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Surcharges Re-Enter The Merchant Transaction Fee Debate

As COVID has battered the economy and changed the way merchants do business, the time has come for them to analyze their clients and customers to see if recouping some or all of their transactional costs makes sense.

While so-called surcharging has been around for nearly a decade, and credit card processing fees have more than doubled during that time, the current climate has seen a growing number of businesses deciding to pass along some of the costs. But if and when merchants do make the change, Payroc Chief Financial Officer Kevin Hodges said, it must be done correctly.

“We have a compliant surcharge program that, depending on certain geographies and certain card types, is able to track it in a way that complies with the state regulations and card regulations, and just makes it easier for the merchant to conduct business,” Hodges said in a recent interview with PYMNTS.

As it stands, the bulk of the transaction fees consumers pay go back to the card issuers and the card networks, Hodges said – and, in turn, drive up costs for the merchant while triggering a proliferation in the size and number of individual fees.

“I think that’s where there can be some frustration in the industry,” he said, predicting either reduced rewards or a new mechanism for lower interchange or card network fees. “Consumers are seeing card products with a lot more rewards attached to them, and then those rewards basically get passed on to merchants through higher interchange fees and the like,” Hodges noted, adding that there may be some sort of reckoning in the future.

A Highly Personal Decision

With its purview of servicing over 30,000 clients and processing over $10 billion in annual card volume, the Payroc CFO said the decision of whether to pass along some or all of these fees – or to simply eat them – is a very personalized decision.

That said, Hodges pointed out that the COVID era has had a visible impact on the way people see their local businesses, whether it’s the addition of curbside pickup, the use of PPE, the installation of signs and barriers or other new protocols.

“There’s definitely a greater acceptance of paying a surcharge, and so I think consumers can understand why there may be a new surcharge applied in certain cases,” Hodges said.

Not For Everyone

There are myriad personalized factors to consider before a merchant undertakes a program to implement surcharges, including an audit of things like average ticket size, customer demographics and the percentage of credit versus debit transactions.

“If they’re doing 99 percent debit transactions, offering a surcharge product probably isn’t going to do much for them,” Hodges noted.

But in other circumstances, especially when big-ticket items are involved, he said the ability for a merchant to deploy a flexible fee-sharing system makes a lot of sense.

“It’s another tool in their toolbox,” he said. “It’s just another lever that [merchants] can pull to try to help rationalize their expense base – and if they feel it’s appropriate, we have a technology that enables them to do it.”

Who Would Want To Pay More?

It seems counterintuitive, but Hodges explained that in many situations, customers are happy to pay a little bit more in order to use their card to make a purchase – just as there are situations when merchants are happy to eat a comparatively small fee.

“Merchants may still want to be burdened by some of the card processing fees in order to get cash out of their system or to get funding faster,” Hodges said. “There are also times when the consumer may still want to [absorb the cost and] pay with a card, especially if they want to get [special] payment terms, credit card rewards and that type of thing.”

From Payroc‘s point of view, it’s really about talking to new and existing merchants and training them about how the program works, as well as things like rules, regulations and disclosures.

“Surcharging tends to be a fairly personal decision for merchants because so much of it is based on who they are dealing with and what their customer base is like,” Hodges noted.

The Big Picture

Given all the disruptions that have happened over the past 10 months, Hodges said it was important for merchants to think about the big picture, and to analyze their businesses more holistically rather than just in terms of processing fees.

“So it’s really just looking at business processes in general and, given the way business has evolved over the past 12 months, how some of those trends may continue in the future” – particularly smaller businesses, to ensure they are doing things today to be ready for the future, he said.

As far as the future is concerned, Hodges said there was one thing in particular merchants should prepare for. “There’s going to be an evolution of doing away with the standalone terminals and moving more toward integrated solutions,” he said.

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