At one time or another, most merchants and other service providers have probably contemplated imposing a fee on their customers that submit payments by credit card. After all, such merchants and other service providers pay what is known as an interchange fee or “swipe fee” to the credit card network every time a customer pays by credit card. This fee typically ranges between 1.5-3.0 percent of the total transaction value, thus increasing merchant and other service provider costs, which increased costs often go unnoticed by the paying customer. VISA and MasterCard rules traditionally prohibited merchants and other service providers from recouping the swipe fees from the customer through a surcharge on customer credit card payments. Although merchants and other service providers could offer a discount for cash or other methods of payment, few merchants or service providers employed this practice for a variety of logistical and financial reasons. Therefore, the price of a product or service is traditionally the same regardless of the payment method. Savvy customers were thus free to capitalize on a number of benefits offered by credit card issuers such as customer rewards programs that typically pay 1-2 percent of the purchase price back to the customer (at the expense of merchants and other service providers). Such rewards programs became increasingly popular and created the desired effect for the credit card network of encouraging credit card payments (again at the expense of the merchants and other service providers).
On July 13, 2012, VISA, MasterCard, and certain other financial institution defendants entered a memorandum of understanding to enter a settlement agreement to resolve a number of merchant litigation claims regarding interchange fees. In the proposed settlement agreement, VISA and MasterCard commit to amend their surcharge rule such that merchants and other service providers may impose a surcharge on credit card payments. However, the surcharge is subject to restrictions such as (i) a cap which basically limits the surcharge to merchant or other service provider’s cost of credit card acceptance and (ii) a level playing field restriction such that the surcharge is equal to that imposed on other credit cards. Further, merchants and other service providers must disclose the surcharge to customers at the point of sale (or online with respect to online payments). The settlement agreement does not permit surcharges on debit cards, possibly because Dodd-Frank already drastically reduced interchange fees legally permitted on debit cards.
Although the settlement agreement requires court approval and may not become effective for some time (VISA’s press release predicts an effective rule change date of mid-2013), bankers may wish to consider the potential implications of this rule change for their customers and product offerings. Surcharges might serve to eliminate the financial incentives associated with credit card rewards programs. With such financial incentives removed, a fair number of customers may decide the increased risks associated with potential penalties and interest on credit card balances outweighs any potential benefit of payment by credit card. Therefore, banks may experience increased demand for and volume of more traditional methods of payment such as debit cards, checks and even cash. Bankers may want to consider the effect of this settlement on future customer needs and whether there is opportunity to capitalize on changing payment patterns.
The recent settlement in which VISA and MasterCard agree to permit merchants to impose limited surcharges with respect to credit card payments might provide opportunities for bankers who anticipate resulting changes in customer demand for financial products.