Two (opposite) developments for card payments over the past month. In the US, Visa and MasterCard settled a legal case with retailers. As part of the settlement:
The card companies and banks would also allow stores to start charging customers extra for using certain credit cards in an effort to steer them toward cheaper forms of payment.
But these surcharges will be capped:
Merchants would also be required to disclose information about card fees to customers, and credit card surcharges would be subject to a cap, according to the settlement papers. Surcharge rules would not affect the 10 states that currently prohibit that practice, which include California, New York and Texas.
In Australia, the Payments System Board has decided to limit card surcharging to “the reasonable costs of card acceptance“. The report is here. The reasons for this change is concern about excessive surcharging and the charging of a single surcharge over different cards despite the different cards having different merchant fees.
Both these practices are inefficient because they can cause consumers to underutilise a particular payment method.
So we seem to have got to about the same place in both countries. However, I still have concerns that the Australian reforms are unnecessary micromanagement.
I agree that there is an issue for internet sales – where the advertised prices are sometimes in a payment method (cash) that cannot be used. And there is clearly an issue in the taxi industry where the surcharge is 10% – but that whole industry is riven with inefficiency and legislative restrictions that make such a high surcharge possible.
But for your average store, if they want to set a 3% surcharge and the merchant charge from the card company is only 1.5%, so what? The customer can choose to take their business elsewhere. And on what basis do we decide that this tiny part of the price must be cost based, but none of the rest of the price needs to be cost based? We don’t force retail prices to reflect the ‘reasonable cost of the goods and services’. We let competition and choice in the market place work it out. On the PSB’s logic we should be requiring all prices to be cost based to avoid ‘inefficiency because consumers under purchase goods that are priced too high’.
We could take the PSB’s argument further. I know a few restaurants that wont accept any cards. Clearly on the PSB’s logic, this is unacceptable. When I dine at one of those restaurants I will be forced to underutilise debit or credit by being forced to pay in cash. Should the restaurant be forced to accept cards – with appropriate compensation through a cost-based surcharge?
Now, I have no idea why the restaurant doesn’t want to accept cards. Maybe it can’t be bothered (and it customers don’t really care). Maybe the vendor just hates electronic payments (and if customers care, they go elsewhere). Similarly, when a retailer does accept a card I have no idea of the cost (or benefit) to that retailer of taking the card relative to accepting cash. The merchant fee is one part of the cost. But there may be ‘additional costs’. The PSB recognises this and so when it tries to define reasonable costs of card acceptance it includes ‘additional costs’. But ‘additional costs’ include:
Any other costs that are incurred only for the acceptance of cards of the relevant schemes and not other
This strikes me as creating a mass of uncertainty. And a retailer who starts to claim ‘additional costs’ in any surcharging will have the card companies immediately breathing down their necks – because they are going to police the scheme.
So my predictions:
- Some merchants will surcharge – but only at the merchant fee level. It will be too risky to include any ‘other costs’ and potentially face legal action.
- Few if any merchants will set the surcharge at different levels for different cards – that is just too complex to explain at the check-out. So any surcharge will be the lowest merchant fee.
- From (2), we get a nasty game where each card system has an incentive to keep its merchant fee higher than everyone else’s’ fee, knowing that the store will set the surcharge at the cheapest fee. So I predict that the new rules will create a profit incentive for banks and integrated card systems (AmEx and Diners) to raise the merchant charges.
And this final point is why regulators generally steer clear of explicit price regulation. It often backfires and leads to higher – not lower – prices.