Oct 16, 2007

Petrol stations ban credit cards – is surcharging the only viable solution?

According to this article by the Gulf News in Dubai, fees for accepting credit card payments “increased about a year ago for petrol stations from 1.35 per cent to 1.4 per cent for each transaction and petrol stations were fine with it for a year. It was recently increased again by 0.2 per cent to 1.65 per cent.” And that’s the proverbial straw that broke the camel’s back. Petrol stations across the Emirates suddenly decided to no longer accept credit cards. Terminals will soon be removed while Visa, MasterCard and the banks negotiate with the retailers.

Merchants see credit card fees rising and have little ability to negotiate interchange fees with the payment schemes. If the article is correct, fees have risen from 1.35 per cent to 1.65 per cent in just over a year. That’s 30 basis points. Not just peanuts. To cover this increase, it appears that the debate is primarily on whether or not retailers can or should surcharge purchases paid by credit card.

I understand that merchants must feel out of control and angry about it. But I also understand that the payment schemes need to be able to raise interchange fees in order to compete against each other and attract card issuers. Banks need the fees more and more. Interest margins are not what they used to be, and payment services increasingly need to be funded out of interchange.

A compromise is needed. A pressure valve of sorts, which gives merchants the ability to negotiate easier and gain better control of the fees that they pay, while at the same time allowing payment schemes to continue raising interchange fees to attract card issuers.

I can’t see how surcharging can be avoided. Giving merchants the ability to surcharge certain card products which are too expensive in relation to their value, creates a powerful incentive for payment schemes to create more useful products and services for merchants. Payment schemes will actively innovate for the benefit of merchants if it will help them avoid seeing surcharges applied to their brands. Card brands will be under very strong pressure to either reduce their interchange fees or innovate to make the fees justifiable to merchants. In practice, thanks to these strong pressures, customers should see little if any surcharging actually being applied.

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