By Patti Murphy
Proscribes Inc.
If you're not doing surcharging or cash discounting you're missing out, John Barrett, senior vice president at Payroc, told ISOs and merchant level salespeople (MLSs) attending the Midwest Acquirers Association annual conference in July.
A few years ago such counsel would have elicited more than a little skepticism. In some circles it may have even been seen as heresy. But these days, after COVID shutdowns crimped already slim profit margins at businesses across the spectrum, including ISO and MLS enterprises, the notion of passing along to purchasers the cost of card acceptance is gaining wide acceptance.
And for good reasons. Merchants see improved margins. ISOs and agents, too. Plus, it can be a merchant retention play. Consumers, meanwhile, appear to be amenable: most merchants report few, if any, customer complaints.
Jonathan Razi, co-founder and CEO of CardX, which has been leading the charge on surcharging, pointed to a June 3, 2021, article by Emily Stewart published by Vox as evidence surcharging (and its corollary cash discounting) plays well in the court of public opinion. "The ugly truth behind your fancy rewards credit card: America's poor foot much of the bill for credit card points, miles and cash back," the headline screamed.
"It's true," Razi said. "We were sharing that a lot in Colorado," he added, referencing CardX's successful lobbying on a bill authorizing surcharging in that state. The Colorado legislation, signed into law in June, came just months after a federal district court judge in Kansas struck down that state's anti-surcharging statute. Razi, a Harvard-educated attorney, successfully argued that Kansas law violated the U.S. Constitution's free speech guarantee by allowing businesses to offer discounts for cash payments while banning surcharges on credit card payments.
A New York law banning surcharges was effectively struck down in 2018 when the U.S. Supreme Court ruled that the law regulated the communication of prices, not prices themselves, since discounts for cash were expressly permitted. "Merchants should be able to freely communicate costs," Razi said.
Just two states now have laws on the books that prohibit surcharging: Connecticut and Massachusetts, and both states' laws (similar to New York and Kansas laws) expressly permit cash discounts.
Razi said CardX is weighing its options to effect changes in Connecticut and Massachusetts. Options include lobbying for legislative action, seeking favorable opinions from state attorneys general (as happened in Oklahoma in 2019), or challenging the laws in court. "We always look for the best option in each state," Razi said. But he hinted that a legislative fix may be the ticket.
Credit card surcharging has a storied history in the United States. In the 1980s, Congress passed a law banning surcharging, but that law was allowed to lapse in 1984. Undeterred by congressional inaction, the card brands persisted with their own surcharge bans for nearly 20 years.
The final blow came in 2012 when an out-of-court settlement of a lawsuit filed by merchants against Visa and Mastercard included a provision ditching the surcharge ban for credit cards. Debit and prepaid debit cards remain subject to a surcharging ban. At the time of the settlement several states had laws banning surcharges, but that list has since been whittled down to two.
Razi believes the future of surcharging is in the hands of the states. "I think we're going to see a shift toward prescriptive laws that establish guardrails," he said. The Colorado law, for example, caps credit surcharges at 2 percent or the actual discount fee a merchant pays to process a credit card payment. Merchants also must disclose surcharges using specific language prescribed in the law, and surcharges must be included as line items on consumer receipts.
Surcharging isn't for everyone. Most experts agree merchants selling big ticket items, those that employ recurring billing, those that don't take a large number of debit card payments, and B2B transactions are the best candidates for surcharging.
"We've yet to implement surcharging with any of our merchants," said Adam Niec, co-founder of Certain Pay. The Ohio-based ISO has access to a surcharging solution through its acquiring partner, Elavon, but "We don't really push it," Niec said.
Only about 10 percent of merchants signing with VizyPay, an Iowa-based ISO, currently choose surcharging, said Austin Mac Nab, VizyPay's managing partner. The majority—about 70 percent—go with cash discounting.
Carrington Fisk, executive vice president at KastenBerry, an ISO headquartered in Kansas City, Mo., suggested the card brands may at some point feel pressured to drop the surcharge ban on debit card payments. "As soon as this happens, cash discounting will go away and surcharging will prevail," he said.
Razi isn't convinced. "From what I hear, the card brands are pretty committed to keeping it," he said. Here's the suggested rationale: many consumers, unwilling to pay surcharges, will pay with a debit card, which still generates network volume and interchange. If debit cards carried surcharges, the transactions might move to non-card methods, like checks and cash.
Like surcharging, cash discounting has a long history. Gas stations were among the first to offer discounts to cash-paying customers as a cushion against rising oil prices and interchange fees.
