A settlement some 10 years ago between card networks and merchants over swipe fees technically granted merchants the right to surcharge consumers who pay with credit, as a means of offsetting interchange fees. But Payroc CEO Jim Oberman told PYMNTS in a recent conversation that the capability has long gone unused by the vast majority of merchants.
He said that’s because laws in California, New York, Texas and other states nonetheless made it illegal for merchants to add card use surcharges. So, there wasn’t much point for processors like Payroc to build in the capacity to allow merchants to assess surcharges.
“A lot of us on the processing/acquiring side of the aisle said, ‘Why put a lot of money into this technology when three of our biggest markets can’t do it anyway?’” Oberman said.
But while states like Massachusetts still prohibit merchant surcharges, California and Texas have since moved to allow them. And although New York hasn’t completely removed all regulation of surcharges, it has loosened up the rules significantly in recent years.
Oberman said that was enough to motivate Payroc to invest several million dollars in building Reward Pay, a fully compliant surcharging platform for merchants. The system lets merchants give their customers a choice: Pay with debit, ACH or cash and skip the surcharge altogether, or pay with one’s credit card of choice and face a 3 percent to 3.99 percent surcharge.
Oberman said Reward Pay was gaining traction before COVID-19, but the pandemic has given it an unexpected boost – pushing surcharges toward becoming a more mainstream practice among merchants and consumers.
“It’s not mainstream yet, but it’s becoming more mainstream,” he said, noting that Payroc remains very bullish on Reward Pay’s potential for the near and middle term.
But in the longer term, merchants face the potential problem of convincing consumers to start paying for the payments choice that they’ve come to expect to receive for free.
Rethinking Who Should Pay
Many consumers seem to assume that merchants should pay the price of taking card swipes, while customers should reap the benefits in the form of cash back, rewards points or airline miles.
But Oberman said merchants are increasingly realizing that the cost they’ve always borne for “all these rewards goodies” is more than they’re willing to take on. He pointed out that retailers are increasingly open to the idea of pushing those costs off to consumers who are collecting card rewards, or persuading consumers to pay some other way.
However, the historical holdback – and the obvious concern for merchants – is that surcharges can be “penny wise and pound foolish.” Merchants might get their 3 percent swipe fee back on individual sales, but run the risk of ticking off consumers by charging them to pay how they want. Consumers might simply move on to the next shop or site that doesn’t assess surcharges.
Oberman conceded that risk has caused lots of merchants to wave off Payroc’s services. They love the idea of offsetting the cost of taking cards, but feel they just can’t add a surcharge when none of their competitors do.
He said that’s particularly common among sellers of big-ticket items, where an extra 3 percent to the bill often means a few hundred extra dollars is added to the purchase.
That’s why Payroc has added the ability for merchants to customize the system, so that big-ticket sellers can assess surcharges as little as 1 percent. As Oberman noted, that’s enough to offset some of the swipe fees, but hopefully not so much to send the consumer running.
Customers’ Changing Attitudes About Surcharges
Even if merchants find that their customers are being run off by the surcharges, Payroc makes it easy for retailers to unwind the system and go back to their old ways. But Oberman suspects that those unwinds won’t be as common as one might suspect, as consumers’ attitudes are changing.
According to Oberman, merchants utilizing Reward Pay are seeing two trends. The first is an uptick in debit use, which indicates that either people are choosing a surcharge-free payment method or that they’re following the general trend of swapping credit for debit in the unsettled COVID era. (He said it’s hard at this point to tell which explanation is correct.)
The second trend Oberman sees is a greater-than-expected willingness among credit card consumers over the past several months to just pay the surcharge without a lot of hesitation.
“The consumer seems not as sensitive as I thought,” Oberman said. “Why is it happening? COVID for some reason has made this more acceptable to consumers who are willing to pay the surcharge. This is a phenomenon to me, and I’m not understanding [it] myself. I don’t get it – but it is happening.”
Happening with a few caveats. For example, Oberman noted that only roughly a third of Payroc’s business involves card-based payments with surcharges. The remainder consists of fee-free cash and debit transactions. In other words, two-thirds of consumers are ducking surcharges if they can.
Whether that ticks up or whether consumers will just skip the merchants that charge fees is unknown. It’s also unclear whether consumers will be quite so ready to roll with the punches if merchant surcharges start really going mainstream, popping up everywhere buyers want to shop.
Oberman noted that consumers know they’re paying surcharges, as signage makes it clear that credit card use comes with a cost. But it’s hard to say how closely consumers are paying attention to that versus focusing on their purchases before signing a charge receipt. And it remains to be seen whether consumers will react well when their credit card bills start coming in markedly higher than before.
It also remains to be seen how well this will work across channels. It’s fairly easy to switch online to a different card on file to avoid a surcharge, but in a physical store, consumers are limited by what cards they are carrying. And for really big-ticket purchases, they might simply need to pay with credit because they lack the money on hand for cash or debit payments.
Those unknowns are hard to answer without more data. So, too, is the question of whether merchants who have spent months reorganizing their operations to better serve customers’ digital needs will risk irritating buyers with new charges aimed at controlling how they pay.
Merchants have tried in the past through various means to claw back those interchange fees, but such efforts have largely ended in failure so far. But Payroc is betting that under the right conditions, consumers might be more willing to pick up a bit of the fee load than they have in the past.