Will U.S. Merchants Soon Be Able to Add Surcharges to Credit Card Payments?

@edbyu points me to a Wall Street Journal article on a possible settlement in a legal case that would end Visa and Mastercard rules against merchants charging consumers more for using credit cards.

According to the piece, we generally don’t see surcharges on American Express and Discover cards because their rules allow surcharges but only on equal terms with other cards accepted by a merchant. So a store accepting only American Express could impose surcharges now. But if that store also accepts Visa and Mastercard, they cannot add surcharges to purchases made with those cards, and thus cannot also add surcharges to Amex charges. Thus ending the contractual prohibition on Visa and Mastercard surcharges would effectively and the practice of also not adding surcharges to American Express and Discover payments.

The Durbin Amendment to the Dodd Frank financial reform law signed in 2010 limits the cost to merchants of accepting credit cards, but doesn’t affect the cost of accepting credit cards. Debit cards have been much less profitable for banks since then, and one effect has been for banks to see their checking account customers as less profitable and to increasingly impose fees on consumer bank accounts. Another has been a reduction in rewards for consumers using debit cards (it no longer makes sense for banks to buy miles to reward debit card customers when the cost of the miles is greater than the fees the banks are earning for a transaction). Suntrust is one recent exception, where they re-instated points-earning debit cards. But Suntrust was one of just a handful of banks that failed stress tests several months ago, and rewarding consumers for opening accounts is one (albeit high cost) way to bring in new deposits and shore up their capital position.

Since retail stores haven’t been able to get the government to force credit card companies to charge them less for their services through legislation, the courts (and the threat of massive punitive damages) represent a new way to rewrite contracts to reduce costs on retailers that accept credit cards.

Now, for all of the complaints about interchange fees (and of course retailers want to pay less for the services they receive), it’s worth noting that companies get money right away, deposited straight into their account when processing credit cards, and without the risk that a check bounces. Consumers paying by credit card tend to spend more money per transaction. Credit card transactions also reduce the likelihood of employee theft significantly compared to cash transactions. And they allow consumers to better manage cashflow (one bill at a specified time each month rather than money coming out of an account right away). It’s easier to track balances in checking accounts in real-time when paying a single bill (most people don’t fill out their check register after each debit card transaction), and this helps consumers avoid overdraft fees. So both consumers and merchants benefit from credit cards, entirely apart from rewards programs.

In the Journal piece, retailer lobbyist Mark Horwedel argues that if merchants could impose surcharges, credit card processing companies would simply lower their fees so that merchants wouldn’t impose the surcharges. In other words, he’s hoping to use the government to improve merchant bargaining power against Visa and Mastercard.

It’s worth looking abroad at countries that have allowed credit card surcharges and that have pushed down interchange fees to understand the likely effects. According to this 2010 paper (.pdf),

These unintended consequences include increased costs and fewer benefits for cardholders. This is precisely what happened in Australia—the most complete experiment to date with regulating interchange fees—when the central bank in that country artificially capped interchange fees. Credit card customers in Australia now pay more for their cards and receive less in return, and there is no evidence that consumers, including those using cash or other forms of payment, have benefited at all or that overall economic efficiency has improved. In addition, artificial reductions in interchange fees would likely cause card issuers to reduce their risk of credit loss through lower credit limits or tougher credit standards, essentially reducing the availability of credit. This has consequences for consumers, as well as merchants, the latter of which should expect decreased revenues if the supply of consumer credit is further reduced.

The paper goes on to suggest that lower credit card volume would be bad for credit unions that disproportionately rely on interchange fee revenue (despite massive government handouts, financial institutions remain weak),

Frequent flyers who expect consumers to benefit from lower interchange costs need only look at Qantas, which imposed a fee on consumers for paying by credit card without lowering price.

Nonetheless, the Journal predicts that the retail lobby could accomplish through a legal settlement what it couldn’t get included in Dodd Frank legislation.


