Surcharging: A Bad Strategy?

  The merchant community in recent years has put increasing pressure on the interchange fees associated with credit and debit card acceptance. Besides disputing the interchange levels themselves, merchants have aligned to legally challenge Visa, MasterCard and some state rules that prohibit retailers from trying to recoup these costs by surcharging card-paying customers at the point of sale.
  The natural question becomes, what would merchants actually do if they could assess surcharges on card transactions?
  We surveyed more than 1,000 consumers to assess the potential impact of payment-fee recovery schemes on customer behavior and the resulting effect such programs might have in enhancing retailer margins. In short, more than 71% of the respondents claim surcharging card transactions would adversely affect their long-term purchasing behavior.
  Given this reaction, merchants might not be so quick to implement surcharges. The majority of respondents are aware that merchants pay a fee for credit or debit card transactions but are strongly opposed to explicitly carrying any of the burden themselves as a way of keeping retail costs down.
  Participants interviewed were asked how they would react to surcharging in the context of a $70 transaction in which they planned to use a payment card but could have used an alternative payment method. The findings suggest the impact from surcharging on merchant sales could be significant, as 31% of the respondents said they would cancel their purchase if charged a 2% fee for debit or credit card transactions.
  When the interviewees were asked a similar question in the context of not having payment alternatives, the indication remains grim for surcharge-anxious merchants as 59% said they would simply leave the store if assessed a 2% surcharge.
  Assuming this reaction is accurate, the savings made on transaction costs would not come close to sufficiently compensating retailers for lost volume.
  Incentives such as discounts or coupons for cash purchases intended to dissuade consumers from using payment cards offer another potential fee-recovery mechanism for merchants. Asked if a POS discount (as low as 1% or 2%) would influence payment behavior on our $70 test-case transaction, an overwhelming majority of the consumers interviewed responded favorably, suggesting the convenience value of debit and credit cards is relatively low.
  Customers seem easily influenced by incentives, and many respondents said they would even increase their purchase total to realize nominal discounts or coupons. However, our analysis indicates that the global impact on margins still would be negative, as merchants would provide incentives on all noncard transactions and not just the additional share that was created by having the incentive program in place.
  A survey of 2,200 businesses in January 2004 found that almost half of Australia's merchants, which are allowed to surcharge, said they were considering assessing fees to their credit card transactions over the next year. A recent merchant survey, however, found few, if any, have done so.
  This is not to say that transaction fees could not become commonplace in the future. Consumers pay millions in ATM transaction fees per year, with many, despite their protestations, unwilling to walk across the street to use a machine owned by their issuer. Will consumers put their money where their mouth is, or will surcharging follow suit and eventually become an accepted "cost of doing business?"
  Keri Aivazis and Mathew Segal are partners with OC&C Strategy, a global strategy consulting firm with U.S. offices in San Francisco and New York. They can be contacted at keri.aivazis occstrategy.com or mathew.segal occstrategy.com.
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