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Surcharging Ripple Effect

January 25, 2013
Credit
Patricia Hewitt
Mercator Advisory Group
On Sunday, merchants in the United States will be able to impose a surcharge fee on credit card transactions for the first time in history. This change was enabled through the merchant interchange fee lawsuit preliminary settlement approved by a court in November. As of Jan. 27, merchants that follow the process prescribed by the card networks can apply a surcharge of no more than 4% of the transaction. Surcharges can be imposed at the brand (for all credit card transactions) or at the product (for specific credit card types) level. Merchants have some hurdles to jump to charge the fee, which include submitting intent to acquirers and network, point-of-sale modifications, and consumer notification language as well as the soft spending environment should douse enthusiasm in the short term.

However, we could see some early adopters coming out of the travel industry (where online purchases and business cards are common) or targeted fees designed to incent consumers to use private-label payment products. But this is not the main point of this Perspective.

Reviewing the published operating rules for Visa and MasterCard, it is clear that these added fees can only be applied to credit card transactions. For example, the Visa guidelines explicitly state merchants cannot apply these fees to signature-debit transactions. But in some cases, a signature-debit transaction is similar to credit for merchants that lack PIN pads or are not proactive defaulting to PIN-based transactions (and in this case we would include franchisees for example). We believe this sets up the risk that some signature-debit transactions will be impacted by any fee schemes designed by merchants, especially those done at the brand level not by intent, but by circumstance.

In the very near future, debit issuers may wish to include information about credit card surcharges to their debit card customers or, if warranted, leverage this change to encourage more consumers to use their PIN at the POS to avoid any unintentional fees.

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