About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. Very interesting. I’ve been convinced in recent years that with all these credit card bonus offers and allowing customers to earn points/miles in general is creating a bubble in the credit card/banking/commerce world. I am just wondering when it is going to pop.

    The way it works today, credit card companies make a large chunk of their income off of credit card processing fees that they charge to the merchants. To cover their costs, the merchants charge customers more for their products/services. In turn, the credit card companies go behind the merchants’ backs and encourage customers to obtain and use credit cards more often through points/miles programs and credit card signup bonuses.

    Who is orchestrating all of this and profiting from it? The credit card companies. Psychologically we as customers think we are getting a great deal by racking up points earning cards. Merchants need to accept credit card payments because customers are less likely to carry cash. Though the vast majority of customers end up paying more in the end by using credit cards, since merchants have to increase costs to cover the CC merchant fees.

    In the end, the slope is slanted strongly toward the banks and credit card companies, and against consumers. The merchants are stuck in the middle of all of this. And IMO it is just a matter of time before the slope starts to balance out. If/when that happens, expect to see credit card signup bonus offers dry up, and points/miles earning opportunities to dry up as well. Along with that, many “travel/points/miles” blogs that make income primarily from credit card application referrals will dry up as well.

    This is my prediction, and only time will tell what happens in reality.

  2. I don’t think that’s how it works. Interchange fees haven’t gone up, and CC users like us are actually a big loss to the bank. There’s simply not enough money in there to pay for all the rewards, and prices at the store don’t go up because more people use rewards cards.

    What banks are hoping for is that a certain percentage of uses will carry a balance, since interest charges is where most of the money comes from.

  3. Jon, what would you say is the underlying asset in this bubble? Traditional bubble usually has overvalued underlying asset (i.e. tech stocks in 2000, or Real Estate in 2005), so in this scenario what is that asset? Just trying to pin down on the macro-economic level (Flyertalkers and MilePointers aside) what it would be for hundreds of millions of people who do use credit cards.



  4. what is sad about this is that consumers (you and me and the masses) have the power here. we can vote with our actions, and if done in mass the reactions are swift. However most people 99% (the herd of cows) apply very little thought to their decisions, and change would never happen in this form as it would be next to impossible to get the masses to act as a whole. The only thing that could force it is extreme action that customers recognize and revolt against. The evil minions developing these changes know that large movements would cause that so the approach will be small, incremental and gradual. Kind of like boiling the frog. Throw him in hot water he jumps out. put him in cold water then heat the water he cooks.

  5. I disagree Jon. The consumer will most definitely not see lower prices as a result of this. You will see a surcharge on top of what you normally pay – prices rarely go down. Lower prices were the grand ‘benefit’ to consumers promised by merchants in order to pass the Durbin amendment, but not surprisingly, this has not been delivered.

    Consumers benefit from having access to useable credit.

  6. As someone who plays both sides here (merchant and consumer), I have to say that I think Jon is 100% right. We are all being played by the banks.

    The banks have created a feedback loop where consumers are incentivized to act in a way that gives the banks income at the cost of merchants. Basically, the bank says: “Hey you. Help us nab this merchant for 3%, and we’ll split it with you!”. Merchants are prohibited from creating a matching disincentive (card fees).

    If you play the game well as a consumer, you can come out ahead. But this is not an efficient economic system, and I believe it can not last.

    The efficient system would be to let the free market decide. If larger average purchases, less cash handling, fewer checks, etc have value to merchants, then they will set low or no card fees. Why have a bank/merchant contract that creates an artificial restriction?

  7. BaronDon: exactly, why would merchants make all this effort and spend money on lobbying just so they can be back to making the same money, and have angry CC users on top of that.

  8. As someone who has a company that accepts credit cards… What you may not know is that “premium” cards that offer awards actually cost the merchant more to accept. The % that is charged to the merchant is higher than a regular card that offers no rewards. The percentage is 1%-2% extra. Plus don’t forget that merchants are also charged a rental fee for the terminal which is $25-$30 depending on the type of machine. They also charge a fee to deposit your funds into your bank account, then your bank charges you a transaction fee for that deposit. The fees never end! Oh, plus paper supplies, an additional phone line to transmit all transactions. So the costs add up fast, and in this economy merchants can’t afford to raise prices.

