Will Debit Card Merchant Agreements Prevent Credit Card Surcharges?

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.)

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. Not anywhere that takes V/MC, if I read correctly, but anyone that takes V/MC AND AX. If they don’t take AX, then they have no obligation to treat V/MC debit the same as credit. AX is the equalizer, which means that probably only smaller business that don’t take AX would be allowed to impose the surcharge. Places like this commonly already offer cash discounts.

  2. Gary,

    AmEx has always confused me. They don’t have the market penetration that Visa and Mastercard do (duh, you flat out say so in your post) and they’re generally known for their higher fees. Because Visa and MC are so widely accepted, it’s got to be assumed that most people carry a Visa/MC if they carry an AmEx. Why do merchants even bother with AmEx? What’s to stop them from dropping AmEx? I can’t think of a single merchant, that if they were to drop AmEx, that I stop shopping there just for that reason.

  3. @Dan would be an interesting equilibrium to see Amex alter their contracts to only require parity with out charge cards but not debit cards, then the whole issue would go away

  4. @Dan: Amex has the highest volume of credit card transactions. They justify their high fees because their customers pay more than non-amex cardholders.

  5. @Dan The average Amex cardmember spends more than the average MC/Visa customer. Merchants who don’t accept Amex because of the higher fees are short-sighted because there are plenty of customers who will stop repeating at merchants once they figure out who does not take Amex. My best reward cards are Amex. I make a mental note when a restaurant or other shop I go to doesn’t take Amex, and I generally feel less compelled to go there next time. Amex has a large base of corporate accounts. These are cardholders with a corporate Amex, who would rather have their tab taken care of directly by the company. If they end up at a restaurant that doesn’t take Amex, they’ve got to put it on their Visa/MC, and probably deal with getting reimbursed by their company. It’s not worth it. Some of the biggest spenders are these corporate cardholders who (not surprisingly) spend freely when the co is picking up the bill.

  6. The UK has allowed credit card surcharges for a few years. Oddly, the airlines are the only people who really do it, apart from Ikea!

    Big retailers do not impose surcharges. You are most likely to see it in your local corner shop, where there will be a handwritten sign saying ‘we charge 20p for card payments under £5’.

  7. Raffles hit it right on the nose. There is unlikely to be much, if any, change. Big businesses are willing to absorb the costs, while many small businesses are reluctant to tick off customers with what is viewed as “nickel and diming.” While it is technically against the cards’ T&C for those businesses who currently set surcharges, they do it anyway and probably won’t change.

    I see few changes as a result of the legislation.

  8. Really frustrating that airlines should benefit from this because there is really no option to pay with cash.

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