The Green Sheet Online Edition
October 10, 2018 • 18:10:02
Making the most of the rules: Passing on credit card fees
With tremendous momentum for passing on the credit card fee ‒ whether in the form of a surcharge or cash discount ‒ it's no surprise that ISOs, merchant level salespeople and merchants are asking what these rules mean to them.
Last year, American merchants paid $77 billion in fees for accepting credit cards, according to "Airlines cash in on loyalty credit cards," by Andrew Tangel and Alison Sider, The Wall Stret Journal, Aug. 27, 2018 (www.wsj.com/articles/airlines-cash-in-on-loyalty-credit-cards-1535362202). These costs, however, are shifting more and more to the consumers who choose credit for convenience or rewards, as the buzz at every industry convention attests. And this trend will disrupt the traditional processing incumbents and create a new paradigm ‒ with new winners and losers.
With the United States increasingly adopting Australia's model ‒ where 42 percent of all merchants and a full 60 percent of large merchants pass on the credit card fee today ‒ we can expect to see more enforcement from the card brands and state attorneys general should these practices cross the line.
The biggest winners, then, will be the companies that build durable books of business by getting on the right side of the rules. To get started, there are some important things to know.
Regulatory trend
Landmark changes to the card brand rules and state laws mean that businesses in 43 states (for details, see www.cardx.com/compliance#statelaws) are now able to pass on credit card surcharges, which has long been standard practice for government and education institutions.
In its historic Expressions Hair Design v. Schneiderman decision, the U.S. Supreme Court held in 2017 that state "no-surcharge" laws are regulations of constitutionally protected speech, setting the table for acceptance in all 50 states.
The shift toward surcharging comes at an opportune time, as the payments landscape has become heavily commoditized and ISOs race to the bottom in terms of profitability (for further discussion on this, see "The realities of margin compression ‒ and what to do about it," by Evan Weese, The Green Sheet, Aug. 27, 2018, issue 18:08:02). These new solutions allow ISOs to move past rock-bottom pricing and compete on product benefit, which adds to margin and retention.
Merchants seeking to surcharge must satisfy not only state regulators, but also the policies of card brands, such as Visa and Mastercard. These important requirements include:
- The merchant must be registered with the card brands.
- The merchant must inform customers of the credit card fee with appropriate signage at the store entrance (if applicable) and at the POS.
- The amount of the credit card fee must not exceed 4 percent of the transaction, and the merchant must not profit from the credit card fee.
- The credit card fee and the price of the product or service must be processed together as one transaction.
- The receipt must show the amount of the credit card fee as a separate line item.
- The merchant must not apply a fee to debit cards.
Surcharging versus cash discounting
Is cash discounting a loophole that gets around these rules? Our opinion at CardX is no.
Most purported cash discount programs are noncompliant, because they list the cash price on the shelf and then add a fee at the POS. This brings them under the surcharge rules, meaning fees cannot be charged to debit transactions. Merely claiming that a program is cash discount does not make it so.
More to the point, federal law defines a "discount" as a reduction from the listed price as follows:
- "The term 'discount' [...] means a reduction made from the regular price." 15 U.S.C. § 1602(q) and
- "[T]he term 'regular price' means the tag or posted price charged for the property or service if a single price is tagged or posted." 15 U.S.C. § 1602(y)"
The card brands agree, with Visa rules plainly stating, "A merchant is permitted to offer discounts for paying in cash, however, the discount must be given as a reduction from the standard price."
As a consequence, a true cash discount program must increase the price listed on the shelf and then reduce it at the register when consumers choose cash. Very few merchants want to do this, since increasing prices on their shelves makes them look more expensive relative to competitors. Also, expressing a preference for cash often carries the stigmatized perception of avoiding taxes (see Cash Businesses and Tax Evasion by Susan C. Morse, Stewart Karlinsky and Joseph Bankman (https://repository.uchastings.edu/cgi/viewcontent.cgi?article=1552&context=faculty_scholarship).
It's worth considering why, in all markets where both surcharging and cash discounting are permitted, surcharging is much more prominent.
Take a look at higher education in the United States: 81 percent of American universities that accept cards pass on a credit card surcharge (styled as a convenience fee), but not one university uses cash discounts. Alan S. Frankel's amicus curiae brief in support of the petitioners in the Expressions Hair Design v. Schneiderman case stated, "There is no indication that even a single university sets tuition based on the use of a credit card and offers a discount for check payments."
Similarly, in Australia, cash discounts are virtually nonexistent, while surcharges are extremely common. What's driving the clear preference for surcharging? Surcharging allows merchants to maintain their prices while processing credit cards at a true 0 percent cost. This pricing model would be quoted as, "$10, with a 3.5 percent surcharge for credit."
Passing on the credit card fee is changing the ISO business. The key to making the most of this opportunity is ensuring you keep your merchants for the long term—which is only possible if you're keeping them on the right side of the rules. 
Evan Weese is the marketing lead for CardX, a Chicago-based technology company that provides credit card acceptance solutions to businesses, government and education. He can be reached at evan@cardx.com.
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