Surcharge (payment systems)

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A surcharge, also known as checkout fee, is an extra fee charged by a merchant when receiving a payment by cheque, credit card, charge card or debit card (but not cash) which at least covers the cost to the merchant of accepting that means of payment, such as the merchant service fee imposed by a credit card company. [1] Retailers generally incur higher costs when consumers choose to pay by credit card due to higher merchant service fees compared to traditional payment methods such as cash. [2]

Contents

A surcharge may be prohibited by card issuers, such as Visa and MasterCard, but the enforcement of the prohibition is not uniform. Some jurisdictions have laws which require, allow, regulate or prohibit a merchant imposing a surcharge. If no surcharge is permitted, the merchant's costs are borne by the merchant, who may incorporate the burden in its prices. In some jurisdictions, when a customer pays with cash, the merchant may offer a discount. [3]

Surcharges on payment systems are generally applied to credit card facilities provided by the merchant. Pexels-karolina-grabowska-5239804.jpg
Surcharges on payment systems are generally applied to credit card facilities provided by the merchant.

Economics of surcharging

Different payment methods such as cash, credit cards and debit cards have different costs and benefits to both the merchant and the consumer.

Under "uniform pricing" (pricing that does not reflect the payment method chosen by the individual), consumers do not consider the effect of their choice of payment on the seller. Using credit cards, which utilize a payment platform, will incur fees to the seller. [4] Additionally, the seller suffers from indirect costs such as missing interest payments on the balance of goods or services sold using credit. [5]

Thus, the cost of using payment systems like these are borne primarily by the merchant. For customers to internalize this negative externality, merchants can use pricing incentives, through surcharging, to direct their customers to paying in the most cost-effective manner for their business. Utilizing this practice, the merchants can capture more of the consumer surplus using price discrimination methods. These tactics have been stopped in many countries where regulatory requirements ban the practice from occurring. Additionally, many card companies have enforced requirements stopping merchants from surcharging card transactions, to maintain demand from consumers for their services. [4]

In the presence of surcharging, consumers are encouraged to make payments using a cheaper option. They will elect to use traditional methods, such as cash, to avoid the extra cost of acquiring a good or service. Consumers indirectly place competitive pressure on payment platform providers, which could indirectly lower the merchants' payment costs. [6] As consumers' indirectly lower the cost to sellers or selling, the right to apply a surcharge on expensive payment methods means the business can offer lower prices on goods and services to all potential customers. [6] This could generate an increase in demand and an overall increase in consumer welfare. In the absence of surcharging it is postulated that there are substantial negative social and economic welfare effects including inflation, a reduction in the purchasing power of consumers because of larger debt service, lower ravings rates and inequitable cross-subsidization between consumers paying with cards and those paying with cash. [7] [8]

Regulation of surcharging

United States

In Expressions Hair Design v. Schneiderman, the United States Supreme Court held that New York’s “no-surcharge” law regulates speech, and remanded to the Second Circuit Court of Appeals to determine whether the law can survive First Amendment scrutiny. The New York law prohibits businesses from posting a cash price and adding a fee when customers choose credit (a “credit card surcharge”). However, the law permits businesses to post a credit card price and charge less when customers choose cash, check, or equivalent means (a “cash discount”). Because these two pricing regimes are economically identical and different only as a matter of framing, the Supreme Court determined that the New York law regulates not the prices themselves, but instead the communication of prices.

Similar “no-surcharge” laws existed in 10 other U.S. states. Namely. California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Oklahoma, Texas, and Utah. The Florida “no-surcharge” law was found unconstitutional in Dana’s Railroad Supply v. Bondi, [9] and the California “no-surcharge” law was found unconstitutional by a federal district court in Italian Colors Restaurant v. Harris. [10] The Texas “no-surcharge” law faces a pending legal challenge. [11] Currently, businesses in 46 states are permitted to surcharge consistent with the rules promulgated by Visa and Mastercard. [12] [13] [14]

Australia

Since the Reserve Bank of Australia's 2003 requirement that the card brands remove the 'no-surcharge' rules that had previously been in effect, Australia has seen a significant increase in the number of businesses opting to pass on transaction costs, with approximately 42% of Australian businesses assessing transaction fees in 2013. [15] The competition amongst the card brands in the wake of the changes has significantly reduced the interchange fees assessed to merchants. [16] Surcharges must not be more than the amount that it costs a merchant to accept a particular type of card for a given transaction. [17]

