One year into the pandemic, the effects of COVID-19 have hit small business owners especially hard. While stimulus bills and initiatives such as the Paycheck Protection Program have provided some relief, many businesses are still struggling.
As the road to recovery continues and merchants prepare for the largest interchange rate hike in more than a decade, business owners are increasingly looking for ways to control costs. This includes evaluating the cost of payment acceptance, which is why we are seeing a renewed interest in programs such as cash discounting, surcharging, convenience fees and more.
While these programs might seem like an ideal solution because they help small businesses offset their credit card processing fees, they tend to be surrounded in confusion, misinformation and legal battles. For one example, take the recent victory in Kansas when a federal judge ruled in favor of small business owners, overturning a law that once prevented them from surcharging purchases made with a credit card.
Given this increased oversight and the need to protect First Amendment rights, the time has come for the payments industry to take a long, hard look at how we market and sell enhanced pricing programs. This includes cash discounting and surcharging, but is particularly important for hybrid programs.
When cash discount programs first appeared on the scene in the payments industry, there were many unknown elements. Despite the lack of clarity, you could easily find merchants using some variation of the concept to complete a sale or lower their credit card processing costs.
However, not only were these practices frowned upon, but they could get you in trouble with the card brands. That’s why I find it interesting that the very people in the processing industry who championed the recent reemergence of these valuable programs were once some of their most vocal critics.
The same is true for surcharging, which has been contentious and publicly litigious, to put it mildly. Together, these pricing models have been largely ignored up to this point, and for good reason. After all, why would anyone want to take on Visa, Mastercard, or American Express for something illegal in certain parts of the nation? So, what changed?
It's fair to say that in electronic payments, no piece of legislation has created as much change, good or bad, as the Durbin amendment. It makes you wonder what Sen. Dick Durbin, D-Ill., would have thought if he had foreseen the impact of his contribution on the enormous Dodd-Frank Act. Would he have been impressed or possibly horrified?
Just to clarify, standardizing cash discounting was not the primary focus of Durbin's addition. In fact, it wasn’t until a few years after the Durbin amendment took effect that the first version of what some affectionately call “Hybrid Cash Discount” programs came to market.
Since then, we’ve seen a range of programs which quite honestly, rivals the days of the wild, wild west. While I appreciate the creativity and underlying goals of these programs for both merchants and the greater payments community, the time has come for us to eliminate the confusion and do it right.
To do so, we need to get back to basics. Let’s start by looking at Section 920 of the Electronic Funds Transfer Act, which is part of the Dodd-Frank Act. How does it define cash discount, how did the Durbin amendment make it legal, and was it ever really illegal?
Under Section 920, the card brands cannot inhibit the ability of merchants to provide discounts or in-kind incentives for payments by cash, check, debit card, or credit card. Discounts cannot vary by issuer or card brand, must be offered to all consumers and be disclosed clearly and conspicuously. (You can read the full text of the Act
In layman's terms, if you want to offer a cash discount, no one can stop you as long as you follow the law and tell people that you're offering a discount. The underlying concept is really very simple.
Some of you may be wondering why there wasn’t more buzz around this portion of the law. The primary reason is because when the Durbin amendment was passed in 2010, almost everyone in payments was focused on the portion of the law which drastically lowered debit card interchange fees. It wasn’t until 2013 when a group of merchants won the first big case against the outright ban on surcharging. That moment started a domino effect that is still racing through state courts across the country.
To date, only five states have surcharging bans in effect: Colorado, Connecticut, Maine, Massachusetts, and Oklahoma. As mentioned above, Kansas recently joined the ranks of states that allow surcharging, and others appear to be headed that direction. Almost every time you turn around you hear about developments, briefings and cases in favor of surcharging. Even the Attorney General of Oklahoma acknowledged the ban on surcharging will eventually fall.
The holdout states mentioned above appear to be taking a “wait and see” approach. For example, in 2019, New York settled the matter to allow surcharging with proper additional disclosures. Bordering states that still have a ban in place are now signaling that the New York law will be the probable path when their states’ bans are challenged. This is why many payments experts believe it’s only a matter of time before all fifty states allow surcharging.
