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Fred Williams

Why a phantom credit card surcharge makes sense to retailers

Who doesn't like credit cards that pay you more cash back?

The retailers who pay higher interchange fees to cover the cost of the rewards, that's who.  (Plus the baby in the ads who always gets the better of Jimmy Fallon.)

Merchants on Jan. 27 gained the ability to slap surcharges on Visa and MasterCard transactions.  But don't be surprised if you have not run into the fees yet at the checkout register.  Having won the surcharge right after a seven-year court battle, retailers generally renounced plans to use it. Why a phantom credit card surcharge makes sense to retailers

So why did they fight for it?  They see the surcharge as a deterrent against the higher transaction costs linked with rewards cards. Advocates talk about it the way you would talk about a nuke sitting in a silo -- something they would hate to use, but like to have around.  With a ceiling set at 4 percent initially, surcharges on high-cost cards would quickly have buyers reaching for cash, or their debit cards.

But actually charging customers more at the register would make retailers unpopular. And there is no need; they already have a simple way to discourage credit card use: They can offer a discount for using cash or debit cards instead, under the Durbin Amendment of the Dodd-Frank act.

"The reason merchants originally wanted to put this in ... (was) as leverage to negotiate (against) high interchange fees," said Edmund Mierzwinski, consumer program director at the U.S. Public Interest Research Group. "Perhaps they won't increase so rapidly as they have."

That said, with 7 million retailers covered by the new surcharge rule, it is hard to imagine that it would go entirely unused.  (If you have seen a credit card surcharge already, please let us know by emailing Editors@CreditCards.com.)
"Nobody wants to be the first," said Robert Hammer, a card industry analyst in California, "but somebody will be the first; then second, then third."

Hammer compared the situation to the advent of annual fees from card companies in the 1980s. "When the first issuers started charging an annual fee," he said, "everybody started."  

The surcharge can be no more than the merchant's cost for card interchange fees -- which typically range from 1.5 percent to 3 percent of the transaction. That may sound like a small difference, but it adds up.  If you are doing $10 million in credit card sales, the difference between 1.5 percent and 3 percent is $150,000.

The high interchange fees associated with rewards cards are clearly in the crosshairs. Court settlement papers mention Visa Signature specifically as an example of the higher-rate cards that merchants can charge extra for, up to the actual cost of interchange fees.
 
Analysts don't predict a hit to current rewards offers, however, as cards with points, miles or cash back have come to dominate the market. We love our cash back, and are not likely to give it up.  A report by the analyst Aite Group calls rewards cards the "lifeblood" of card marketing. Rewards cards accounted for 85 percent of card use in 2008, and having only grown in importance since then, Aite said.

Mintel Comperemedia calculates that reward card offers make up 75 percent of all card offers sent through the mail. "Reward cards are almost the new plain vanilla," said Andrew Davidson, senior vice president at the analysis company. "If you can qualify for a card, most people can qualify for rewards."


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