The credit card surcharge may be ready for a larger role in payments.
An antitrust settlement with Visa and Mastercard over interchange fees gained preliminary court approval last month, advancing a pact that envisions a shift of some card swipe fees from merchants onto credit card holders.
The settlement with Visa and Mastercard details a post honor-all-cards retail landscape in which merchants use surcharges to steer customers from paying with higher-interchange fee credit cards towards payments using less-expensive cards.
The pact, if it gains final court approval and survives appeals, could herald a new era of credit card surcharging, which the networks see as the solution to merchants’ higher costs for accepting premium and commercial cards.
Policy changes under the agreement “fundamentally alter” the payment card field, giving “merchants practical and enforceable tools to exert competitive pressure on interchange pricing and network fees,” class attorneys for the plaintiffs wrote Wednesday in a motion seeking $206 million in legal fees.
The pact also allows merchants to reject certain pricey, high-end credit cards. However, any widespread effort by merchants to refuse a $795 Chase Sapphire Reserve or $495 Bilt Palladium card – and the generally affluent shoppers who wield them – seems like an instant non-starter from a business standpoint.
That’s why surcharging becomes more likely, at least for some businesses with thinner profit margins, where transaction expenses represent a significant financial impact.
The settlement allows a merchant to levy a surcharge up to 3% to cover their costs for premium and commercial cards. A merchant choosing to surcharge also must decide whether to do so at the product level, selecting premium or rewards cards on which they’d levy the charge, or at the brand level, which would apply to all cards branded either Visa or Mastercard.
About 40 states allow surcharges, and some including Colorado and Georgia regulate their size.
But two bigger issues confront merchants considering surcharges: Many customers don’t like them, leading to lost sales, and there’s payment-processing and disclosure work involved to implement them.
About a third of small businesses (35%) impose card surcharges, according to an annual survey of smaller merchants market research firm JD Power released in January.
The downside? About a third of their customers (32%) “occasionally or frequently” abandon a transaction when they encounter a surcharge, according to the poll of 4,400 businesses with less than $20 million in annual sales.
Merchants’ complaints about how much burden surcharge programs would impose on them consumed a sizable portion of an April 27 hearing before U.S. District Judge Brian Cogan in Brooklyn, New York. Large merchants, including retail giant Walmart, had urged Cogan to reject the settlement.
Mary Miller, an attorney for Circle K and the National Association of Convenience Stores, raised the surcharge issue at the hearing.
“There’s just something that doesn’t make sense about requiring the merchants, who are arguably the ones being harmed by the anticompetitive scheme, having to do the work and telling the customer ‘Now I’m going to have to surcharge you,’” said Miller, a partner with the law firm Lehotsky Cohn.
A surcharge expansion isn’t likely an issue just for smaller companies – larger enterprises are adopting them, too, said Jonathan Razi, a Chicago fintech entrepreneur. He founded CardX, a credit card surcharging company, and ran it for a decade, selling the business in 2021.
Surcharges added to business-to-business payments are “very common,” because of the growth of virtual and other credit cards in corporate procurement functions, he said in an interview last week.
Card issuers often incentivize companies to use their cards, which has driven surcharge growth as vendors seek to recoup their interchange cost when customers mandate that they’ll only pay invoices by card.
“They get an interchange rebate from the provider, so [buyers] say we are only going to pay on credit cards,” Razi said. “If you’re the vendor receiving that payment, you say, ‘OK, in that case, I'm going to pass on the transaction fee to you.’”
A shift towards more widespread surcharging also stands to benefit the card networks and processors, Razi said.
Card networks will likely gain more volume while processors – from Elavon to Fiserv to Global Payments – can offer surcharges as an additional service to their merchant customers, Razi noted.
“The vanilla payment processing has been totally commoditized, and in payments, you’re always looking for what's the value-added service I can offer,” he said.
