Release Date: June 14th, 2019
Author: T. McGuinness, Ph.D.,
Credit Card Surcharging Research Group

A Question of Choice

Abstract

One of the striking breakout conclusions from our research is the opportunity for “Choice” in payments and how significant an opportunity this is for all businesses.

When paying for a product or service, all consumers – business or individual – prefer options. This is not new it has been known since the introduction of the first “Charge Plates” in 1928. This gave purchasers their first real choice and alternative to cash transaction.

Until 1958, no one had been able to successfully establish a revolving credit financial system in which a card issued by a third-party bank was being generally accepted by a large number of merchants, as opposed to merchant-issued revolving cards accepted by only a few merchants.

With the ultimate introduction in September 1958, Bank of America launched the BankAmericard which would become the first successful recognizably modern credit card. This card succeeded where others failed by breaking the chicken-and-egg cycle in which consumers did not want to use a card that few merchants would accept and merchants did not want to accept a card that few consumers used. Bank of America chose Fresno California to launch because 45% of its residents used the bank, and by sending a card to 60,000 Fresno residents at once, the bank was able to convince merchants to accept the card. And in 1976, all BankAmericard licensees united themselves under the common brand Visa. In 1966, the ancestor of MasterCard was born when a group of banks established Master Charge to compete with BankAmericard; it received a significant boost when Citibank merged its own Everything Card, launched in 1967, into Master Charge in 1969.

This was the true beginning of universal purchasing choice, which has become almost universal. We say almost because in recent years we are seeing a reversal of this trend as processing fees increase again after a long dormancy, causing businesses to start pushing customers towards low-cost or no-cost alternative payment models.

Just when these trends appeared to be showing momentum, recent U.S. Supreme Court and State decisions have created a new alternative that further increases choice both for the merchants and for their customers.

The Key Is Choice

As in the early days of credit card adoption, choice appears to be the driving force in the adoption of legal compliant credit card surcharging.

In most business, the enterprise compensations for 2.5% or more credit card processing fees by rasing price. This is a survival tactic for many businesses that are offering highly competitive products or services with margins well below 20%. The 2-3% cost of accepting credit cards can be the difference between profitability or not.

For many years merchants used payment options to increase their attractiveness to customers, but as credit cards have increased in processing costs many merchants try to shift the customer to other payment methods, that in many cases – such as invoice terms can actually prove to be more costly and damaging to cash flow.

Adoption

While few B2C (Consumer) sales businesses are adopting credit card surcharging, those in the B2B (Business to Business) space are offering it with great success. With considerable analysis companies are finding that the proper re-introduction of choice concepts is the key to successful conversion to surcharging since it only applies to credit cards and not debit cards or other payment forms.

Thus this becomes an opportunity to apply persuasion in guiding customers to other payment forms while increasing the perception of choice for the customer.

Those enterprises that have successfully converted to full compliant surcharging are not finding any real push-back from their customers. This is because these businesses are clarifying the payment options more clearly.

Here is a typical example of “Choice Payment Options:”

Customer Choice Payment Options – With Properly Compliant Options
Payment Costs To Merchant	Payment Costs To Customer	Payment Types	Benefit To Consumer	Benefit To Merchant
No Cost	No Cost	Cash	Immediate Payment But No Float Or Cash Flow Benefit	Immediate Cash Flow
No Cost	No Cost	Check	Immediate Payment But No Float Or Cash Flow Benefit	Immediate Cash Flow – Minor Risk Of Bad Checks
Very Small Transaction Cost	No Cost	eCheck	Immediate Payment But No Float Or Cash Flow Benefit	Immediate Cash Flow
		ACH	Immediate Payment But No Float Or Cash Flow Benefit	Immediate Cash Flow
		Debit Cards	Immediate Payment But No Float Or Cash Flow Benefit	Immediate Cash Flow – Minor Risk Of Chargeback
No Cost	Small Percentage	Fleet Cards	Credit Terms Enhancing Float & Cash Flow	Rapid Cash Flow – No Processing Cost – 2.5%** Profit Enhancement
		Virtual Cards	Credit Terms Enhancing Float & Cash Flow	Rapid Cash Flow – Minor Risk Of Chargeback – No Processing Cost – 2.5%** Profit Enhancement
		Ghost Cards	Credit Terms Enhancing Float & Cash Flow	Rapid Cash Flow – Minor Risk Of Chargeback – No Processing Cost – 2.5%** Profit Enhancement
		Gift Cards	Immediate Payment But No Float Or Cash Flow Benefit	Rapid Cash Flow – No Processing Cost – 2.5%** Profit Enhancement
		Reward Cards	Significant Customer Benefit: Credit Terms Plus Rewards (Cash Back or Other Benefit) – Benefits Can Be As High As 8% (Reduced by Surcharge Still Results In Benefit To Customer [Need Citation]	Rapid Cash Flow – Minor Risk Of Chargeback – No Processing Cost – 2.5%** Profit Enhancement

As the enhanced concept of Choice is reintroduced and the customers are informed of all of their choices in ways similar to the above, the impact of surcharging is reduced to negligibility. [per study performed on ClubCorp 2019]

Summary

The key to the successful and stress-free implementation of a fully compliant credit card surcharging strategy is Choice Exposure.

By exposing the payment choices and their respective benefits and options for the customer, surcharging is just a single option, instead of the only perceived option as it is with so many businesses today.