U.S. Merchants Remain Slow to Surcharge

Navigator Edition: June 2014
By: Paul Sammer and Jeff Avery

Following changes to Visa and MasterCard’s merchant guidelines in January 2013, there was much speculation concerning when, if ever, merchants would introduce surcharges. In the U.S., airlines have often been cited as likely first candidates to charge the new fees, given the industry’s widely adopted fee-based model of asking customers to pay for checked baggage, meals, and seat assignments. But, with the exception of regional carrier Allegiant Airlines, which describes its surcharge as a discount for debit use, no major airline in the United States has, to date, introduced new fees, although some U.S. airlines do surcharge for flights that are booked from select countries overseas. The absence of surcharging is especially notable given that most of the merchants that had actively sought the ability to institute the practice have refrained from doing so. Nevertheless, merchants should continue to monitor developments in the event that surcharging becomes a more attractive opportunity than it has appeared recently.

Merchants may be hesitant to adopt credit card surcharges for several reasons. The introduction of a surcharge could result in  consumer backlash and consequential lost sales, undermining the rationale for imposing the fees. Furthermore, implementation would be complicated by the existence of certain state prohibitions on the practice. Acceptance technology currently in place may require more robust capabilities to facilitate surcharging in a seamless manner, as many POS systems do not have this functionality. Moreover, certain processors have indicated, as did First Data in a 2013 Client Alert, that they have decided thus far not to support surcharging capabilities.

Despite these considerations, surcharging  has the potential to offset acceptance costs (albeit with risk), and the introduction of surcharging in other countries offers some insights. In Australia, reforms allowing surcharges were instituted in 2003, but by 2005 surcharging had caught on with only a few of the largest retailers. What followed, however, was a gradual rise in the number of merchants engaged in the practice, so that by 2010 nearly half of the largest merchants in Australia were charging customers to use a credit card. Airlines have been, by far, the companies most at ease with the practice. Australian airline Qantas, the country’s largest, instituted domestic and international surcharges in 2006. In the UK, surcharging by airlines began when low-cost carriers Ryanair and EasyJet introduced fees in 2008 and 2009, and British Airways and Lufthansa followed with their own surcharges in 2011. A key difference between countries abroad and the U.S. is that surcharges above acceptance cost have been possible overseas since inception, whereas in the U.S. restrictions have been put in place that limit surcharging only to cost recovery.

As card payment fees and booking fees came to be accepted in Australia and the UK, merchants began using these fees not merely to offset acceptance costs but also as a source of revenue. Ryanair, taking an aggressive posture, introduced an additional £6 credit card fee in excess of its existing 2.0% surcharge after the UK’s Office of Fair Trading suggested in 2011 that debit card fees should be banned and credit card fees should be capped. Qantas raised fees in 2008 and 2010, increasing its surcharge for international flights from A$18 to A$30 over this period.

Overseas consumers, frustrated by such tactics, have responded by making their opinions known to advocacy groups and directly to regulators, which increasingly are reigning in the practice.  After Australian regulators began to push for lower fees in 2012, Qantas made sharp reductions to its debit card acceptance fees. The company nevertheless maintained its $A30 credit surcharge for international flights and reduced its credit surcharge for domestic flights by 10%, stating that it has never made more from surcharges than its cost of acceptance. The UK in particular has clamped down on elevated surcharges, requiring as of April 2014 that card fees must approximate actual acceptance costs. The European Parliament may vote in late 2014 on similar regulations that would cap surcharges across the continent.

Any surcharges introduced in the U.S. are unlikely to approach levels reached abroad. Specific pricing mechanisms that limit merchants’ surcharging to approximate costs of card acceptance have been put in place as part of recent interchange litigation and have been codified in networks’ operating rules. Whether U.S. companies proceed to surcharge or not, their decisions should be deliberate and well-informed, given the trade-offs associated with imposing such fees and their impact on the customer experience.

For more information, please contact Paul Sammer, Consultant, or Jeff Avery, Senior Analyst, Both specialize in Credit Card Issuing.

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