Anyone in the payments processing industry has seen a steep increase in chatter around the topics of cash discounting and surcharging. Moreover, there’s no shortage of “innovators” demonstrating ways to implement these techniques since the processing industry holds disdain for the former option, and they’ve not been shy about using their lawyers and lobbyists to prove their point.
Merchants are probably wondering which is right for them… but let’s not confuse the real issue: these actions only further prove that payments processing provides no value a merchant is willing to pay for. The entire premise of cash discounting is to avoid the legislated tax of processing while surcharging is a convenient way to pass the cost to someone else altogether.
In cash discounting, a merchant saves their processing costs (let’s call it 3%) if a customer pays with some tender that isn’t a credit card. Therefore they’re happy to pass along most if not all of that savings to a customer. This pisses off the merchant acquirer (First Data), the card networks (Visa), and the card issuing banks (Bank of America) who lose a stream of revenue for doing, well, nothing anyway.
In surcharging, the merchant passes the cost of their processing to the customer. The payments “value” chain doesn’t care about this option because a card is still being used and they’re collecting their fees. In many cases surcharging is actually more lucrative for the merchant acquirer because they’ll really put the screws to the customer, who is mostly ignorant to what a fair processing rate should be. It’s not uncommon to see surcharges in the 4% range while the processing cost for the merchant would otherwise be less than 3% – that’s some real cutting-edge innovation to earn that 100 bps profit; someone call the Royal Swedish Academy of Sciences and inform them that we’ve already found the Economic Sciences winner for the next decade.
We don’t know how these recent trends can’t prompt some soul searching in the payments industry.
“Hey, your customers are telling you that your product is so shitty that they’re trying to force it on someone else.”
Think about this for a second. Let’s say you’re a customer of Dropbox. When they raise prices, it’s because they provide some new value, right? Storage went up, or something like that. If Dropbox raised prices by 25% and there was no change to the product, would you start asking questions?
Yet this is totally acceptable behavior in payments. All of this when consolidation is driving margins and technology makes it cheaper to support more customers.
If you must choose one of the options go with surcharging. No, not because we think the payments “value” chain deserves your money, but because your average Joe customer needs to understand this his airline miles are very costly to merchants. That and cash can be easily stolen by your $8/hour employees. Oh, and you can track customers for re-marketing by hashing their card numbers… just kidding: that’s actually valuable so most payments companies won’t bother providing it.
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