The Green Sheet Online Edition
December 10, 2018 • Issue 18:12:01
The next to last word on surcharging - maybe
How did we get to this place in our industry where cash discount, surcharge or whatever name you want to give it, has taken on a life of its own? There are important distinctions between cash discount and surcharging programs, but they share the same objectives, and from where I stand, they are receiving more attention than previously for two reasons:
- Merchants are fed up with the fees they pay to accept credit cards.
- ISOs and merchant level salespeople (MLSs) are fed up with having to charge less and less for the services they provide, which translates into less and less monthly residual revenue.
At some point push comes to shove and the next thing you know, we have arrived at the surcharge/cash discount demilitarized zone.
Too many violations
So, let's look at the first and most popular method of this latest craze: cash discounting.
For starters the name and model are both in conflict of each other as it was meant to be implemented. Cash discount means exactly what it says. If you pay with cash, you will get a lower price at the checkout counter based on the price on the shelf. If you pay with a credit card, you will pay the shelf price at the counter.
That is often not what is happening in practice today. Based on the rules of Visa and Mastercard, many current "cash discount" programs are in direct violation of the card brands' rules as they pertain to surcharging. The next thing many "cash discount" programs implemented today do is surcharge debit cards, which is in direct violation of the Durbin Amendment to the 2010 Dodd-Frank Act.
So, if many such programs are in violation of Visa and Mastercard rules and federal regulations, why is it still happening and why haven't the major card brands dropped a hammer on ISOs, MLS and merchants?
The card brand rules
The rules that Visa and Mastercard presented to the industry when they agreed to allow surcharging were as follows:
- Post a sign that states there will be a surcharge when paying with a credit card.
- Limit the surcharge to no more than 4 percent of the transaction.
- Register the merchant with Visa and Mastercard.
- Calculate the surcharge by using a one year average of that respective merchant's effective rate.
For a preponderance of cash discount programs today, numbers 2,3 and 4 above are all being violated, and for some goofy reason, all the cash discount providers appear to be convinced this is not surcharging, so the rules don't apply.
You may also ask, if this is a violation, then why do the large processors allow it? And since they all have lawyers, why have they not weighed in on this? The answer is they have, and they don't like it and don't feel comfortable about it.
The problem is that there are several terminal makers, as well as POS software companies, that build the ability to surcharge into the terminal, which allows the ISOs and MLS to implement surcharging without the processor being aware that this is happening. I am sure that if they really wanted, they could just look at all merchants where the processing rate is over 3.5 percent and deduce that a cash discount program is being used. I seriously doubt they will do this until someone tells them to do so.
Now we come to surcharging which is permitted by Visa and Mastercard if done in accordance with their rules. When implemented properly, surcharging follows all the card brand rules to the letter, and if used correctly, it is an effective sales tool and model that can be marketed by every MLS. Plus it removes the threat of fines or warnings from the card companies.
Doomed cash discounts
It would seem obvious that everyone would choose surcharging rather than cash discounting. So why isn't this the case? Simple, there are just not that many places where an MLS can find a true surcharge product. They are not readily available. It is not easy or cheap to offer a service that will not only surcharge, but also recognize a debit card and not surcharge those cards. It takes coding and money to make this work, and at the end of the day, why would anyone pick building a surcharge product when for pennies they can offer cash discount functionality?
At this point in time, more and more MLSs are offering cash discount programs, and they are making a lot more money than they have in the past. Well, I say enjoy it while it lasts, but don't start buying boats, cars and trips to Las Vegas.
I believe if you are selling merchants on cash discounts, your days are numbered. It is just a matter of time before Visa and Mastercard become vicious about enforcing the rules, or some shopper who happens to be the grandmother of a U.S. Congressman or Senator starts making a fuss about having her debit card surcharged and to borrow an American idiom likely derived from World War II Dear John letters, that will be "all she wrote."
I should note that MLSs who have a large group of merchants using cash discounts should now halt those programs; otherwise their portfolios may be almost worthless.
The surcharging option
OK, now that I have ranted long enough about this polarizing product, here is what I think and what I am doing. My company has the ability to offer a cash discount product, but we do not do so even when asked to provide it by the merchant. Instead, we offer surcharging, and follow all the rules and regs.
Surcharging is clearly not for every merchant. We usually get one of three responses when we offer it:
- No way. My customers will kill me.
- I want to try it, but I don't want to be first.
- When can we start?
Often, those in the third group tell us after only four weeks or less to deactivate surcharging because of push back by their customers. After more than 20 years in this industry, I have seen gimmick after gimmick come and go. None of them lasts very long. Is this the latest gimmick? Time will tell. If I am still here in 10 years, I will find out if I was right or very wrong.
Steve Norell is director of sales at US Merchant Services Inc. Based in Port St. Lucie, Fla., he oversees the USMS sales force and maintains the company's bank and processor relationships. You can reach him by email at firstname.lastname@example.org or by phone at 772-220-7515.
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