In 2017, the Australian Competition and Consumer Commission (ACCC) placed an excessive payment surcharge ban on all merchants in the country. [18] Businesses in Australia were banned from charging customers excessive surcharges on transactions made using EFTPOS, Mastercard, Visa and American Express. The ACCC provided a statement on the matter directed at all businesses:

“Our message to business is that you are not allowed to add on any of your own internal costs when calculating what surcharge you will charge customers. The only costs businesses can include are external costs charged to you by your financial provider". [18]

Canada

In June 2017, Visa and MasterCard agreed to drop their contractual prohibitions on surcharging in Canada as part of a settlement of a long-standing class action lawsuit. Canadian merchants may begin to apply credit card surcharges 18 months after court approval of the settlement. [19]

European Union

In March 2015, the European Parliament voted to cap interchange fees to 0.3% for credit cards and to 0.2% for debit cards [20] and subsequently issued, in November 2015, the Payment Services Directive (PSD2) prohibiting businesses from charging extra when consumers use credit cards or debit cards. [21]

United Kingdom

In the United Kingdom, the Consumer Rights (Payment Surcharges) Regulations 2012 limit payment surcharges with some exceptions. Payments for the supply of water, gas and electricity are regulated but payments for calls from public telephones are not regulated. [22]

Since 2018, no payee (whether a business or not) may charge any payer surcharge for the use of a non-commercial card, nor may the payee charge a payer using a commercial card a fee which exceeds the cost borne by the payee for that transaction. [23]

Switzerland

The Federal Competition Commission has recently allowed payment schemes to ban surcharging in Switzerland through their standard contract terms. [24]

Reasons for surcharging

Countries including the United States, Australia, and Canada have sought to promote price competition among card brands to increase efficiency. [16] In the United States, consumer protection advocates have promoted for surcharging solutions as a mechanism to slow the rapidly increasing cost to businesses of card acceptance, including the 24% increase in interchange cost for Visa and Mastercard rewards cards since 2004. [25] The Boston Federal Reserve argues:

"Merchant fees and reward programs generate an implicit monetary transfer to credit card users from non-card (or “cash”) users because merchants generally do not set differential prices for card users to recoup the costs of fees and rewards. On average, [...] each card-using household receives $1,133 from cash users every year." [26]

Whereas businesses that pay for the cost of card acceptance have no mechanism of exerting price pressure on the card brands, businesses that require their customers to pay the fees associated with their card create price competition, as the customers choosing the form of payment will prefer to use lower-cost cards. By creating the incentive for customers to choose lower-cost cards, surcharging reduces transaction costs overall. For example, industry experts have shown that, on a $1,000 transaction, motivating a customer to choose a debit card (to which no surcharge is applied) instead of a premium rewards credit card reduces the interchange cost of the transaction by up to $23.38. [27]

In the absence of surcharging, a retailer will attempt to recover the cost of using their payment platform a uniform increase in the price of goods and services. They will include a margin on top of their products in order to cover the average cost to the business of using a payment system, such as a credit. This results in a cross-subsidization from consumers using different payment types. Those who pay with low-cost methods such as cash or direct debit pay the same amount as customer using credit cards. [28]

Additionally, in the absence of surcharging, the prices of different payment methods are masked to the consumer, harming consumer welfare. Using credit cards to pay for goods or services can distort consumer's cost-benefit analysis decisions and increase their willingness to pay for goods or services. [28] An MIT study found that students when bidding on sporting tickets were willing to place bids up to 64% higher when using credit compared to cash. [29] This underestimation bias the consumer is prone to because of increased credit card usage results in a reduction in their personal welfare.

