By Evan Weese
On Oct. 18, 2018, Visa released a bulletin that changed the payments industry immediately and permanently. Addressing the reality that programs for passing on processing fees "have become increasingly popular at merchants," Visa clarified that the most common model for "cash discount" is "NOT compliant with the Visa rules and may subject the acquirer to non-compliance action."
This definitive statement of the rules, coupled with Visa's admonition that it "actively enforces its rules pertaining to cash discount programs," has been met with considerable interest, with agents, ISOs, and processors wondering what this means to them. Many had enthusiastically adopted programs for passing on fees in response to both merchant demand and the profitability of this processing model, and the guidance from Visa represented a potentially seismic shakeup to their plans for continued growth in an intensely competitive industry.
As the dust settles on Visa's pronouncement, many acquirers are recognizing this update as an opportunity. Merchant demand for lower processing costs will not abate anytime soon, and the clear guidance provided by the card brands enables acquirers to build a high-margin, high-retention book of business with complete confidence that they're working within the card brand rules.
Although some in the industry use the terms 'surcharging' and 'cash discounting' as if they were interchangeable, they are, in fact, two distinct pricing models. The most important difference between the two, which the Visa bulletin addresses emphatically, is that cash discount programs cannot add a fee at the register.
Per the bulletin: "Models that encourage merchants to add a fee on top of the normal price of the items being purchased, then give an immediate discount of that fee at the register if the customer pays with cash or debit card, are NOT compliant with the Visa Rules and may subject the acquirer to non-compliance action."
All major programs marketed as "cash discount" add a fee at the point of sale for an obvious reason: merchants don't want to raise their prices across the board. No business wants to appear excessively expensive or uncompetitive by increasing its stated price on shelves, so every purported "cash discount" program adds a fee at the POS to recover the costs associated with card acceptance.
When the fee is added at the point of sale it is, by definition, a surcharge.
It is no surprise that both acquirers and merchants gravitated to this model – in every market where both surcharging and cash discounting are permitted, surcharging is strongly preferred. (See my prior article "Making the most of the rules: Passing on credit card fees," The Green Sheet, Oct. 22, 2018, issue 18:10:02, for more details.) The problem is that the so-called cash discount programs add fees at the POS without complying with the surcharge rules.
The Visa bulletin effectively means that this "cash discount" model is now defunct. With processors anticipating enforcement from the card brands, ISOs and agents should be prepared for "cash discount" merchants to be assessed fines or, even worse, shut down for non-compliance.
The good news is that the surcharging rules provide a compliant path forward for acquirers and merchants who previously offered noncompliant cash-discount programs to do what they always intended: add a fee at the POS to offset the high cost of credit card acceptance.
In addition to allowing merchants to compliantly add a fee at POS, the surcharge model ensures a level of transparency and customer friendliness that benefits ISOs, merchants and customers.
One major advantage of the surcharge model is that it passes on fees only for credit card acceptance, assessing customers no fee for debit. This benefits ISOs considerably because it provides the customer with a "no fee" card option rather than steering customers to cash or check (from which the ISO does not profit at all).
Merchants also benefit because they're able to fully offset the high cost of credit card acceptance by passing on the fee and paying only the low transaction fees for debit, which are typically significantly less than the handling cost for cash or checks. Additionally, merchants avoid the stigma associated with a preference for cash (often associated with tax avoidance) and clearly communicate their motivation: avoiding the high cost of subsidizing consumers' access to credit, rewards and miles.
Finally, customers benefit from having an option to pay with plastic at no additional cost. The transparent fee communication and the "no fee" debit option ensure customers understand that, when charged a credit card fee, they're only paying the costs created by their chosen form of payment. The signage requirements also ensure the customers are never surprised by surcharges and understand the fees are not a profit center for the merchant, but rather intended only to cover their costs.
Surcharging opens intriguing possibilities for ISOs and merchants to reduce costs not only for retail payments, where cash is a viable alternative, but also for online or MO/TO payments where cash or check payments are less feasible. Many ISOs previously confined to the retail environment with a "cash discount" offering will benefit considerably from offering surcharging solutions for ecommerce and MO/TO payments, providing the merchant with a consistent solution across all platforms.
As surcharging has gained momentum in the American market, it has become clear that neither ISOs nor merchants should view the surcharge rules as a checklist for them to manually complete on their own. Full compliance requires comprehensive understanding of the rules and surcharge-specific technology (for example, the ability to automatically distinguish between credit and debit in real time before authorization). ISOs and merchant benefit from relying on the expertise of a turnkey provider of surcharging solutions.
Perhaps the most important lesson from the Visa bulletin is that the rules are complex, and increasing merchant adoption will lead to stricter enforcement of the rules.While ISOs often sell merchants on the cost reduction that comes with passing on credit fees, compliance is perhaps even more important to long-term retention and value creation. ISOs who want to ensure they retain their hard-won clients should take a careful look at the solutions they're selling and partner with a provider who puts compliance first.
Evan Weese is the marketing lead for CardX, a Chicago-based technology company that provides credit card acceptance solutions to businesses, government and education. He can be reached at firstname.lastname@example.org.
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