Credit card surcharging: a new model for payments in America – Part 2

In our previous instalment, the authors have signalled the fact that 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. Today we will see what can be done to change this status.

Consumer fairness

In addition to helping businesses reduce costs, the introduction of credit card surcharging has been lauded by consumer fairness advocates. This support may be surprising to many observers, who are more accustomed to seeing added fees as profit centers for business, but the reality is that surcharging allocates existing costs, rather than creating new ones, and does so within a framework that ensures consumer protection.

In the US, credit card surcharging is governed by a robust set of rules designed by the card brands to make this payment model straightforward and fair to cardholders. Businesses that surcharge must register with the card brands, must apply surcharges across the card brands on the same terms, must charge fees only to credit cards (and not to debit cards), must make all the necessary disclosures, and must comply with a number of other requirements. These rules ensure the customers are not surprised by the surcharge, that the surcharge fees do not become an additional profit center for the business, and that customers continue to have a “no-fee” card payment option in the form of debit.

The card brand rules ensure fairness at the level of individual transactions, and the overall market shift towards credit card surcharging creates more fairness for consumers overall. A Federal Reserve Bank of Boston study found that the average rewards card user is subsidised by over USD 1,100 per year by other consumers paying by cash, check, or debit, who are often using those payment methods because they are underbanked or do not have access to credit. In this sense, the conventional merchant-absorbed payments model in the US is a regressive tax.

This fairness concern has rallied support across the political spectrum for the surcharging model. Conservative think tanks like the Cato Institute advocate for free speech and open communication about pricing, while liberal consumer protection advocates like Elizabeth Warren criticise the merchant-absorbed model in which “first-class upgrades from frequent flier miles are subsidised by food stamp recipients.”

Surcharging ensures businesses don’t have to raise costs for all of their customers to cover the costs of those choosing to use credit cards, while still ensuring that their customers are able to pay in as many ways as possible. This model, while new in the card payments space, is a key feature of emerging payment methods, including Bitcoin and the majority of blockchain technologies, in which the party initiating payment bears the costs associated with making that payment.

Market evolution and momentum for change

The rules for credit card surcharging were first introduced to the American market in 2013, and momentum for passing on transaction fees accelerated in 2017 when the US Supreme Court ruled 8-0 that state “no-surcharge” laws restrict constitutionally protected speech. This momentous decision led California, Florida, New York, and Texas, four states in which over 40% of the US population lives, to allow surcharging for the first time, leading to even more merchant adoption of this model.

The payments industry has eagerly responded to these regulatory developments, as passing on the credit card fee provides a differentiated and higher-margin alternative to conventional “interchange-plus” pricing models. With surcharging, acquirers are able to offer payments solutions that increase their profit margins without the risk that their merchants switch to a competitor who promises to lower their rates, since the merchant is already accepting credit cards at no cost to their business.

Amidst the enthusiasm for passing on credit card fees, many payments providers have been insufficiently attentive to the rules. Credit card surcharging has been introduced to the American market through the adoption of new rules, and the market continues to be shaped by compliance demands. Many payments providers who attempted to evade the card brand rules and add illegitimate fees (often fallaciously marketed as “cash discount”) soon found that the card brands and processors are paying close attention, swiftly shutting down merchants who violate the rules. In October 2018, Visa issued a bulletin reinforcing that merchants that add a fee at the point of sale must comply with Visa’s contractual requirements for surcharging, regardless of what merchants call the fee.

The rules for credit card surcharging ensure consumer fairness, but also create a set of requirements that merchants and acquirers are almost universally unable to meet without the assistance of a technology provider that automates compliance. As the market for passing on fees has continued to expand, many payments companies have recognized that the best strategy for long-term compliance and sustainable growth is partnership with established technology companies focused exclusively on surcharging, as they are able to automatically manage all of the regulatory requirements and provide a turnkey solution for payments professionals to sell to merchants.

The American model

The model for credit card surcharging adopted in the US both responds to the unique demands of the American market and provides a strong model for global leadership going forward.

At a time when other markets are struggling to encourage electronic payment adoption, seeing banks reintroduce various fees to compensate for excessively stringent interchange caps, and attempting to improve the consumer friendliness of their card acceptance methods, the US has introduced a transparent, market-driven, and pro-competitive approach to cost reduction.

As credit card surcharging continues its explosive growth within the US, it will transform the American market and set an example for the payments market worldwide.

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.