Misuse of surcharging

Some merchants impose surcharges to make additional profit instead of to cover official credit card company charges, in violation of consumer protections. [30] A prominent example of this phenomenon occurred in Australia when surcharging was permitted. In December 2010, the average rates of surcharges for MasterCard, Visa and Diners Club credit cards were 1.8, 1.9 and 4%, respectively. The merchant fees for MasterCard and Visa cards were around 0.6% and the fees for Diners Club cards were around 2.2%. [31]

Additionally, many merchants seeking to reduce transaction costs have implemented non-compliant solutions that fail to meet price transparency and consumer friendliness standards imposed by the card brands' contract requirements. [32]

Existing literature on surcharging

Wright investigated the welfare effect of removing a no-surcharge mandate in a model where a not-for-profit credit card provider gave payment facilities to consumers and a homogeneous monopoly merchant. When the rule is removed, welfare was decreased for society as the monopoly merchants placed fees on the use of credit cards which were higher than the merchant fees they were required to pay. [33]

Conversely, Schwartz and Vincent found that the implementation of a no-surcharge rule increases the profits for credit card companies but decreases the welfare of consumers choosing to pay by cash and the merchants themselves. The credit card in their model is provided by a for-profit company to heterogeneous consumers and monopolistic merchants in an open system. [34]

Schwartz and Vincent also analyzed the no-surcharge rule in a competing platform setting with cashback rebates. Their article does not analyse the welfare implication of the no-surcharge rule. However, they provide a framework on the competition between two platforms and how to understand the equilibrium in setting their fees. Their main finding is that there exists no pure Nash equilibrium in setting the fees under the NSR. [35]

See also

Related Research Articles

<span class="mw-page-title-main">Debit card</span> Card used for financial transactions, usually without a credit line

A debit card, also known as a check card or bank card, is a payment card that can be used in place of cash to make purchases. The card usually consists of the bank's name, a card number, the cardholder's name, and an expiration date, on either the front or the back. Many of the new cards now have a chip on them, which allows people to use their card by touch (contactless), or by inserting the card and keying in a PIN as with swiping the magnetic stripe. These are similar to a credit card, but unlike a credit card, the money for the purchase must be in the cardholder's bank account at the time of the purchase and is immediately transferred directly from that account to the merchant's account to pay for the purchase.

<span class="mw-page-title-main">EFTPOS</span> Type of electronic payment system

Electronic funds transfer at point of sale is an electronic payment system involving electronic funds transfers based on the use of payment cards, such as debit or credit cards, at payment terminals located at points of sale. EFTPOS technology was developed during the 1980s.

<span class="mw-page-title-main">Visa Inc.</span> American multinational financial services corporation

Visa Inc. is an American multinational payment card services corporation headquartered in San Francisco, California. It facilitates electronic funds transfers throughout the world, most commonly through Visa-branded credit cards, debit cards and prepaid cards. Visa is one of the world's most valuable companies.

<span class="mw-page-title-main">Charge card</span> Card enabling the cardholder to make purchases

A charge card is a type of credit card that enables the cardholder to make purchases which are paid for by the card issuer, to whom the cardholder becomes indebted. The cardholder is obligated to repay the debt to the card issuer in full by the due date, usually on a monthly basis, or be subject to late fees and restrictions on further card use. Charge cards are distinct from credit cards in that credit cards are revolving credit instruments that do not need to be paid in full every month and a balance may be carried over, on which interest is paid. Charge cards are typically issued without spending limits, whereas credit cards usually have a specified credit limit that the cardholder may not exceed. Most charge cards are held by businesses, corporations or executives thereof, and are issued to customers with a good or excellent credit score.

<span class="mw-page-title-main">Mastercard</span> American multinational financial services corporation

Mastercard Inc. is the second-largest payment-processing corporation worldwide. It offers a range of payment transaction processing and other related-payment services. Its headquarters are in Purchase, New York. Throughout the world, its principal business is to process payments between the banks of merchants and the card-issuing banks or credit unions of the purchasers who use the Mastercard-brand debit, credit and prepaid cards to make purchases. Mastercard has been publicly traded since 2006.

An e-commerce payment system facilitates the acceptance of electronic payment for offline transfer, also known as a subcomponent of electronic data interchange (EDI), e-commerce payment systems have become increasingly popular due to the widespread use of the internet-based shopping and banking.

