Though adoption is on the rise, commercial cards still hold only a fraction of the corporate payments market — and an even smaller share of transaction volumes in accounts payable (AP).
A lack of supplier acceptance is the most commonly referenced barrier that hampers card adoption in B2B payments, and interchange fees are most frequently blamed for that conundrum. It’s a challenge that has opened the doors for B2B payment solution providers to introduce new ways to support corporates’ use of cards in AP departments, whether by mixing rails (i.e., allowing businesses to pay with cards but enabling suppliers to receive payment via a different technology), or by connecting suppliers to the ability to collect Level II and III interchange data to lower processing fees.
There’s another route that companies can take, however.
According to Unified Payments Group‘s Founder and President Dan Hatcher and Chief Executive Officer John Perez, the current regulatory framework in the U.S. does allow, in many cases, for companies to add a surcharge to transactions when accepting commercial card payments.
Hatcher and Perez discussed this often-missed opportunity, and why it can provide a more strategic way for suppliers with tight margins to accept cards than alternative methods.
An Evolving Regulatory Framework
The legality of card surcharges can be traced back to Expressions Hair Design v. Schneiderman, a 2017 Supreme Court case that, in essence, sided with New York merchants in their ability to establish a surcharge when customers pay with cards. Perez explained that today, this is a state-by-state issue, with 45 states now allowing for surcharges on card payments — Oklahoma being the most recent to enact a ban on surcharge bans.
Before the Schneiderman case, said Perez, businesses would approach their legal counsel about the possibility of adding surcharges when accepting commercial cards.
“Of course, they got a myriad of different answers,” he said. “It’s really only been since March 2017 that, if you were in the correct space, you could legally pass through a surcharge, and there are a good many companies that aren’t aware of that.”
But even with growing awareness of the legality of surcharges, Hatcher noted that there remains an education gap in corporates’ understanding of how to compliantly implement those surcharges, even across an organization’s own leadership team.
“The CFO might be well aware that there are opportunities to participate in compliant surcharge technology, but the chief technology officer might not have any idea,” noted Hatcher. “There’s a lot of education that is required not only en masse across verticals and industries, but also within a single middle-market or enterprise-level organization.”
Preserving Buyer-Supplier Relationships
The opportunity for B2B suppliers to accept commercial cards can be an important method of strengthening relationships with corporate buyers who are eager to pay with cards to take advantage of capital float and rebates. But it’s not guaranteed that a surcharge will be willingly absorbed by the buy-side organization.
Perez emphasized that as commercial cards become a more strategic component of corporate spend, card surcharges will be understood as a cost of doing business.
“There are a lot of different reasons why corporate cards are being used more often, but for companies of a certain size, it’s very cost-efficient for banks to make credit available through the purchasing card environment,” he said. “They are rewarding large users of corporate cards by giving back some sort of rebate, and now you have a class of companies for which that credit card really is their operating line of credit. They need that working capital that’s available to them.”
What’s important for service providers like Unified Payments, however, is not only simply offering B2B businesses a mechanism to apply compliant surcharges to transactions when taking cards. Perez noted that it’s also critical to collaborate with customers and promote communication between buyers and suppliers to ensure transparency for both beneficiaries and payers when a surcharge is involved.
An Alternative to Level III Data
Applying a surcharge is not the only way B2B suppliers can ease the burden of accepting commercial cards.
The strategy of using a service provider to capture Level II and III processing data can also be a valuable one, Perez noted — but it may not be enough.
“If there are processors coming back to companies explaining how to lower your interchange costs through Level II and Level III data, that’s great — I would argue that they probably should have been doing that all along, regardless of the fact that surcharges are now available to a company,” he said.
But, he added, this tactic is most valuable to companies that are migrating from standard processing rates.
“It’s going to be meaningful, but it’s not going to be anywhere near as impactful as getting away from all of the interchange costs associated with processing those transactions,” Perez continued. “It is clearly an improvement, but it’s night-and-day different from being able to put in a surcharge environment in your business.”
Regardless of the strategy, corporates must become increasingly aware that lowering the cost of accepting cards is now a real possibility. According to Hatcher, doing so is a critical method of bolstering the bottom line.
“Taking cards in a compliant-surcharge manner means making an entirely new payment channel available to them,” he said. “This is a process in protecting their margins.”