Would You Pay by a Credit Card if a Retailer Charged a Fee for It?

You may have to make that decision sometime very soon. As part of a settlement in a long-running antitrust case filed by a number of retail groups against Visa, MasterCard and thirteen of their member banks, merchants have been allowed to place surcharges on credit card payments. The retailers will also get $6.05 billion in cash and an estimated $1.2 billion in interchange fee reductions over an eight-month period, which the two card networks are supposed to spend modifying their merchant rules.

Coming on the heels of the debit interchange victory won last year, this settlement is another big win for U.S. retailers in their ongoing war against the card issuers. But not quite as big. To begin with, Visa and MasterCard were not forced to lower the credit interchange rates and they will not do it on their own. What’s more, taking advantage of the hard-won right to place surcharges on credit card payments runs the risk of alienating loyal customers. Just imagine doing your grocery shopping at your local supermarket and pulling up your credit card at the checkout, as you customarily do, only to discover that there is now a two- or three-percent surcharge for credit card payments. I, for one, would not switch to cash, but would try instead to find another grocery store in my area that doesn’t charge me extra when I use my credit card. And I think I would be able to do that. But let’s take a closer look at the settlement and its implications.

Retailers Get $7.25 Billion

Here is what was agreed on, as told by one of the law firms representing the merchants:

Visa, MasterCard and the banks, including JPMorgan Chase, Bank of America, Citibank, Wells Fargo, Capital One and other major banks, have agreed to establish a fund of $6.05 billion to pay merchant claims. In addition, Visa and MasterCard will reduce interchange, or “swipe,” fees that would otherwise be paid by merchants on Visa and MasterCard credit card transactions over an eight-month period while the new rules are implemented. The settlement still needs preliminary approval from the court. This pool of reduced “swipe” fees is valued at approximately $1.2 billion.

In preparation for such an outcome, Visa and MasterCard had agreed that any monetary settlement would be split 67 / 33, respectively, between them, to reflect the bigger market share of the San Francisco-based Visa. The two card networks had also been busy setting billions of dollars aside. As early as in January of this year, we knew that Visa had already deposited $4.3 billion dollars into a “litigation escrow” account, set primarily for the purpose of resolving the merchant lawsuit, in expectation of a settlement in the $5 billion to $15 billion range. Now the WSJ is telling us that the card issuers will help MasterCard pay its share of the settlement, leaving the Purchase, NY-based company with a responsibility for only 12 percent of the total amount.

Credit Card Surcharges

Interestingly, none of the press releases issued by the three law firms representing the merchants in this case makes any mention of the newly-won ability of retailers to place surcharges on credit card payments. I’m not sure what to make of that, but the bigger question is whether or not merchants will actually make use of it. And the early indications are that they will not be in a rush to do so. “I am hoping surcharging becomes commonplace, but small firms will not lead the charge,” says one retailer quoted by the WSJ. “I think it will depend on what our competitors do,” he adds. He is right to be hesitant and I don’t think that events will turn out the way he hopes.

See, retailers are constantly looking for a competitive advantage and more often than not that involves subsidizing the customer in some form or other. The best example I can think of is the free shipping option, which has now become standard for most big online retailers and many smaller ones. No one is forcing the merchants to offer free shipping, but they are doing it anyway. And now many consumers have come to take free shipping for granted and will not make a purchase from a merchant which doesn’t offer it. Do you think that these consumers would quietly agree to pay a surcharge every time they use a credit card?

The Takeaway

So my guess is that the merchants will take the cash, forgo the surcharges, and keep pressing for a permanent credit card interchange fee reduction. After all, they must understand that a decrease in credit card spending could not possibly be fully offset by an increase in the use of other payment methods. On the contrary, falling credit card usage will lead to falling sales. And the merchants wouldn’t want that.

Image credit: Ecrsoft.com.