Apologies if this is a little bit inside baseball, but the world is waiting to see how the multi-billion dollar settlement agreed to last month between Visa, Mastercard, some banks and retailers will affect the credit card industry. In addition to payouts and reduced processing fees, the settlement allows merchants to impose surcharges on credit card use.
On the one hand, since they can already discount cash, it seems economically a non-issue. And yet such surcharges have stuck in some markets where they are permitted (and they remain illegal in several states).
I personally have predicted that they would arise in air travel, not because those fees will net more money from consumers to airlines (my guess is that the airfare plus fee will equal what airfare would otherwise have been) but because the surcharges will be revenue that isn’t subject to the 7.5% federal excise tax on air transportation. Already that’s a big driver of ancillary fees – taking money out of “travel” and into “other” buckets to reduce the tax burden on airlines which is substantial.
There are lots of reasons why credit cards are actually valuable to merchants, such as eliminating cash eliminates much employee theft, that merchants don’t have bad check risk (though they do have chargeback risk), and they get funds in their bank accounts right away. And those are reasons to believe that surcharges may not appear widespread (except those reasons also exist in Australia, for instance, where surcharges are common).
One new claim is that surcharges will remain prohibited as a result of debit card surcharge prohibitions which would still exist under this agreement.
It’s an interesting claim, and I’m not personally familiar with debit card merchant agreements. But it seemed interesting nonetheless.
Under the agreement, a merchant that added a surcharge to Visa or MasterCard transactions would also be required to add the surcharge to American Express transactions, if the merchant took American Express. (Half of those who accept Visa and MasterCard also take American Express, said David Darst, an analyst who covers the industry for Guggenheim Securities.)
But American Express has its own rule that says merchants must treat every form of electronic payment equally — and that means that to add the surcharge to American Express transactions, the merchant would have to add it to every other card it accepted, including debit cards. But both Visa and MasterCard prohibit surcharges on debit cards — Catch-22! — which effectively means merchants cannot add a surcharge to any transaction.
So the theory goes as long as retailers accept Visa and Mastercard debit cards then they cannot add surcharges to those cards, cannot therefore add surcharges to American Express cards, and thus could not add surcharges to Visa and Mastercard credit cards. A lot of “if’s” there so I’m not prepared to endorse the theory as a bet on the future.
But I knew there had to be some reason that Visa and Mastercard didn’t think the settlement would undermine their long-term business. Could this be it?
(HT: Alan H.)