Each time a merchant accepts a credit card as a form of payment, it pays an interchange fee. These fees account for the cost of processing the transaction and remove merchant expenses associated with collecting funds and/or managing cash operations.
To increase the revenue earned on goods or services sold, some merchants started adding surcharges to credit card transactions.
By law and by network policies, surcharges may reflect only the actual costs of processing a credit card transaction. As interpreted by most merchants, this means pegging their surcharge pass-through to the acceptance costs of the most expensive card they may ever accept, whether they actually receive payment via that card or not.
So, while a retailer may pay an average interchange of 2% on credit card transactions, generally, they will charge 3% to 4% on every credit card transaction. Suddenly, “recouping” the cost of credit card transactions is a new profit center for retailers.
Industries that have widely embraced surcharging are the very ones in which consumers have the least flexibility in their choice of payment: hotels, airlines (particularly discount airlines), and sellers of high-ticket durable goods.
Confusion around surcharges has caused problems for merchants, card issuers, and consumers. Credit card issuers in some states lobbied for no-surcharge laws, resulting in laws being enacted in 10 states.
The laws in all of these states, however, are being challenged as violations of free speech, and four states have had courts overturn their surcharging bans.
The consensus coming from all levels of courts boils down to this: Do not surprise the consumer.
Merchants must use numbers on receipts rather than percentages to reflect surcharge fees so customers know what they are paying for when they choose to use a credit card.
Surcharging may only lightly impact card issuers like credit unions, as merchants selling to consumers on a daily basis (e.g., grocery stores, drug stores, quick serve restaurants, etc.) are unlikely to add surcharges to their transactions for fear of losing business to competitors.
Surcharging can have a negative impact on the transaction experience, as most consumers do not appreciate when the seller adds a fee at the register that was not originally listed on the price tag. In this case, the buyer may opt to purchase a similar product elsewhere if it is available without the surcharge.
Additionally, for retailers, adding a surcharge is not a simple task. Merchants must notify their network at least 30 days in advance of adding a surcharge.
They must also disclose the surcharge as a merchant fee and clearly alert consumers of the fee at the point of sale and on receipts.
If a credit union’s cardholders are based in states that allow for surcharging on credit card transactions, member-facing staff should be made aware of the process and restrictions should they receive an inquiry.
Credit unions across the country should be prepared to deal with credit card surcharging should it become more widespread and accepted in the coming years.
GLYNN FRECHETTE is senior vice president, Advisors Plus, at PSCU. He leads the Advisors Plus Consulting and Campaign Services organization and is responsible for directing and deploying the full range of Advisors Plus financial and marketing services to credit unions.