Surcharging Ripple Effect

by Patricia Hewitt 0

On Sunday, merchants in the United Stateswill be able to impose a surcharge fee on credit card transactionsfor the first time in history. This change was enabled through themerchant interchange fee lawsuit preliminary settlement approved bya court in November. As of Jan. 27,merchants that follow the process prescribed by the card networkscan apply a surcharge of no more than 4% of the transaction.Surcharges can be imposed at the brand (for all credit cardtransactions) or at the product (for specific credit card types)level. Merchants have some hurdles to jump to charge the fee, whichinclude submitting intent to acquirers and network, point-of-salemodifications, and consumer notification language as well as thesoft spending environment should douse enthusiasm in the shortterm.

However, we could see some early adopters coming out of the travelindustry (where online purchases and business cards are common) ortargeted fees designed to incent consumers to use private-labelpayment products. But this is not the main point of thisPerspective.

Reviewing the published operating rules for Visa and MasterCard, it is clear thatthese added fees can only be applied to credit card transactions.For example, the Visa guidelines explicitly state merchants cannotapply these fees to signature-debit transactions. But in somecases, a signature-debit transaction is similar to credit formerchants that lack PIN pads or are not proactive defaulting toPIN-based transactions (and in this case we would includefranchisees for example). We believe this sets up the risk thatsome signature-debit transactions will be impacted by any feeschemes designed by merchants, especially those done at the brandlevel not by intent, but by circumstance.

In the very near future, debit issuers may wish to includeinformation about credit card surcharges to their debit cardcustomers or, if warranted, leverage this change to encourage moreconsumers to use their PIN at the POS to avoid any unintentionalfees.