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The Interchange Antitrust Settlement: The Peril of “Going Nuclear”

July 30, 2012
Credit
Ken Paterson
Mercator Advisory Group
The proposed Visa/MasterCard Antitrust settlement (Payment Card Interchange Fee and Merchant Discount Antitrust Litigation) has been public for over a week now, and there are lots of nuances to be analyzed (Mercator members should see our July Research Note The Interchange Antitrust Settlement: An Initial Assessment), and even the survival of the settlement has taken on its own dynamic as merchants consider whether or not to opt out.

So let me focus on just one element: the ability of merchants to surcharge consumers for using credit cards, a.k.a. “going nuclear.” In the United States, where consumers have very little experience with surcharging (outside of exceptional government and educational payments), consumer sensitivity to surcharging could be particularly strong.

Based on preliminary data from Mercator Advisory Group’s June 2012 CustomerMonitor Survey Series survey of 1,000 U.S. consumers, a vast majority of consumers owning a general purpose credit card indicated that they had never had the experience of “Stores charging an extra fee if a credit card is used.” When surcharging was presented as a hypothetical experience in the survey, results highlighted some real downside risks for both merchants and issuers. Over eight out of ten credit cardholders encountering surcharging would choose either a different method of payment or would take their business to another merchant. It is important to note that in these scenarios, no surcharge amounts were noted, only the existence of a surcharge. However, the rather dramatic consumer reactions to the notion of surcharging—both anti-merchant and anti-credit card—are notable considering the surcharge amount was not specified.

Market observers seem divided at present regarding the likelihood that merchants will actually surcharge. And in the current economic environment, the likelihood of surcharging is perhaps lower than it might be in a seller’s market. I liken surcharging to a strategic weapon; its power can be a strong bargaining chip in negotiations, but in the event it is used, considerable collateral damage to all stakeholders is likely. As the payments stakeholders plan their strategies in light of the settlement, let’s hope that the credit cardholders are not ignored. Their reaction to the nuclear option should not be underestimated.

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