There has been a lot of press about the recent settlement between Mastercard and Visa and U.S. retail merchants. This is actually the latest of several settlements that have taken place with this litigation since the lawsuit began in 2005. Put another way, a child born when the lawsuit was filed would be a junior or senior in college today. That’s a long time to litigate.
What Changed in the Mastercard-Visa Merchant Settlement
The big difference in this settlement, aside from 10 basis point reduction in interchange fees, is the agreement by the networks to significantly relax the “honor all cards” rule. Until this settlement, merchants had to accept any Mastercard or Visa card, be it a debit card, a no-frills credit card, a commercial card, or an ultra-high-end card with a rich loyalty program attached to it. Since those cards have different pricing levels, the merchant was forced to sacrifice margin on the high-value cards, and they could not differentiate the different card types in their acceptance or pricing policies. This settlement lets them add surcharges for higher-cost card offerings (up to 3%) and even refuse to accept them if they wish. Card issuers will also have to identify the type of card the customer is using on their plastic so that consumers and workers can identify them at the point of sale (POS).
The Hidden Costs of Premium Card Surcharges for Retailers
Great news for merchants: They can recover the incremental expense of higher-cost cards or not accept them at all, and their CFOs will be happy (or at least less grumpy). But wait, how does this really happen?
Customer Experience Challenges at the Point of Sale
Let’s take a look at a checkout line in a big box retailer, and just to make it timely, during the holiday season.
A customer uses a premium Visa card to purchase a high-end personal computer. The merchant has decided to impose a 3% charge on premium cards, so either the retail POS system or the retailer’s associate needs to identify that this card is to be surcharged. The associate or the POS system informs the consumer that the purchase will cost 3% more than they anticipated. The consumer can then decide whether to accept the surcharge and use the card or choose another way to pay. This slows down the line (remember, it’s the holidays), which reduces merchant revenue.
It also creates potential problems for highly valued customers. First, they need to decide whether to pay the surcharge or change payment types. They’re used to fast and error-free transactions with this merchant, and this is a new barrier. If the customer regularly uses this loyalty card, they may consider changing merchants if their favorite card costs more at this retailer. Even if the customer chooses to change payment types, the transaction has slowed, and they’ve had a less-then-perfect customer experience. And if the merchant has decided not to accept higher-value loyalty cards, the experience could go from bad to “see ya.”
Commercial Cards and Business Travel: Unexpected Consequences
Consumer payment issues with this settlement are significant, and they also bleed over into commercial cards, whereby businesses may be negatively affected in categories previously unaffected by surcharging, like business travel. Consumers and businesses are already undergoing years of pressure and anger over rising costs. Perceptions of additional fees will not be easily absorbed and will risk serious public backlash.
At best, this settlement creates a challenging situation for merchants. They can recover lost interchange expense, but they also risk losing their most valuable customers if they impose surcharges on higher-cost loyalty cards—not to mention the additional expense of updating the POS system and the extra associate training expense. This approach to resolving the “honor all cards” rule is a complicated solution that could change the nature of the merchant/customer relationship and add expense, even though it could also generate more revenue for the merchant.
Is This Settlement Final? What Merchants Need to Know
But wait, this may not be the final settlement. The National Retail Federation and National Association of Convenience Stores have strongly criticized the agreement as inadequate and mostly cosmetic, so there may be more litigation before the final settlement is reached. But even if there is more litigation, the idea of differential surcharging has been established, and it’s likely that some form will survive to the next round. Stay tuned, or if the litigation continues at its current pace, just let the next generation of managers handle it.
Need help navigating your strategy in light of these changes? Contact me at [email protected] to discuss how this settlement could impact your organization’s payment operations and customer experience.