<span class="mw-page-title-main">Dynamic currency conversion</span> Foreign exchange process

Dynamic currency conversion (DCC) or cardholder preferred currency (CPC) is a process whereby the amount of a credit card transaction is converted at the point of sale, ATM or internet to the currency of the card's country of issue. DCC is generally provided by third party operators in association with the merchant, and not by a card issuer. Card issuers permit DCC operators to offer DCC in accordance with the card issuers' processing rules. However, using DCC, the customer is usually charged an amount in excess of the transaction amount converted at the normal exchange rate, though this may not be obviously disclosed to the customer at the time. The merchant, the merchant's bank or ATM operator usually impose a markup on the transaction, in addition to the exchange rate that would normally apply, sometimes by as much as 18%.

A merchant account is a type of bank account that allows businesses to accept payments in multiple ways, typically debit or credit cards. A merchant account is established under an agreement between an acceptor and a merchant acquiring bank for the settlement of payment card transactions. In some cases a payment processor, independent sales organization (ISO), or member service provider (MSP) is also a party to the merchant agreement. Whether a merchant enters into a merchant agreement directly with an acquiring bank or through an aggregator, the agreement contractually binds the merchant to obey the operating regulations established by the card associations. A high-risk merchant account is a business account or merchant account that allows the business to accept online payments though they are considered to be of high-risk nature by the banks and credit card processors. The industries that possess this account are adult industry, travel, Forex trading business, multilevel marketing business. "High-Risk" is the term that is used by the acquiring banks to signify industries or merchants that are involved with the higher financial risk.

<span class="mw-page-title-main">Payment card</span> Card issued by a financial institution that can be used to make a payment

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Debit card cashback is a service offered to retail customers whereby an amount is added to the total purchase price of a transaction paid by debit card and the customer receives that amount in cash along with the purchase. For example, a customer purchasing $18.99 worth of goods at a supermarket might ask for twenty dollars cashback. The customer would approve a debit payment of $38.99 to the store, and the cashier would then give the customer $20 in cash.

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<span class="mw-page-title-main">Interchange fee</span> Fee paid between banks for card-based transactions

Interchange fee is a term used in the payment card industry to describe a fee paid between banks for the acceptance of card-based transactions. Usually for sales/services transactions it is a fee that a merchant's bank pays a customer's bank.

The Cabcharge account payment system was established in 1976 to provide taxi passengers a way to pay for taxi fares by non-cash means. The payment system is owned and operated by A2B Australia, an Australian Securities Exchange listed public company. In the UK and Singapore, Cabcharge is operated by subsidiaries of ComfortDelGro.

Interchange Plus is the common name for a pricing structure for accepting credit card transactions by merchants. The Interchange fee is an important factor in determining the actual cost of accepting credit cards. Interchange pricing is what the Visa and MasterCard associations along with credit card issuing banks charge merchant account providers to process credit and debit card transactions. Merchant Account providers then charge a markup on interchange known as interchange plus pricing to process the transaction and provide customer service to the merchant accepting the credit or debit card payment. Interchange Plus pricing is known as the most honest and transparent form of pricing for merchants looking to accept credit cards. There are a lot of credit card processing companies that only offer interchange plus pricing.

