Aug 29, 2007

Why merchants will eventually switch to credit card surcharges instead of cash discounts

Payments News links to a Los Angeles Times article describing how more and more gas stations in the US are offering discounts to customers that pay with cash instead of plastic. "To dodge the rising fees that credit card companies tack onto transactions, both no-name and big-brand stations are charging drivers less when they buy with cash." The article explains that customers apparently understand why gas stations are steering them away from plastic.

Cash discounts are not a clean solution to rising interchange fees, since by definition all plastic payments are penalized. Why should customers be penalized for using a low interchange product like a debit card? It would be much easier if merchants could surcharge on selective card products, like premium cards, rather than use the very blunt instrument of cash discounts.

Merchants complain that they can't negotiate interchange fees. They just have to accept the fees imposed on them. Much of the animosity and legal headaches are directly related to the sense of not being in control. Giving them the ability to selectively surcharge would address this issue. Merchants that don't like the fees on a particular product could then pass the cost on to their customers. You want to use a premium card and collect airmiles or cash back from your bank? Fine, just pay the extra cost of using that card. Allowing surcharges makes sense and would go a long way towards eliminating much of the legal risks hanging over card companies today.

Surcharges are contractually off limits to merchants, who could have their ability to accept credit cards revoked. But the legal support for prohibiting surcharges could be falling apart. The same article describes a gas station chain that put up two prices and used the word "Credit" to differentiate the higher price from the cash cost. Visa threatened to charge the company $5,000 a day and cut off the stations' ability to take Visa credit cards unless they changed the wording on their signs so as not to imply a surcharge on credit cards. State regulators took side against Visa, and Visa backed off. It's a very small step from there to clear and outright surcharges.

Selective surcharging would seriously disrupt current market dynamics though, wouldn't it? The ability for merchants to selectively surcharge would automatically force payment schemes to think seriously about the benefits they provide to merchants when they come up with a new card product with higher interchange fees attached. It would foster innovation that benefits merchants. Imagine new credit card products with new features that merchants get really excited about, and are ready to pay interchange fees for. Hey, isn't that a pretty good end result?

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