Pandemic's timing could push more merchants to start surcharging

It's still unclear how the coronavirus pandemic will alter payment habits over time — will consumers avoid cash out of fear of germs, or will they favor it as the one payment option that nearly all merchants accept?

An impending change in interchange rates may tip the scales in cash's favor.

Only four states — Kansas, Connecticut, Colorado and Massachusetts — continue to ban the practice of merchants adding an extra fee to defray the cost of credit card acceptance.

But an increase in interchange fees for card-not-present transactions is scheduled to take effect in April — right at a time when card-not-present transactions are likely to spike due to increased online shopping from people sheltering at home.

It's one of many complexities companies are struggling with as the crisis progresses.

Bloomberg News

"As for coronavirus, there is not a lot of thought on credit card fees for primarily business owners of small restaurants," said Alecia Muth, director of market intelligence for Strawhecker Group. "For them, it is more about how do we stay in operation at this point?"

But when business owners see things become more settled and the U.S. comes out of the coronavirus pandemic, they may start thinking about adjusting their margins, Muth added.

"That's when all of this could come into play," she said. "For consumers now, they will maybe be saying they are willing to pay whatever price for products because they just need food delivered to them."

Regardless of whether surcharging is an option for merchants, interchange costs are firmly on their mind during the coronavirus crisis. Last week, the National Restaurant Association sought federal help in eliminating the card fees to help restaurant owners cope with nationwide shutdowns. That type of decision isn't likely to unfold quickly as part of a relief package, and other retail groups sought more immediate relief.

Ultimately, Chicago-based CardX, a payments technology company that helps merchants add surcharging at the point of sale and comply with federal regulations, is prepared to provide the needed education for merchants who may see interchange go up for card-not-present and rewards cards next month, in addition to a jolt to revenue from coronavirus shutdowns.

"A lot of merchants will be looking at the potential savings of surcharging, and it should actually accelerate the move for surcharging becoming part of the market norm," CardX CEO Jonathan Razi said.

"In the meantime, there is no question that volume is going to further shift online and card-not-present in the wake of coronavirus," Razi added. "We've seen adversity before and we are going to see it again."

Still, CardX continues to work with lawmakers in the states reluctant to lift the surcharging ban in hopes of convincing them to consider the benefit to merchants.

The major card brands had lifted the rules against surcharging five years ago as an initial concession in the merchants' class-action against the card brands and resulting swipe-fee settlement. Merchants were generally more interested in a fair monetary settlement and some legal decisions made regarding card brand rules.

"My perspective is that it is incumbent on those states still banning the practice to modernize their laws," Razi said. "You really see how those laws are out of step with where payments are headed, and you know that because most governments surcharge you for services with a credit card, that's for sure."

A county district attorney's office in Kansas recently brought a case against a Wichita restaurant that it said was applying an illegal 4% surcharge on credit card purchases, which the restaurant eventually settled by agreeing to pay a $60,400 fine, The Wichita Eagle reported.

Because the restaurant claimed it would be near impossible to track down all patrons who were charged the extra fee, it agreed to pay $30,000 of that fine to a local charity and $30,000 into a county general fund, the article stated. Additionally, the restaurant agreed to stop adding the surcharge.

"We are trying to inform these states that they would still have all of their consumer protection laws in place, and you can still ensure advertising is truthful and no surprise fees are tacked on," Razi said. "That is where the conversation is now, that they can do all of that after eliminating surcharge bans."

The argument resonates with most state lawmakers, as evidenced by 94% of the country allowing surcharging on credit card payments, Razi added.

That door swung open when the Supreme Court provided a stipulation in early 2019 that paved the way for merchants and the state of New York to drop a legal dispute over the issue of surcharging. The court ruled that merchants opting to add the fee for card acceptance would have to clearly state that in writing and show the cost differences to consumers through signage.

It eliminated the question of whether merchants should be told how to describe a two-price system to customers when choosing a payment method. It turned a "no surcharge" stance into a "no surprises" type of approach.

Even though a company like CardX pushes for merchants to benefit from surcharging, it remains a relatively difficult task to get merchants to band together to demand an end to bans — or to even add surcharging to their own business models.

"Generally speaking, in our conversations with small and medium size merchants, many are not familiar with surcharging, or don't know what it is, or they think it is maybe cash discounting, or some other method," Strawhecker's Muth said.

Cash discounting — the practice of informing customers that items in a store are less expensive if purchased with cash — does not have the legal barriers and complexities of straight surcharging, which is the practice of charging more for products to cover card fees. The downside of cash discounting is that consumers, in general, carry less cash these days.

"Because of that confusion, there probably is not a critical mass that is pushing this surcharging initiative forward," Muth said. "You will see someone doing it periodically, but it is not very common."

Some of that apprehension stems from a customer-management standpoint, Muth added.

"When a merchant is interacting with a customer for a sale, and then they have to explain what a surcharge is and trying to navigate that conversation … because of that, many just take the stance that paying credit card fees is just part of doing business," Muth said.

This year, Oklahoma followed the Supreme Court's reasoning and dropped its surcharging ban, leaving only four states with a ban in place.