Retailers Can Charge Consumers More to Pay With Credit Cards Starting Tomorrow — And Why It’s Much Ado About Little

There have been tons of stories the past couple of days, across television and all sorts of media, about credit card processing fees starting tomorrow.

Except, the scary headlines don’t match the reality. We’ll see very few changes tomorrow.

This all stems from a settlement reached between retailers and Visa and Mastercard this past summer which will allow retailers to add a surcharge to Visa and Mastercard transactions.

But most won’t because in many cases the surcharges are worth it to the retailer: companies get money right away, deposited straight into their account when processing credit cards, and without the risk that a check bounces; consumers paying by credit card tend to spend more money per transaction; credit card transactions also reduce the likelihood of employee theft significantly compared to cash transactions.

And the charges remain illegal in 10 states (California, Colorado, Texas, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, and Oklahoma). Furthermore, any retailer doing business in those states cannot add surcharges in the states where it’s legal.

And the change applies to Visa and Mastercard but not to American Express or to debit transactions. And any store that takes Amex has to accept cards on an equal basis. It’s expected that stores accepting American Express will not be able to add surcharges to Visa and Mastercard transactions.

So smaller retailers in states that permit the charges who do not accept American Express might do this. My dry cleaners might do it. And for them I guess I’ll pay with my Suntrust debit card that earns 1 Delta mile per dollar. Or I’ll go to the dry cleaner across the street.

Still, the change in ability of some stores to add surcharges is good for retailers, or at least the bargaining position of retailers vis-à-vis merchant processors, though it is not good for consumers.

Academic work on Australia, the best experiment at this with the most data, suggests that consumers pay more for their cards and receive less in return, that retail prices haven’t fallen as a result, and that credit is harder to get for consumers because the transactions are less profitable for banks. The changes have been pushed in courts and legislatures by retailers who don’t want to charge for credit card processing per se, but want to be able to push down the costs of their processing (by agreeing not to surcharge in exchange for lower prices, for instance).

Nonetheless, I don’t expect to see major change in the US and how payments are processed as a result of the settlement, or the changes in rules that go into effect tomorrow. But as a backup plan, it’s great all of the changes that have taken place in the market over the past year or two that allow the purchase of prepaid debit cards from national retail chains with credit cards so that we can all still earn our miles while avoiding surcharges at small retailers!

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. @Zack – I believe this change is the result of a legal settlement. I’m not sure the laws on which the class action suit was based were passed during the Obama Administration. If you’re thinking about Dodd Frank financial reform, and the Durbin Amendment, those are doing lots of really screwy things… but not, as far as I can tell, this.

  2. In Southern California gas stations, for some time, have charged extra for purchasing gas with a CC. Typically 10 cents per gallon. I think they get away with it because it is a “discount” for paying with cash rather than a charge for using a credit card.

    At least one health insurance company in Calif has tried to make it hard to use a CC to pay the monthly premium. They wanted to charge a fee for using a CC but the state shut them down on that. So now they make you call in every month if you want to pay with a CC. If you want to have a payment from your checking account, you can do it online. Pain to call in, but worth it – especially since my payment happens to be the exact amount of a prepaid card I get from OD (using an Ink card of course).

  3. Although I agree with your assessment that surcharging probably isn’t in the short-term future, I do not believe that all of your reasons are correct:
    *” retailer: companies get money right away, deposited straight into their account when processing credit cards” – Nope, networks (V, MA, AXP) have payment terms, the faster you want payment the higher the discount rate.
    *Unless the contract changed, I understood AXP’s contract to say that AXP can not be treated any worse than competitors. That is very different than all networks have to be treated the same.

  4. Hi – We have had it for sometime in New Zealand (where the retailer can charge additional for credit card) Basically the retailers are competitive so don’t charge any card fees, but the accomodation outlets do – generally 1.3 – 1.5% always giving the option to use eftpos or cash. Smaller hotels (non chains and motels) generally don’t charge it. Last week stay at Hilton Queenstown was about 1.3 % I think – airlines of course were the early birds on this.

  5. We have had this in the UK for years and the sky has not fallen in. Ikea is the only ‘physical’ retailer of size that imposes one. A lot of ‘mom and pop’ retailers add on 25p if you spend under £5.

    The real gougers have been the airlines. Virgin charges 2.5% on the whole balance – literally £100 on a full J ticket! BA charges £4.50. Don’t even ask about Ryanair.

    However, the card companies have been burnt by airline failures and do not hand over most of the money until after the date of travel. Not good for cashflow.

    I also work with a company who resell my Wimbledon tennis debenture tickets. They do not get paid a penny until after the tournament. They sell some tickets for me for £2000 in November, I get 25% up front and the rest in May, but they don’t see a penny from Mastercard / Visa until July!

  6. As a current Australian resident, I very much hope the market does not move to the model here.

    Retailers charge 1.5 to 2 percent per transaction with regularity, and cabscharge a usurious 10 percent to pay by card. The availability of points earning credit cards is poor, and annual fees are many times higher than cards in the US, really wiping out the value proposition. This is to say nothing of sign up bonuses, which are universally low.

  7. Vote with your feet; if a merchant charges for use of the card, go to one that does not. And challenge those in the states where it is illegal. I took a Florida contractor to the Better Business Bureau (BBB) when he refused to refund a CC fee. He refunded the money within days of receiving the BBB complaint. Be and educated consumer and use your purchasing power to its fullest potential.

  8. “any retailer doing business in those states cannot add surcharges in the states where it’s legal”

    Really, is this written into the settlement? Then why did they even bother to go thru the motions. If any retailer doing national, or even regional, sales is kept out of doing this anywhere, then really it is only a matter for your local dry cleaner. Much ado about nothing.

  9. @Robert Hanson, I am wondering about the interpretation of this too. I’m wondering if or how brick and mortar outlets are different from online services in this respect. I could see a situation in which an airline, for example, couldn’t charge different credit card fees based on where a customer resides, but is that true, for instance, for a national grocery store chain which has brick and mortar outlets nationally? If so, why were Kroger and Walgreen’s among the leaders in the push to get this change? It would only give options to their local competition, not to them.

  10. Most discussions of the advantages of cash vs credit cards for merchants omit that the risk of armed robbery rises greatly as a business increases the cash in the till. Getting a clerk shot would be an extraordinarily high price to pay for saving a tiny percentage on fees.

  11. you said
    “consumers paying by credit card tend to spend more money per transaction; ”
    I’ve been looking into this recently, and I’m curious what your source is? I haven’t found any source that actually claims this. I find people that misinterpret the sources I’ve found to reach this conclusion. Most of the points have to do with people that use credit cards tend to have more debt (carry a balance), and people just infer that means people spend more on credit cards as opposed to similar cash transactions.

  12. And never forget how the Federal Government benefits of credit card usage. All credit card sales are now reported to the IRS, making it much more difficult for cash to slip into the owners pocket without reporting.

    And your personal spending habits and expenses are more easily tracked as well. Cash leaves no electronic trail!

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