America’s payments marketplace is home to many “firsts”—including the first card networks established and the largest card volume processed. But there is one superlative American merchants would prefer to change: the US has the single most expensive interchange pricing in the world.
Despite increasing economies of scale, and decreases in interchange in other countries, the cost of card acceptance continues to rise for businesses in the US. From 2012 to 2018, the total interchange fees levied by Visa and Mastercard in the US went up by a shocking 77%.
Globally, reductions in interchange fees have largely been driven by direct regulatory intervention—whether in the form of new laws, regulatory threats, or government-led industry agreements—an approach that many believe is ill-suited to American free market principles.
Yet the landmark 2017 case in Expressions Hair Design v. Schneiderman, coupled with modifications to merchant contracts with the card brands, have created a market-driven option for cost reduction: credit card surcharging.How surcharging works
Credit card surcharging has seen significant adoption within the US in recent years. This model, in which a fee is added to credit card transactions to offset the cost of payment acceptance, allocates the costs associated with a payment to the cardholder who chooses to pay by credit.
To understand the surcharging model, consider a hypothetical purchase of USD 100.00 in goods.
If the customer chooses to use a credit card for convenience or rewards, the costs associated with that choice are added to the transaction, typically as a percentage fee (e.g., 3.5%). On the surcharging model, the customer would pay the costs created by the choice to use a credit card (in this case USD 3.50) and the merchant would receive the full sale amount of USD 100.00.
If the customer instead chose to pay by cash, check, or debit card (which is generally much less expensive to accept than a credit card), there would be no fee charged. Rather, the merchant would pay the cost of cash or check handling, or the relatively low cost of debit card acceptance (as required by the card brand rules).Price pressure and payment acceptance options
The primary motivation for businesses to pass on their credit card fees to customers is simple: they need to manage costs.
When reviewing the list of top verticals for credit card surcharging, which includes auto repair, wholesale distribution, law, medicine, accounting, insurance, recurring membership billing, and home contractors, a clear pattern emerges: businesses in industries with low margins and high average tickets have embraced this option.
Each business faces different challenges in managing card processing costs. In wholesale distribution, for example, profit margins are often in the single digits and, if a customer chooses to pay by commercial credit card, the distributor’s profits may be eliminated entirely. Auto repair shops often voice frustration that their customers receive insurance checks to cover repair costs, yet demand card payment options that may result in hundreds of dollars of fees. Law companies are accustomed to charging clients for all of their quantifiable expenses, such as printing materials or sending documents by courier, and payments costs are no different.
In each case, however, the businesses face the same fundamental choice. They can (1) absorb the cost of credit card acceptance and suffer reduced profitability; (2) raise prices across the board, which affects all their customers, not just the customers choosing to pay by credit card; (3) refuse to accept credits cards at all; or (4) pass on credit card fees to their customers.
Businesses are choosing the fourth option—credit card surcharging—for many reasons: they are unwilling or unable to reduce profitability to accommodate their customer’s preferred method of payment; raising costs across the board is likely to make them less competitive; and they risk losing customers if they don’t provide the option to pay by card, especially as an increasing share of customers use cards as their primary or sole method of payment.
Don’t miss our next instalment where we will discuss how the customer is positioned within this story, ways the rules for credit card surcharging have evolved over time, and means to change this space.
About Michael Tomko
Michael Tomko is COO of CardX. At CardX, Michael leads product, client service, and strategic initiatives. Michael earned a J.D. from Harvard Law School and a B.A. from Harvard College.
About Evan Weese
Evan Weese is Marketing Lead at CardX. Evan leads editorial outreach strategy for CardX, which includes brand communication and breaking regulatory news. Evan holds a B.S. in Finance from Miami University.
About CardX
CardX is a Chicago-based provider of turnkey solutions for credit card surcharging. CardX provides technology-enabled compliance to partners that include ISOs, ISVs, processors, and the merchants they serve. As a leader in regulatory expertise, CardX served as amicus curiae in the US Supreme Court for Expressions Hair Design and continues to shape the compliance landscape.
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