Could Surcharges Stunt Credit Card Companies’ Success?

by Alyssa Oursler | August 21, 2012 10:30 am

A recent poll shows that Americans — while divided over many issues — are standing relatively united on at least one front: credit card surcharges.

Businesses must pay a swipe fee when they accept credit cards and, in the past, Visa (NYSE:V[1]) and MasterCard (NYSE:MA[2]) have banned them from shifting that cost to customers.

On Visa’s website, it currently describes a surcharge, or “checkout fee,” as “an unfair surprise fee that a retailer tacks onto a consumer’s bill when he or she uses a credit or debit card. Visa rules do not allow retailers to charge cardholders a checkout fee for using their cards.” But that page will need to be updated soon, as a recent ruling has approved credit card surcharges — although the settlement still needs judicial approval.

Unfortunately for the credit-card companies, consumers seem to agree with the “unfair” label that Visa put on such fees in the first place.

According to a recent CreditCards.com poll[3], 65% of Americans say they will pay another way if the fee is charged — no matter how small the fee is.

And when told the actual rate, things only got worse. The surcharge can be up to the amount of the swipe fee, making for a range from 1.5% to 3%. When that possible price was mentioned, only 2% said they would be willing to pay a 2% fee.

That’s a pretty strong statement — and one that doesn’t look too good for Visa and MasterCard at first glance.

Two-thirds of consumers switching methods for any fee amount is a pretty hefty chunk — and that number only increased with age. More than half of 18-to-34-year-olds said they would switch to cash, debit or another method, and 70% of those older than 50 said they would switch.

Plus, getting cash is easy these days — there are ATMs on just about every corner, and many banks will even reimburse ATM fees.

But don’t panic just yet. Several caveats make it seem unlikely that Visa and MasterCard will really take that much of a hit.

To start, even if consumers do switch, not all will switch to cash. Debit card surcharges still are prohibited, plus swipe fees for debit cards were capped last year[4]. That combination makes debit cards an easy alternative — and an alternative that still sends revenue, albeit less, toward the same companies.

Because old habits die hard, a switch to debit — or even no switch at all — is a strong possibility. As Professor Larry Compeau told Fox Business, “It’s a lot easier to say you won’t pay a fee in a telephone survey than it is to actually follow through when you’re standing at the checkout and you realize you don’t have cash.”

The recent success of credit card companies is just one display of how popular plastic is — Visa and MasterCard shares are up a respective 60% and 40% in the past 12 months, and other card companies like Discover Financial (NYSE:DFS[5]) and American Express (NYSE:AXP[6]) have seen similar success.

Otherwise, just look around. Paying with a credit card is commonplace, with just about every fast-food joint, grocer and pharmacy sporting easy-to-use terminals. Heck, many people have multiple cards in their wallets.

And it’s important to remember that this whole discussion hinges on a big hypothetical — the switch away from credit cards depends on whether and how retailers add the surcharge in the first place.

The prospect of strong resistance could mean that stores choose to just suck it up and absorb the cost of swipe fees. The risk of losing customers by implementing the charge might be greater than the temptation to pass along the cost to those paying with plastic — a cost they’ve been footing for some time now. Or, stores also could lower prices across the board to appease customers while implementing the surcharge for card users.

And there’s even more fine print. Forget about the ruling — surcharging actually is illegal in 10 states[7]. So for citizens in California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas, it really is much ado about nothing.

In the end, only time will tell how much of an impact the new rule will have. But a preliminary poll, however negative, probably don’t have the higher-ups at Visa and MasterCard worrying.

As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.

Endnotes:
  1. V: http://studio-5.financialcontent.com/investplace/quote?Symbol=V
  2. MA: http://studio-5.financialcontent.com/investplace/quote?Symbol=MA
  3. According to a recent CreditCards.com poll: http://www.creditcards.com/credit-card-news/poll-credit-card-users-wont-pay-surcharge-1276.php
  4. capped last year: http://investorplace.com/2012/06/home-depot-cuts-3000-product-prices-because/
  5. DFS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DFS
  6. AXP: http://studio-5.financialcontent.com/investplace/quote?Symbol=AXP
  7. illegal in 10 states: http://usa.visa.com/personal/using_visa/checkout_fees/index.html

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