Peter Guidi's Blog

Surcharging for credit versus discounts for cash; why it makes a difference and how the consumer will react.

In alternative payment, Bank Fees, Bank Tax, Convenience Store, credit card, debit card, interchange, loyalty, merchants, payment, Payment card, Petroleum retailing, Platforms, retailers, swipe fees on July 16, 2012 at 8:02 pm

In the struggle between the Credit Card Associations and Retailers this week’s court decision reminds me of the old western film when two guys are fighting and the guy with the rifle runs out of ammo as the other guy’s gun is a few yards away. There is that brief moment when they both realize that the game has changed and now the race to the finale is upon them.  This week MasterCard Inc. and Visa Inc. along with some large banks settled what had become known as the Brooklyn case, setting the stage for retailers to pick up the gun and shoot first.

 The weapon that the Brooklyn decision has given the retailer is the ability to surcharge the consumer for the use of a credit card.  Surcharging is a tremendously powerful tool that has the ability to dramatically shift consumer behavior. Surcharging is fundamentally different than Discounts; understanding why, is the key for retailers wishing to leverage this decision. How powerful is surcharging?  Alphawise (Morgan Stanley Research) reports that “43% of consumers would be “very-likely” to switch from credit/charge cards to debit, cash or check if asked to pay a 1-2% surcharge by a merchant”. Further, “on average, those who said they would be “very likely” to stop using a credit card would shift about 67% of their credit purchases to other forms of payments”.

Retailers have some experience with offering discounts for cash or alternative payment discounts.  In the Convenience Store Industry, the per gallon discount for cash or merchant issued debit has been moderately successful. Some merchants like Savannah’s Parker Stores, are offering up to 10 cents off per gallon for consumers using their PumpPal card. These programs are reported to have captured between 5% and 25% of their consumer’s transactions.  But if Alphawise is correct, and Parker posts a price of $3.50 with PumpPal, and then ROLLS-UP the price of gas by 10 cents per gallon for the use of credit, then according to Alphawise’s survey results,  upwards of 50% of consumers appear ready to walk away from credit cards

The reason Surcharging is more powerful than Discounts is because of “Network Effects”. Network Effects are an economic term that describes the attraction of two groups of end-users across a “platform”. The reason the card associations have never allowed surcharging is because the economic principles driving a platform (two-sided market) state that only one side of the platform can be weighted with fees to the end-user.  An example of network effects is the Adobe PDF Reader. Almost all of us have the PDF reader on our computers, and it is free. The PDF writer on the other hand is expensive. The reason the writer is expensive is because so many people have the reader. If Adobe had charged for the reader it’s likely no one would have purchased it and as a result, the writer would be valueless. The same is true for credit cards, show the consumer the real cost of using their credit card and they are likely to find another way to pay.

The question is; will the Retailers react? Like our gun fighters, there is risk going for your gun.  Mike Schumann, owner of Traditions Classic Home Furnishing in Minneapolis was quoted in the WSJ saying that he is “hoping that surcharging will become commonplace, but that small firms will not lead the charge” adding that he might charge 2.5% to 3% if his competitors adopt the practice. During a call with a national home furnishings chain, the CIO wondered aloud how consumers would react to seeing an $80.00 upcharge for a major purchase. It’s a good question. But what does seem clear, is that in areas of every day spend, like gasoline and groceries, retailers have a new tool. We’ll have to see if they choose to use it.

 

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