Let’s make sure our positions are clear here.
- We believe that the cost of accepting payments should be zero
- We believe that merchants should have the right to charge customers whatever amount they deem relevant for paying by card
- We believe the duopoly of Visa and Mastercard should not be able to tell merchants how to run their businesses
- We believe increased costs of accepting credit/debit cards will increase the likelihood that legislative action is taken to reduce the cost of payments
- We believe legislative involvement would be unnecessary if Visa and Mastercard operated in a free market
Now that we’ve set some ground rules we can get into it.
In 2023, Visa and Mastercard arbitrarily lowered the surcharging limits from 4% to 3%.
Quick background on this.
A surcharge was a premium fee added to a bill if the user paid by card (technically only credit card but virtually no merchants followed the “laws” of Visa and Mastercard).
The cost of interchange is ~2%. A 4% surcharge meant the payment processor would earn ~2% of the merchant’s gross processing volume (GPV) just for waking up in the morning.
Keep in mind that certain categories of merchants – like restaurants – make 5% margins, meaning that their payments “partner” could be making more money than the business owner. We built a fun little table showing how much more money the processor could take home than the merchant depending on a few configurations.
When Visa and Mastercard lowered their surcharging cap they did several things.
First, they made it so some merchants – even with a 3% surcharge – wouldn’t even cover their costs of payments acceptance; that’s because in some situations a merchant’s interchange could legitimately be above 3%. This is totally against the spirit of the 2013 ruling which allows merchants the freedom to surcharge.
(And by the way, how awesome would it be to see merchants surcharge card brands by different amounts to drive pricing down, e.g. Visa gets surcharged 10% and Mastercard only 2% until the merchant gets concessions from Visa, then they can wallop Mastercard until they get what they want from Mastercard.)
Second, they decreased the chances of cardholders noticing/complaining about the high cost of using their cards. The irony is that any smart business already accounts for the cost of plastic and passes the cost to the consumer. So that 1% cash back you think you’re getting is actually just a 2% kick in the nuts as society deals with the taxes of payments acceptance.
Third, they pissed off merchant acquirers who would now have to settle for an “unreasonable” 100 bps of margin depending on the merchant. Clearly making 20% as much as the business owner (who toils 80+ hours a week) for what is tantamount to a few hours a year of effort on the part of the payments bro isn’t fair.
Fourth, they probably appeased legislators who were eyeing the high costs of payments acceptance as surcharging become commonplace. There’s some data from an Australian payments provider that shows ~60% of merchants are surcharging.
Here’s the secret about payments…
It’s a joke of an industry.
Never will you meet more people who have made more money doing less than nothing than you will in payments processing.
That’s because:
- There’s guaranteed demand (who can refuse cards anymore?)
- There’s no product (it’s why payment processor R&D is negligible)
- It’s made intentionally complicated (the best way to make money on a commodity is to make it hard to understand)
This has made it so the payments industry is at least one step ahead of everyone else at all times.
With payment bros having a taste of 200 bps of margins and then losing that, they’re indignant.
So you know what?
Time to change course.
Surcharging is dead. Long live surcharging*!
And by surcharging* we mean cash discounting/dual pricing, which is literally the same f*cking thing as surcharging with the most infinitesimal of wrinkles you couldn’t possibly convince the average person that there was any practical difference.
Bear with us here, because we have to expose just how hilariously absurd the “rules” are in payments so that everyone in payments can keep piling on the economic back of Joe Consumer.
Ready?
Here’s the difference between surcharging and cash discounting (we recommend reading that link):
A cash discount is when you post credit card prices and offer a discount on that price for customers who pay with cash.
A surcharge is when you post cash prices and charge an additional fee on top of that price for customers who pay with a card.
Boom.
#Innovation
#Evolution
#Disruption
For some industries the effective change in implementing cash discounting is literally nothing.
For example, think about your plumber. They’re not telling you the cash vs card price before they begin work.
Instead, you’re given a bill with two amounts: one for card payments, and the other for non-card payments.
It’s. The. Exact. Same. As. Surcharging.
It might be a little more work for certain industries to implement dual pricing, like restaurants, because they’d need to change the prices of every menu item in theory… but, you know: < 1% of merchants were compliantly surcharging, so there’s that.
Look at this “cash discounting” from Sea World, a “sophisticated”, Tier 1 merchant:
Looks like they’re non-compliant by adding a 5% surcharge to all cards, right?
Great news: remove all price tags in the store and now all of a sudden it’s compliant cash discounting!
And here’s the thing:
There’s no limit to how much a merchant payment bro can cash discount.
From the Atlanta Fed,
Credit card surcharge program rates are capped at 4 [now 3] percent of the transaction amount, but cash discounting has no restriction. Of course, the higher the service fee the more likely the customer will be to notice and possibly move to another merchant who does not have such a program.
https://www.atlantafed.org/blogs/take-on-payments/2018/04/30/cash-discount-programs-the-flip-side-of-surcharging.aspx#:~:text=Credit%20card%20surcharge%20program%20rates,not%20have%20such%20a%20program.
That’s right: ain’t no duopoly telling this payment bro how much more money they can make than the merchant implementing the cash discount.
Listen up merchant: after toiling 90-hour weeks your profits must be less than mine.
Fair is fair.
Because payment processors will make so. much. more. money cash discounting, we expect cash discounting to become the everything’s-a-nail-here’s-my-hammer solution to payments, fully replacing surcharging.
Of course merchants could and should just change prices to recover card fees, but nobody will ever accuse a merchant of being smart.
Ever.
The great chicanery continues.
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