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References

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  2. ↑ Schwartz, C. "Payment Costs in Australia" (PDF). RBA. Retrieved 18 October 2020.
  3. ↑ "Cash Discounts, Credit Surcharges and Free Speech". Bloomberg.com. 2017-01-10. Retrieved 2017-11-22.
  4. 1 2 Bourguignon, Hélène; Gomes, Renato; Tirole, Jean (2014). "Card Surcharges and Cash Discounts: Simple Economics and Regulatory Lessons" (PDF). Competition Policy International. 10 (2). Retrieved 18 October 2020.
  5. ↑ Murphy, M (1977). "Retail Credit, Credit Cards and Price Discrimination". Southern Economic Journal. 43 (3): 1303–1312. doi:10.2307/1057787. JSTOR   1057787.
  6. 1 2 Dark, Cameron; Fisher, Chay; McBey, Kim; Tellez, Ed. "Payment Surcharges: Economics, Regulation and Enforcement" (PDF). RBA. Retrieved 18 October 2020.
  7. ↑ Levitin, Adam (2005). "The Antitrust Super Bowl: America's Payment System, No-Surcharge Rules, and the Hidden Costs of Credit". Berkeley Business Law Journal. 3 (1): 265–336.
  8. ↑ "BetBarter Deposit and Withdrawal Methods - India Guide". 2022-06-22. Retrieved 2022-07-01.
  9. ↑ "Dana's Railroad Supply v. Attorney General, No. 14-14426 (11th Cir. 2015)". Justia Law. Retrieved 2017-11-03.
  10. ↑ "Calif. AG, Restaurant Debate High Court Ruling At 9th Circ. - Law360". www.law360.com. Retrieved 2017-11-03.
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  12. ↑ "Surcharging Credit Cards–Q&A for Merchants" (PDF).
  13. ↑ "Merchant Surcharge Rules & Fees | Mastercard". www.mastercard.us. Retrieved 2017-11-03.
  14. ↑ "Online Services | Department of Public Safety". www.dps.texas.gov. Retrieved 2022-07-01.
  15. ↑ "Commonwealth Consumer Affairs Advisory Council: Credit Card Surcharges".
  16. 1 2 "The Personal Credit Card Market in Australia: Pricing over the Past Decade" (PDF).
  17. ↑ "Questions & Answers on Card Payments Regulation". Reserve Bank of Australia.
  18. 1 2 "Excessive payment surcharge ban". ACCC. Retrieved 28 October 2020.
  19. ↑ "Merchants may soon ask customers to pay surcharge when using credit cards | Metro News". metronews.ca. Retrieved 2017-11-03.
  20. ↑ "Commission welcomes European Parliament vote to cap interchange fees and improve competition for card-based payments" (Press release). Brussels: European Commission. 10 March 2015.
  21. ↑ "L_2015337EN.01003501.xml". eur-lex.europa.eu. Retrieved 2017-11-03.
  22. ↑ "The Consumer Rights (Payment Surcharges) Regulations 2012", legislation.gov.uk , The National Archives, 18 December 2012, SI 2012/3110, retrieved 19 December 2022
  23. ↑ Regulation 6A, The Consumer Rights (Payment Surcharges) Regulations 2012
  24. ↑ "Kreditkarten Domestische Interchange Fees II (KKDMIF II)" (PDF) (in German). Competition Commission, Government of Switzerland. p. 44.
  25. ↑ Credit Cards: Rising Interchange Fees Have Increased Costs for Merchants, but Options for Reducing Fees Pose Challenges (Report). Government Accountability Office. November 19, 2009.
  26. ↑ "Who Gains and Who Loses from Credit Card Payments?" (PDF).
  27. ↑ "Brief Amicus Curiae for CardX, LLC in Support of Petitioners" (PDF).
  28. 1 2 King, S. "Credit card surcharging: what is it and how is it changing?". The Conversation. Retrieved 18 October 2020.
  29. ↑ Prelec, Drazen (2001). "Always Leave Home Without It: A Further Investigation of the Credit-Card Effect on Willingness to Pay". Marketing Letters. 12 (1): 5–12. doi:10.1023/A:1008196717017. S2CID   18207187.
  30. ↑ "Review of Card Payments Regulation: Regulation Impact Statement" (PDF).
  31. ↑ Deng, Tan, Z, H (2020). "he no-surcharge rule and surcharging behaviours in credit card markets". Australian Economic Papers. 59 (4): 358–375. doi:10.1111/1467-8454.12189. S2CID   225425098 . Retrieved 18 October 2020.{{cite journal}}: CS1 maint: multiple names: authors list (link)
  32. ↑ "I see that some companies offer a "cash discount" program. Is this compliant?". CardX.
  33. ↑ Wright, J (2004). "The determinants of optimal interchange fees in payment systems". The Journal of Industrial Economics. 52 (1): 1–26. doi:10.1111/j.0022-1821.2004.00214.x. hdl: 2292/176 . S2CID   3935636.
  34. ↑ Schwartz, Vincent, Marius, Daniel (2006). "The No Surcharge Rule and Card User Rebates: Vertical Control by a Payment Network". Review of Network Economics. 5 (1): 72–102. doi: 10.2202/1446-9022.1090 . S2CID   18609289.{{cite journal}}: CS1 maint: multiple names: authors list (link)
  35. ↑ Schwartz, Marius; Vincent, Daniel R. (29 July 2020). "Platform Competition With Cash-back Rebates Under No Surcharge Rules". The Journal of Industrial Economics. 68 (2): 298–327. doi:10.1111/joie.12210. ISSN   0022-1821. OCLC   8638876738. S2CID   197879844.
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