News headlines are warning consumers to "brace for new checkout fees".
These new fees are the result of a $7.2 billion swipe fee settlement made between MasterCard and Visa and retailers last July. Terms of the agreement allow merchants to charge a checkout fee up to the amount they must pay to process the card payment. Industry estimates of what merchants will charge range between 1.4% and 4%.
The reality, if you're not trying to sell a news story, is far less interesting. Some merchants will adopt the additional fees, but it is unlikely to have a significant impact on consumer buying experiences.
First, more than one-third of the nation's population resides in the 10 states (California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas) that still restrict differential pricing for credit card use. In addition, it's very unlikely large and multistate retailers will endure the accounting and public perception challenges associated with implementing swipe fees. Finally, American consumers' slight understanding of how payment networks operate will create a PR fiasco for any merchant of scale that attempts to add a fee.
Still, there are reasons why retailers – small merchants in particular – should consider charging a checkout fee.
I've surveyed a statistically insignificant sample of a half dozen consumers on this topic. Their comments were consistent with the opinions I've read in the mainstream press. In short, consumers believe that whatever cost a merchant might bear is already built into their cost of business. In other words, they believe they're already paying the surcharge. In a way this assumption is perfectly true, but it ignores two important points. First, it requires consumers who pay with any other payment type to subsidize the rewards of credit card consumers. Second, many smaller merchants are experiencing pressure on their margins that is unprecedented.
The cost of goods continues to rise, yet merchants are reluctant to raise the price of their end products. In other words, we are experiencing inflation, but much of its impact is being absorbed by retailers. While paying a 2% fee for the convenience and efficiency of digital payments was quite agreeable five years ago, the increasing interchange associated with rewards, corporate and signature cards has combined with smaller margins to create a painful inability to simply build the cost of interchange fees into retail prices.
Small local merchants and service providers are the most likely to take advantage of checkout fees. When hungry at a coffee shop, buying a muffin or bagel seems like a great idea, until I realize I have no cash. I feel a pang of guilt realizing it would be cheaper for them to give me the muffin than to process my credit card. A good number of small merchants, like coffee shops, already restrict credit card use for small orders. Rather than setting a minimum order of five dollars, a small surcharge might create a better customer experience. A swipe fee of $.50 for any purchase less than five dollars would enable more sales and be minimally offensive to customers.
If smaller merchants have a positive experience and consumers begin to accept the idea of fees, larger merchants will likely follow suit. Trish Wexler, a spokeswoman for the Electronic Payments Coalition, expects checkout fees to eventually evolve, citing funeral directors as an example of one service looking into surcharges. It is easy to see their interest, when interchange fees could cost hundreds of dollars per funeral.
The ideal solution would be product level surcharging, where merchants charge fees only for high cost cards. The incremental cash back I receive on my signature card is at the expense of other consumers. If merchants could identify high cost cards and charge fees only on them, the true cost of the purchase would be transparent to the consumer and consumers would likely reduce their use of high cost cards. Eventually, we would return to a healthier equilibrium between merchants and issuers where the cost to process the card is in line with the value the merchant receives. This will be impossible for most merchants without merchant acquirers offering new capabilities at the point of sale.
Will consumers object to the charges and take their business elsewhere? As long as checkout fees remain with small local merchants who can personally explain the need for the surcharge, I think few consumers are likely to abandon their business. After all, I'm already at the coffee shop and I can't order my muffin online.
Eric Lindeen is marketing director for Zoot Enterprises Inc., a provider of credit decisioning and loan origination solutions for large financial institutions.