By Patti Murphy
Visa recently took aim at cash discounting, or at least the way most ISOs and merchant level salespeople (MLSs) sell cash discounting today, suggesting the emerging trend runs counter to its rules. Visa's statement – issued in October as a bulletin to acquirers and their sales partners – follows a decision by First Data Corp. to remove all cash discount programs from its Clover app marketplace.
I doubt these are the last two pronouncements on cash discounting. They are just the latest salvos in an ongoing debate over the cost of card acceptance. The prevailing pricing model – a convoluted set of interchange rates that get marked up by various parties to a transaction and passed on to card-accepting businesses – has been challenged successfully in the courts, the free market and even court of public opinion. (Before retailers began portraying interchange as "swipe fees" most consumers had never considered merchants' cost of acceptance.)
These challenges, coupled with changes in their corporate structures render it increasingly difficult for Visa and Mastercard to cling to a pricing model that is predicated on a wholly different set of risk and reward parameters. Founded by banks, Visa and Mastercard were focused at the time on growing retailer and consumer card adoption to the benefit of their owner banks. Interchange was set to recoup operational costs and costs associated with the risk to issuers that cardholders might not pay off their charges.
Things got complicated in the 1990s when heated competition forced issuers to ramp up their rewards and specialty card games. Mastercard and Visa responded with ever more complex interchange fee structures that factored not only merchant categories but also details about the card – rewards, platinum versus plain vanilla, etc.
In the early days, Mastercard, Visa and their member banks had good reason to dissuade merchants from imposing surcharges on card purchases or offering discounts to customers paying by cash or check. After all, the thought of outright pricing of card acceptance might have scared off consumers. But we've become a society that is comfortable with using cards and even loading those cards on mobile apps. In fact, Visa- and Mastercard-branded cards (credit, debit and prepaid) today are more common than smartphones. (The average American carries about 2.6 credit cards and 1.5 debit cards, according to various sources.)
While merchants are prone to grousing about costs, and challenges to interchange predate the move to greater pricing complexity, clinging to the status quo, particularly when the status quo means thwarting efforts to recoup costs, seems counter-productive. But that's what appears to be happening as Visa seeks to quash cash discounting and both companies impose restrictions on surcharging such as merchant registration and fee caps.
The issue that Visa (and leading acquirers like First Data) say they have is not with cash discounting, per se, but with the way most new cash discounting programs are being implemented. Typically, merchants in these programs will mark up prices for all products and services and offer a corresponding discount for cash-paying customers. Where it gets fuzzy is that receipts for these transactions often list both the markup and the discount. And it's not uncommon for the markups to be listed as service fees, which, after all, are basically indiscernible from surcharges.
To pass muster with Visa, cash discounting programs must follow the model gas stations use, displaying the credit and cash prices conspicuously prior to purchase. This may be easy enough for gas stations, which typically only offer a few fuel options, but it could prove a herculean task for merchants selling hundreds or thousands of products.
In most cases, I suspect merchants are not to blame for Visa's problems with cash discounting. Merchants are always on the lookout for ways to cuts costs, and when an ISO or MLS offers a fee structure that's cheaper and simpler to understand, it's pretty much a no-brainer. But ISOs and MLSs need to do more to explain how these programs should play out.
Recently when paying for a pricey plumbing project with my credit card I was told there would be a 4 percent fee to cover card processing. While I said I understood, I counseled the plumber not to present it that way to other customers lest it land him in hot water with Visa and Mastercard. He was genuinely surprised to learn what he was doing was covered by card brand rules.
By coming down on current cash discount program arrangements, Visa appears to be compelling merchants who want to recoup costs to implement surcharging programs and risk a backlash from consumers who like getting discounts but bristle at the thought of paying surcharges. But that's not the only potential drawback. Surcharges can only be applied to credit card purchases (not debit or prepaid card purchases), and are generally capped at 4 percent of the ticket. Plus any merchant implementing surcharging must pre-notify the card brands.
Then there are the laws in 10 states banning surcharging, including large states like California, Florida, Massachusetts, New York and Texas. The future of these state bans is in question, however. A federal court struck down California's ban on surcharging. And the U.S. Supreme Court last year struck down a lower court ruling that upheld New York's surcharge ban, asserting that the prohibition impeded merchants' free speech rights. That case was sent back to an appeals court for reconsideration.
Given the Supreme Court's ruling, most experts expect all state prohibitions on surcharging will eventually fall by the wayside. With them, I believe, will fall many of the negative connotations associated with surcharging.
By putting the kibosh on cash discounting, Visa may have hoped merchants would fear alienating cardholders with explicit fees (that is, surcharges). But most consumers understand that there's a cost to businesses for accepting credit cards, and most are accustomed to paying service fees, for everything from accessing cash at ATMs to home delivery of food and liquor. Paying a fee for the convenience of paying with a credit card, I suspect, isn't going to be seen as a major hardship for most consumers. Those that don't want to pay the fees can always carry more cash, and if necessary make more trips to ATMs
Patti Murphy is Senior Editor at the Green Sheet and President of ProScribes Inc. Follow her on Twitter @GS_PayMaven.
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