The floodgates opened to cash discounting, however, with passage of the Durbin Amendment to the 2010 Dodd-Frank Act. The Durbin Amendment, which ushered in the capping of debit card interchange, also included a provision expressly protecting the rights of businesses that wish to offer discounts for cash or other specific payment types.
As is the case with surcharging, there are rules governing cash discounting. Businesses must post signs at the entrances to their shops, and at checkouts, detailing cash discounting policies. They must also verbally offer customers a cash discount before completing a transaction, and any cash discounts must be clearly printed on receipts.
Implementation of cash discounting can vary. The traditional method, what some call "cash discounting 1.0," adds a non-cash adjustment to each transaction. The alternative, "cash discounting 2.0," requires merchants to mark-up prices on all products to compensate for processing fees, then discount the purchase by that percentage for customers paying with cash or check. Typically, non-cash adjustments and cash discounts are in the 3 to 4 percent range.
One big difference between surcharging and cash discounting, however, is that higher prices can be charged to both credit and debit card paying customers in a cash discount program. Most ISOs and MLSs say they offer cash discounting on a trial basis, but add that once the savings become apparent few merchants return to traditional pricing models.
"Our team has been offering cash discounting for the better part of three and a half years," said Dustin Magaziner, partner and CEO at PayBright, in Raleigh, N.C. "Across the several thousand accounts we've boarded on cash discounting, we've seen 10 percent switch back to traditional."
Mac Nab has observed that most merchants are open to getting card processing fees absorbed. "Cash discounting 2.0 is certainly the way to go for certain businesses," he said. These include restaurants with limited menus (think pizza shops), auto repair shops and HVAC companies.
The best fit is with merchants that have average tickets between $25 and $50, Fisk added.
Customers also seem to be OK with cash discounting. Swipe4Free, in Long Island City, N.Y., reported that only about 1 to 3 percent of card-paying customers inquire about the additional cost when merchants surcharge or offer discounts for cash.
"The answer to complaints should relay the decision to keep the price lower for cash-paying customers by ensuring the price increase only impacts customers using cards," Chris Benabu, Swipe4Free co-founder and COO, wrote in a recent ebook, How to Sell Cash Discounting. "If that answer is given, our data suggests there won't be any significant drop in revenue."
The biggest draw for ISOs and MLSs selling cash discounting is improved margins. "The residuals are significantly higher, allowing agents to hit their goals much quicker," Magaziner said. "What used to take two to three years [to achieve in residual streams] can now be done in six to nine months."
Niec said the average residual on a card sale by merchant accounts on Certain Pay's cash discount program is 175 basis points (1.75 percent), compared to 60 basis points on interchange-plus.
VizyPay is seeing gross profits in excess of 200 basis points for large-ticket merchants, Mac Nab said. Merchant accounts with lower average tickets (up to $100) can gross between 170 and 200 basis points per transaction. These compare to between 80 and 150 basis points with surcharging, and 20 to 50 basis points on interchange-plus, Mac Nab added.
"Cash discounting not only improves [an account's residual] performance, it allows my reps to serve lower-volume customers," Fisk said. Plus, when a merchant pays nothing for card processing, they can't be poached by competitors selling lower rates.
Other benefits include shorter training and sales cycles. Rather than training new agents on all the ins and outs of payment processing, they only need to know how to convince merchants they can eliminate payment processing fees. "With cash discounting it's much easier to get new reps out selling," Fisk said.
Benabu concurred, stating, "All the time spent collecting statements, creating spreadsheets, haggling over price, and even integrating with existing systems just goes out the door."
Whether selling cash discounting or surcharging, technology solutions need to be in place. Merchants need a terminal, and an API or app that can distinguish between credit and debit cards, for example. Settlement and reconciliation are other key components, and in the case of surcharging, there are state compliance considerations. Available solutions address these requirements.
CardX built a solution that meets all compliance requirements of the 48 states that permit surcharging, Razi noted. "We cover about 97 percent of the population," he said, adding that the front end built by CardX can sit in front of most processors. "Virtually any ISO will find one of their partners is supported by CardX," he said.
Swipe4Free offers physical and virtual terminals that support non-cash adjustments and surcharges, as well as a waive-the-fee option that can be used for those few customers who may balk at paying more for using their cards. Benabu said the company also works with POS providers to create semi-integrations with its terminals. "If they refuse, we work with merchants to integrate the terminal into the sales process, while showing them how to reconcile this approach with their existing POS," he said. 
Patti Murphy is senior editor at The Green Sheet and co-host of the Merchant Sales Podcast. Follow her on Twitter @GS_PayMaven.
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