Merchants Gone Wild: The Surcharge Edition

Since about mid-December of 2018, checking out in the stores here in Boston has become even more of a hassle.

Never mind the people who start rummaging around in their purse or wallet to pull out their cards after stepping up to the checkout counter. Or the chatty person who strikes up a conversation with the only cashier on duty while the rest of us cool our heels.

Now, once I get to checkout, I’m asked if I want a bag – and if I do, will I pay 10 cents for it?

This newfound friction is the result of the City of Boston passing a bill that bans plastic bags and gives merchants the right to charge for ones made of paper. Yes, I know that for many of you, especially in California, this is old news and standard operating procedure – but hear me out.

These encounters are all the more ridiculous when staring down at a counter filled with a bunch of items that could only be carried away in a bag.

I say yes, because … well, what else is there to say?

Of course, it’s not the money – after all, it’s only a dime – but it’s the extra hassle at checkout. The extra step, the extra decision to be made, the time that it takes to add the charge and get the bag, since it’s not a given that everyone will want it and pay the 10 cents.

At that moment, all the speed and convenience of making EMV faster and activating tap-and-go at checkout goes *poof*.

Soon, consumers in many states in the U.S. may find themselves faced with another checkout hassle: merchants adding a cost that covers their processing fees.

Only, unlike the paper bag charge, it won’t be optional.

And it will be a lot more than just 10 cents.

The Ban on the Ban

The specific issue that I’m referring to is merchant surcharging – a fancy term to describe the fee charged by merchants when consumers use network-branded card products to pay for their purchases.

The ability for merchants to surcharge in the U.S. is nothing new.

Card networks, under pressure from regulators, modified their rules in 2013 to allow merchants to surcharge – basically ending the ban – under very specific conditions and with very tight parameters for how to calculate that surcharge. The card networks left it up to the states to decide whether or not to allow its operating merchants to do so.

Although many states allowed merchants to surcharge, most merchants haven’t taken advantage of the ability to slap those fees onto consumers.

Similarly, most merchants have stopped asking consumers to produce a “cheaper” card or cash to pay for their purchases. Merchants, especially in an increasingly tough retail environment, just want the sale. And they know that giving consumers a choice in how they want to pay is priority number one, two, and three for making sure that happens.

But surcharging as a topic of conversation in the U.S. has been given a new lease on life ever since the New York State Supreme Court decision ruling that merchants could surcharge — thus overruling  legislation that prohibited them from doing so.

According to the decision, merchants can surcharge because it is their right, under the Freedom of Speech Act in the Constitution, to tell consumers that they can – and they will, if the consumer uses a network-branded card to pay them.

The ban on the ban has kick-started a whole new conversation about how merchants can find a new pot of gold at the end of their checkout rainbow.

And, I hope, a whole new conversation about what happens when regulators mess around with rules established by the card networks to prevent merchants from engaging in the bad behaviors that can harm consumers.

Because when they do, consumers can get hurt.

And then regulators are forced to backtrack.

For proof, we need look no further than the two markets that many in the payments industry regard as leading the pack in payments innovation: Australia and the U.K.

Innovation by Any Other Name

Surcharging has been permitted Down Under since 2003. Yet the ACC, the Australian regulator, had no choice but to put the hammer down when merchants there used the ability to surcharge to effectively gouge consumers. Rather than just passing along the cost of the processing fees, some merchants added hefty charges just to get more money from consumers who wouldn’t resist.

Those practices pressured the regulator to put strict rules in place in 2016 for large merchants – and in 2017 for smaller merchants – that prohibited such excessive fees and provided instructions on how to calculate them.

Yet the bad behavior persisted.

Last summer, the Australian regulator put merchants on notice when it publicly admonished Cruisin’ Motorhomes for allegedly charging consumers more than was permitted under the rules – and fined them $12,600.

The message that the regulator intended to send to merchants?

Break the rules and you’ll pay the price.

Across the pond, until about this time last year, merchant surcharges had been alive and well in the U.K. since 1991 – yet merchants infrequently used them. It wasn’t until 2011, when a complaint was filed with the U.K. regulator, that the practice of merchant surcharging was put under the microscope –mostly because of the practices of travel operators that layered on excessive fees at the end of the traveler’s booking process.

The complaint that started the merchant surcharge backlash was brought by a traveler who amassed a £48 processing fee for one leg of his family vacation. The result of that complaint was a toughening of the surcharge rules in 2012  – but apparently, they still weren’t tough enough.

The U.K. regulator was forced to ban the ban of the ban – reverting to the card network operating rules that prohibit surcharging – starting in January of 2018, since merchants continued to play in the grey areas that only perpetuated instances of consumer harm.

Perhaps most frustrating for online consumers was the practice of “drip pricing” – a ruse that only presented consumers with the merchant surcharge at the end of a transaction, after the time and energy of searching online for the cheapest prices and lowest fares was expended.

A 2012 survey presented by the U.K. Office of Fair Trading’s (since renamed the CMA) chief economist revealed how damaging these practices were for consumers.

More than half thought they could have found a cheaper alternative, had they known the total price upfront – 44 percent of consumers would have shopped elsewhere. Nearly three quarters of consumers surveyed (74 percent) said the total price should have been presented upfront, and 39 percent said the extra fee was much higher than they had expected.

Consumers felt confused, and also betrayed.

Putting a Price on Consumer Trust

Back here in the U.S., the potential impact of merchant surcharging has the potential to do much more than harm consumers – it could also throw a real wet blanket on the frictionless checkout experience that payments innovators, and the entirety of the payments ecosystem, has been setting out to achieve for the better part of the last decade.

Imagine a world in which consumers are told that if they use a card at checkout, they will be charged 1 percent of the purchase price. That’s a relatively abstract concept until the consumer gets to the counter at the store or the checkout page online and sees the charge. At that point, they’ll have no choice but to go along with it or find a merchant that doesn’t tack on the extra fees.

But just because merchants can charge the fee doesn’t mean they all will.

I’ve noticed that in many Boston stores now, I’m not charged for a paper bag. When I ask why not, I’m met with the following response: “How else are you supposed to carry the stuff out of the store?” Maybe they’ve added the 10 cents into the cost of something else I’ve purchased, or maybe they’re eating the cost of the paper bag, since giving consumers bags has always been part of the checkout experience.

All I know and care about is that I am not hassled at the end of checkout by the bag/no bag stutter step.

Many on the side of merchants in the surcharge debate say it’s a clear sign that interchange fees will go the way of the dodo bird, since passing the fees onto the consumer will only force them to be set lower.

I seriously doubt it.

It’s more likely that consumers will start to push back on merchants that charge them to use the cards they have always used to pay for things at their shops, online or off. They like the value they get when they use them, and the convenience of acceptance wherever they shop. They also know that the card networks and issuers put rules in place to protect them if a merchant’s system is ever compromised.

This brings me back to the card network ban on merchant surcharging to begin with.

It was obviously pro-consumer, because it prevented merchants from doing precisely what they did in the U.K. and Australia. Card networks, like all platforms, must worry about all their stakeholders and prevent bad behavior. Their rules are designed to do just that.

That’s a good thing, and regulators should applaud it rather than condemn it. More than anything else, those operating rules help ensure consumers’ trust in the payments ecosystem. Without them, as we have learned, innovation – and all of the great benefits that come along with it – can grind to a halt.