CardX CEO: Ban On Card Surcharge Ban May Lead to Lower Interchange Fees

Will the ban on the credit card surcharge automatically lead to significantly higher prices when consumers opt for the plastic (via card or digital wallets) at the pump, at the counter … or pretty much anywhere?

Maybe, maybe not. As noted in this space by Karen Webster, the ban on the ban – where, now, in New York, surcharges are allowed when merchants post total prices for transactions – shows the inefficiencies of regulation that supersede card networks’ own rules governing merchant activities.

There’s also likely the pushback from the consumers themselves, who will prove adept at simply opting for other payment methods when confronted with higher fees incurred if they pay with credit cards (debit cards, for instance). Or they may gravitate toward merchants who opt not to pad their prices.

After all, the ban on the ban simply means that merchants can opt to tack on surcharges, not that they must. Whether consumers will accept a higher cost tied to their preferred payment methods remains to be seen in New York (and elsewhere), and merchants risk a tradeoff between a bit of bottom line earned today and goodwill damaged down the line.

As Webster recounted Monday (Jan. 28), card networks modified their rules six years ago to allow surcharging, but those fees could be passed along by merchants on a state-by-state basis.

In New York this month, credit card surcharges got the okay.

In an interview with PYMNTS conducted by written exchange, CardX CEO Jonathan Razi said that the New York events represent a “capstone on a major regulatory movement” tied to lawsuits challenging state-level bans in California, Florida, Texas and now, most recently, in the Big Apple.

The sea change may have the impact of lowering interchange fees, boosting credit card acceptance and even benefiting payments service providers with new revenue streams, Razi said.

Yet now the ban on the surcharge ban – made possible by regulatory changes – means that companies must be in full compliance with the rules. Razi said surcharge requirements mean that merchants must navigate multiple registrations, assess fee amounts and ensure that no fees are being levied on debit card transactions. Merchants will increasingly look to partner with solution providers to track and present the new costs.

Razi said that “the payments industry is eager to sell surcharging solutions, which are generally high margin and high retention. The increased price competition for traditional merchant services has resulted in a ‘race to the bottom’ in terms of acquirer margin, so payments providers have embraced the opportunity to sell differentiated solutions that won’t be undercut on cost.”

Razi, whose firm offers payments technology that automates compliance with rules for card surcharging, said that with the decision in the New York case, bans on the bans (so to speak) in the aforementioned states cover 40 percent of the U.S. population.

“These legal victories have significantly expanded the market opportunity for surcharging,” Razi said, and represent a tipping point for the five remaining states that have bans in place – Colorado, Connecticut, Massachusetts, Kansas and Oklahoma – to narrow their scope or drop them altogether.

Razi noted, too, that the New York law maintains an additional disclosure that requires merchants to disclose those fees in dollars and cents wherever they post or quote prices. For instance, a retailer may, on a shelf, display the cash price or the “credit price” alongside one another, may quote it verbally or may show the price differential on an invoice.

Asked by PYMNTS as to whether there will be widespread surcharge adoption by merchants in New York (and elsewhere), and whether there may be “early adopters” of such surcharges, Razi said that nationally, credit card surcharging has already seen strong adoption in verticals such as auto repair, wholesale distribution, law, medicine, accounting, insurance, recurring membership billing and home contractors.

“We expect that these verticals will be among the early adopters in New York as well,” said Razi.

He stated that surcharging would likely also see uptake in businesses that have a high cost of goods sold or have low margins, and where he said interchange costs have gone up by 24 percent for rewards cards over a four-year period.

As merchants embrace the surcharge option, he projects that swipe fees may trend lower, as the legal developments in New York and elsewhere mean that credit card companies are exposed to price competition when cardholders “bear the cost of their own rewards – they’re likely to switch to a lower-cost option if fees become too high, interchange for the market as a whole,” Razi noted.

The landscape may eventually become one where large enterprise merchants that operate nationally will be able to implement uniform pricing strategies nationwide.

One market that may be a model of things to come is Australia, where, since the option for credit card surcharging debuted in 2003, 42 percent of businesses and 60 percent of large businesses currently pass on credit card fees to their customers.

(Side note: In her own column on Monday morning, PYMNTS’ Webster noted that in Australia, regulators have had rules in place for the past few years dictating that such surcharges cannot “be excessive,” with strict parameters of what “costs of acceptance” can be passed along to consumers. These rules come in the wake of the discovery that at least some merchants in Australia were gouging consumers with padded surcharges.)

In the states, said Razi, payment options will likely expand as some firms in lower-margin segments like wholesale distribution may now be able to give their customers a pay-by-card option.