  9. @MV and folks with premium credit cards spend more, you’re getting funds instantly and deposited right into your bank account (a choice! you could get payouts by check). And the fees are competitive, lots of banks offer merchant processing and you do not have to take all card types.

  10. @Gary… Spend more? Sure if you are Gucci, Prada and Cartier… When you have a quick service food business like myself where the average sale is $7, the “spend more” doesn’t apply. Payouts by chq? You understand there is a fee they charge to issue a chq? Also, what do you suggest I tell customers… Yes we accept VISA but only VISA cards that are not tied in with rewards? Makes no sense, especially when ‘no fee” credit cards that come with higher limits are considered a “premium” card. Also consider over-seas cards from tourists how are we suppose to know if it’s regular or premium cards?

  11. MV: don’t you (and just about every other merchant) already build in the cost of credit cards as the cost of doing business?

  12. Rick: No because not every person pays by credit card and if we did, with the fees always increasing we would have to raise prices often, and as I mentioned in this economy that’s difficult.

    Gary: Who’s providing that data? = credit card companies! Enough said.

  13. Who forced you to be a merchant? I am sick of people whining about the plight of their chosen profession.

    If the government’s job is to make sure eveyone gets sufficient income for doing what they want, put me down as the world’s first 15 handicap professional golfer!

  14. One way or another, the cost of the product reflects the cost of doing business so credit card fees, on average, are factored in.

    The only ones who are whining, just like with debit fees, are small mom and pop stores who shouldn’t have been in business to begin with and can’t make a good profit. They will absolutely NOT pass the cost savings down to the consumer. They’ll continue to charge the same prices and try to get CC fees on top of that. After all, who would ever notice a 2-3% price reduction anyway?

    Just like forcing debit fees to be lower accomplished nothing, neither will this measure if it gets passed.

  15. @MV- From the sounds of it, you aren’t set up properly to take credit cards and therefore getting ripped off by your processor. A good merchant processor can set you up without half of the charges you mentioned in your post. Terminal rental fees? That’s crazy.

    I can refer over someone who won’t rip you off if you’d like.

  16. @Jon, I hope you are right, because this entire posting has made me seriously rethink the way I use my money and do business.

  17. @JJ You need a chip readable terminal in Canada. Unlike the USA we in Canada and most of the developed world have moved to chip enabled cards. In the USA you have magnetic strip readers which you can get for free.

    @super bob no one forced me to be anything. The only thing I am forced to do is raise prices but then you the consumer will be whining about that sooner or later.

  18. I was having a new A/C unit put in one of my rental properties. I used one of the A/C companies & shopped around.

    I was making small talk with that merchant and the owner told me he was paying 5% to take credit cards. I told him to join Costco as an executive member and they can do the same for <2%. I also told him to shop around to different processors to see if they can beat Costco's rate. I also told him to check with BJ's & Sam's club too.

    I picked up this info from reading as I do not own a business. I have always shopped around for the best prices/deals. One of my nicknames is bargain hunter. Of course, I don't spend alot of time to save a "penny". The savings has to be there relative to my time spent. Example: I won't drive an extra mile or more just to save a few pennies on gas. I WILL, however, use my Penfed Visa to get 5% back on gas. 🙂

    My sister owns a small store and she takes V/MC. Her increase in business profits pays for the surcharges many times over. Knowing her, she shopped around for the best CC processor deal.

  19. Gary, you are quite right to note the Australia example. I’m Australian, now living over here, and in addition to the QANTAS behaviour(as a side note, QANTAS was state-owned for a long time and the Australian Government still facilitates its anti-competitive behaviour and thus high pricing, e.g. by keeping Singapore Airlines out of our domestic market) my Australian credit cards have higher fees than my US cards and come with fewer benefits. Could well be a sign of things to come here as you warn.

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