. so abuses don't happen, because the last thing we need is to draw attention of legislators on this front," Moussa said.
Up until now, U.S. merchants haven't shown much interest in adding a surcharge to transactions, even though it has been nearly four years since the card networks presented that opportunity as part of a $5.7 billion swipe-fee settlement in an attempt to end an eight-year legal case. Prior to the settlement, the card brands didn't allow merchants to add a fee that might deter consumers from using their cards.
Now that larger retailers have invested heavily in new payment terminals as part of the U.S. EMV migration, they may start to more closely examine pros and cons of adding surcharges to card transactions, possibly at a level of about 2%, depending on the transaction, Moussa said.
"Plus, 80% of smaller merchants probably don't know about the change in surcharging rules," Moussa added. "It is not in the interest of banks to inform merchants, and many I have spoken to are not aware they can surcharge."
As more learn about the process, they may want to try it, especially in certain retailer segments, Moussa said. This would be particularly true of merchant segments like the airlines, funeral homes and others in which consumers are used to extra fees, he added.
"You could also see it in low-value transaction settings like at parking garages," Moussa said. "You are not going to complain about an extra 10 cents on a $6 parking charge if you are anxious to get out of the parking lot."
The potential also exists for acquirers and independent sales organizations to get greedy and push for their merchant clients to surcharge as a way to "get your payment processing for free," Moussa adds. They would do so by arguing that a higher surcharge would cover costs, but in reality such a move would open the door for the acquirer to charge more because network rules don't allow a merchant to surcharge higher than their costs to accept card transactions.
"And who doesn't want free payment processing?" Moussa asks, pointing out why merchants not well-versed on the new rules might be willing to listen to that pitch.
Some states for years have imposed their own laws against surcharges on credit card transactions, but merchants are fighting these laws in court.
Merchants are having some success in having these state laws overturned, with those in Florida winning in November of 2015 in the appeals court. But that particular case found surcharge laws a violation of free speech in restricting the merchants' ability to describe the fee as a surcharge as opposed to a cash discount.
However, the reality is most merchants have no interest in getting into the complex and convoluted surcharging process, said Mallory Duncan, senior vice president and general counsel of the National Retail Federation and chairman of the Merchants Payments Coalition.
"No one among our membership is interested," Duncan said. "The card companies, with the swipe-fee settlement, make the merchant jump through so many hoops to surcharge, the merchants aren't interested in trying to figure it out."
Those "hoops" include percentage caps on surcharging based on amounts the card brands issue periodically, and not allowing higher surcharges than what an acquirer is charging for payment processing.
The merchant also has to post notices on the door of a store and at point of sale terminals explaining that an extra merchant fee is being charged, one that also appears on the customer receipt. In addition, the merchants must disclose to Visa and MasterCard how they are presenting the surcharge to consumers, so as not to lay blame on the banks, Duncan said.
As complicated as it can all get, merchants are very certain about a key aspect of their businesses, said Doug Kantor, a partner at Steptoe & Johnson LLP who has represented merchants in the interchange fight.
"They know what their customers do and don't like, and they don't like extra fees," Kantor said. "It is not likely that an acquirer can talk them into it."
The ability to surcharge in Australia came about in a less complicated way, and the retail market in that country isn't nearly as competitive as the U.S., Kantor said.
"You are seeing surcharging only in a few niche markets, such as the airlines, or isolated geographic regions in Australia with even less competition," Kantor added.
Still, if merchants continue to butt heads with card networks over interchange, Moussa envisions a pattern unfolding in the U.S. in which small merchants who are able to surcharge will begin to do so. Larger retailers that were pushing for the swipe fee settlement would follow, incorporating surcharges in transaction processing.
"Any interchange capping doesn't affect merchant acquiring; it only handicaps banks," Moussa said. "If an acquirer charges 25 cents per transaction, what we have to worry about is if they start charging much higher than that."
Any increase in surcharging in the U.S. could "trigger legislators looking at merchant acquiring in far more detail" and bring more regulations into the ISO and acquiring worlds, Moussa said.