Nov 12, 2006

Surcharge sign: Debit card—0%, Credit card—0.75%, American Express—5%

In his excellent paper, “Payment Wars: The Merchant-Bank Struggle for Control of Payment Systems”, Adam Levitin invites readers to “imagine entering a store with a sign listing surcharges: ‘American Express—6%, Visa—3%, our card—0%.’ If interchange rates become transparent and subject to market discipline, American Express’s interchange-based business model is in serious trouble.” (Click here for more on Adam Levitin's paper).

Well, customers in some parts of the world don’t need to imagine that anymore. They just need to go shopping.

This picture was taken at a store in Denmark. Pay with a local Danish debit card (Dankort) and avoid surcharges completely. Use a credit card issued by a Danish bank and pay a nominal 0.75% surcharge. You get clobbered if you choose to use your Diners Club card (4.75%), your American Express card (5%) or if you are a tourist paying with a foreign credit card (5.75%).

Why do merchants want to do this? Are they trying to make an extra 5% when you pay with your American Express card? They know that you probably also have a local debit card, all they want you to do is pull that one out instead. This particular merchant obviously does not see any difference between an American Express card and a local debit card. So he encourages you to use your debit card, which doesn't cost him much. The only way to get him to stop doing this is to show him how the more expensive card gives him value which is not available through the other, cheaper cards.

American Express's higher fees have forced the company to adopt a strong merchant-centric culture over the years. Compared with Visa and MasterCard, American Express is probably more disciplined in striving to create value for merchants. With growing pressure on interchange, the really big upcoming revolution in the payments world has got to be Visa and MasterCard also developing a more merchant-centric culture. There is no other way to protect interchange fees.

Here's a prior post on merchants steering customers away from high interchange cards, “We do accept AmEx, but don’t you have a Visa card?

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