Surcharge for Credit Cards
by tyler
I’ve spoken in the past about merchants, in accordance with the Consumer Credit Protection Act and (typically) their agreement with their acquiring bank, being restricted from implementing a surcharge for customers choosing to pay with credit cards.
It is a niggly issue that crops up periodically in discussions and one that is worth discussing in a bit greater detail. Let’s begin with a few definitions:
Surcharge: 1) An addition of extra charge on the agreed or stated price.
Incentive: 1) Something that motivates, rouses, or encourages. 2) A bonus or reward, often monetary.
Discount: 1) a reduction in price (noun)
With those three words in mind, you have the basis for understanding what is, inherently, a complicated issue. A merchant cannot implement a surcharge for credit acceptance. However, they can offer an incentive or discount (within certain limitations identified below) for the usage of cash or other non-credit tenders.
For example, a friend wanted to purchase a vehicle using their card to accumulate mileage points. When he presented his tender, he was advised of a 5% increase in price as a result of the tender. This surcharge is not allowed by the rules of the Truth in Lending Act and the rules the dealership agreed to when signing their contract to accept cards.
However, there is a growing number of retailers advertising the price of an item…and the decreased price of the item when cash is used. I remember experiencing this with fair regularity during the 1980s…and, interestingly, it would appear the process is again becoming popular.
I’ve mentioned the Consumer Credit Protection Act. For convenience, the pertinent sections are quoted below…In particular, Section 167 details the specifics regulations surrounding the offering of discounts.
167. Use of cash discounts
(a) With respect to credit card which may be used for extensions of credit in sales transactions in which the seller is a person other than the card issuer, the card issuer may not, by contract or otherwise, prohibit any such seller from offering a discount to a cardholder to induce the cardholder to pay by cash, check, or similar means rather than use a credit card.
(b) With respect to any sales transaction, any discount from the regular price offered by the seller for the purpose of inducing payment by cash, checks, or other means not involving the use of an open-end credit plan or a credit card shall not constitute a finance charge as determined under section 106, if such discount is offered to all prospective buyers and its availability is disclosed clearly and conspicuously.
You may wonder what prompted this line of thought…a friend e-mailed me a photo he took at a gas station in Lakewood, Colorado this morning.
A discount that is “disclosed clearly and conspicuously”.
What’s your perspective? Agree? Disagree? Anything to add? Critiques? The comment form is below…
It's a tough issue. Consumers love the convenience of using plastic. Merchants love the convenience (and safety) of using plastic…they just don't want to have to pay for it. Financial institutions love plastics usage because of the interchange income that such usage provides.
The question is, how can we make sure the costs of plastics usage is fair to consumers and merchants, while compensating the card issuers for their associated risk and expense?
Cash discounts, as you have described, are one way to address this issue. That is, only if the discounts are actually discounts. My guess is that they will merely become disguised surcharges.
In a free market, merchants are free to decide whether or not they want to accept plastics. They choose to because it benefits them, and it is worth the price. If they believe otherwise, they are always able to become a “cash only” merchant.
I completely agree that cash discounts are, in fact, disguised surcharges…at least frequently. At some point it is really a semantics issue of “advertised price” vs. “discounted price.”
The key element you identify is that the decision of accepting plastic is based on benefits of accepting that particular tender. It is, as many things, a bit of a cost/benefit analysis. I will revert this week with some interesting statistics I've found regarding the benefits of acceptance in the SMB sector.
I completely agree that cash discounts are, in fact, disguised surcharges…at least frequently. At some point it is really a semantics issue of “advertised price” vs. “discounted price.”
The key element you identify is that the decision of accepting plastic is based on benefits of accepting that particular tender. It is, as many things, a bit of a cost/benefit analysis. I will revert this week with some interesting statistics I've found regarding the benefits of acceptance in the SMB sector.