Imagine shopping at a flagship designer store or four-star restaurant and seeing a credit card 'swipe fee' on your tab. Pretty hard to fathom, no?
Yet for some merchants with slimmer margins, the idea of passing along credit card processing fees to consumers is appealing, at least in theory. Interchange, the fees paid to card networks and issuing banks, has risen over time, fueled in part by a need to finance the proliferation of generous rewards programs.
Meanwhile, a few technology providers have been quietly selling software that helps acquirers enable merchants to levy fees on card transactions, while fulfilling a host of compliance rules based on jurisdictions, network brands and multitudes of interchange pricing tiers.
These providers are tapping into the growing market of merchants disgruntled about paying credit card interchange. Admittedly, those grumbles have existed since the beginning of the electronic payments system itself. But until 2013, it was against merchants' terms of service with the card networks to pass along processing fees to the customer.
That is no longer the case, and "the economic value is huge," says Jonathan Razi, chief executive officer of CardX, which sells surcharge-compliance software to acquirers.
Razi, a Harvard Law School graduate, saw an opportunity more than six years ago after the card networks started allowing merchants to surcharge for credit cards. The space has also attracted other industry outsiders. Robert Maynard, who founded LifeLock, an identity theft protection service later sold to Symantec, formed SurchX to help merchants pass on card processing fees to cardholders.
"After having processed hundreds of millions of dollars and feeling the pain, I immediately knew this was the opportunity," Maynard says.
Surcharging is a highly complex decision that each merchant must make for themselves – but as always, there's no shortage of factors to consider.
Navigating all the possibilities
For some merchants, these new technology providers eliminate the headache of navigating card brand rules and local laws. The networks' rules are numerous: sellers need to disclose how much they charge at the point of sale, and they also can't profit from the fee. They can only charge the fee for credit card transactions. They can't charge more than 4%, and the fee can't be more than the cost of acceptance.
Add to those rules a patchwork of jurisdictions: surcharging is allowed in most states, but five still have bans — Colorado, Connecticut, Kansas, Massachusetts and Oklahoma — meaning merchants need to be mindful. There are also different interchange rates based on the merchant category and card type to consider.
It all leads to about 20 million permutations of possible rates that a merchant could charge to remain in compliance, according to Maynard.
"The downside of not getting the number right is lots of bad, ugly things," he says. Not to mention, expensive things.
That's because the networks could start to hand out violations if they started to ramp up enforcement. Generally, acquirers and Independent Sales Organizations (ISOs) get fined, but they pass that on to the merchants. Fines for failures in Payment-Card-Industry (PCI) compliance can range from $5,000 to $100,000 a month, depending on the volume and time spent out of compliance, according to IS Partners, a compliance consulting firm.
Pitfalls and potential
That's not to say all merchants are toeing the line; in fact, some might be oblivious to potential fines. From pizzerias to taxicabs to convenience stores nationwide, various credit card fees have been showing up at the point of sale. Some are in compliance. Others? Not so much.
"It's a bit of a Wild West and will continue to be one for a while," says Gavin Rosenberg, vice president of product marketing at Global Payments.
While potential noncompliance is one obstacle to adoption, merchants also worry about alienating customers. After all, consumers aren't generally accustomed to paying for the privilege of using a payment card. Some might even argue that accepting payments is a cost of doing business that most merchants have already reflected in their prices.
Maynard argues those concerns are overblown. When convenience stores started levying surcharges of 5% for small transactions, net margins declined only 0.5%, he argues. Of course, whether that will translate outside of convenience stores remains to be seen.
Paul Martaus, president and chief executive officer of Martaus and Associates, a payments consulting firm, agrees that consumers may not mind in certain situations. Sure, they might balk at first, especially where there's an expectation that the merchant should be footing the bill, like at a major retailer.
Yet, there are many situations when a consumer would actually be willing to pay the fee – while at a mom-and-pop type of operation with perceived low margins, for example. Or some may even prefer to pay cash, like while at a pub or restaurant where they're tipping a server. (Although it's important for merchants to consider the hidden costs of accepting cash – theft, lost sales, losing out on data and time spent reconciling cash registers, just to name a few.)
In those situations where customers may not mind absorbing the swipe fees, the economics are compelling from a merchant perspective, Maynard notes. For example, if a merchant had a net profit margin of 10% and received 3% from SurchX as part of the fee charged to the customer, it would increase the net margin for all items bought with credit cards by three percentage points. That's more than a 30% increase in net margin.
In those situations where customers may not mind absorbing the swipe fees, the economics are compelling from a merchant perspective.
Yet, it just depends on a merchant's priorities. Some have taken advantage of offers from networks like Visa, which offers incentives to stop accepting cash altogether. On the opposite end of the spectrum, merchants like gas stations often choose to offer a lower price to consumers who are willing to pay cash rather than swipe their card. And, like almost anything else, most businesses will fall somewhere in the middle.
Still early days
While credit card surcharging is hardly ubiquitous, there are signs that another boom could be upon us, with the likes of SurchX and CardX growing fast in terms of staff, salespeople and enrolled merchants. Sure, not every merchant will immediately start passing along fees, but the option is now there.
The real adoption, though, could come once surcharging becomes legal in all 50 states. Given surcharging laws have been struck down in California, Texas and New York, proponents say that the legal precedent will need to eliminate bans in the remaining states. That would swing the door wide open, leading the United States to follow the path of Australia, where credit card surcharging is commonplace.
"The category leaders are going to jump in when it's all 50 states," Razi says. "That is going to be a key trigger point."
Behind the scenes, others are developing their own surcharging solutions, Rosenberg adds.
"People are working hard to put together good, compliant programs. If there's a market for something, someone is going to develop a product for it," he says.