Much Ado About: Surcharging
Surcharging remains prohibited outside the U.S. unless there is a local law or variance that requires merchants be permitted to engage in the practice. Source — Visa
In card payments, surcharging refers to merchants charging an additional fee to the customer, to recover costs that merchants face by accepting debit or credit card payments. E.g., an item costs $10, and the merchant charges 1% extra ($0.10) if the customer pays with a card. So the customer pays $10.10.
Recently, I was discussing with someone about Visa cards were briefly not accepted by Singapore taxis in 2013 [1], and more recently Amazon.sg’s surcharge [2]. There’s no local law in SG that permits merchants to surcharge. But just a few hours flight away in Australia, surcharging is allowed.
In this post, I review both sides of the argument for and against surcharging, for the reader come to their own conclusions. Full credit to the Reserve Bank of Australia [3] for a thorough analysis. The three points I’ll cover are:
- The case for allowing surcharging
- The case against allowing surcharging
- Implications — so what
1/ The case FOR allowing surcharging
A) Helping merchants, especially SMBs bear payments costs
Payment costs per transaction for a merchant add up, especially in markets where interchange is unregulated (more here). This is worse for small businesses with less leverage to negotiate lower rates (either with the schemes, or with their acquirers). Surcharging allows merchants to offset some payments costs, and have lower payment fees overall.
B) Consumers benefit and should share the costs burden.
Consumers benefit from card rewards like cashback, miles. Given they have the choice to use cards, and are benefitting at the behest of the merchant, it seems fair that they share some of the costs.
2/ The case AGAINST allowing surcharging
A) Surcharging enables merchants to pass on additional costs to consumer that might be beyond payment costs, resulting in higher prices.
With surcharging, merchants might surcharge customers beyond payments costs, causing overall consumer prices to rise. [4]
B) Surcharging reduces the competitiveness of new payment networks
One argument was that “No-surcharge rules can promote innovation and competition in the payments system by helping new payment providers build up the consumer sides of their networks” [3]. My understanding of the point is:
- A new payment method wants to gain consumer traction, but is more expensive since it hasn’t reached economies of scale.
- Merchants being allowed to surcharge might make the new payment method more expensive than existing payment methods.
- Banning surcharging means all payment methods look ~equal to the consumer, promoting a more “level” playing field for new entrants into the payments system.
Robust debates means analyzing the best arguments on both sides. Curious to hear what other arguments there are for banning surcharging?
3/ Implications – So what?
Most merchants realistically are not allowed to surcharge given the rules (unless you’re in Australia). However, merchants could accept other payment methods and ask their customers to use those payment methods. This is easier to do in person than online.
I’m neither a regulator nor an economist, and have not modelled the economic scenarios of surcharging vs not. My personal opinion below:
- I lean towards giving merchants more freedom and flexibility to surcharge or not. For example, surcharge visibly if they want, or incorporate it into the price of goods (which is probably happening in no-surcharge markets anyway).
- I believe consumers should understand the implications of their decisions. If you use a premium card to earn miles, you ultimately pay for those miles. If you want to help your local small business, consider paying via cheaper payment methods like PayID/PayNow/PromptPay/local debit cards (EFTPOS) vs credit cards for that small ticket transaction.
[1] News article
[2] Note that the surcharge has since been removed — news article
[3] Regulator white papers are a wealth of insights.
[4] Perhaps there’s some economic theory and statistical model, but I don’t see why merchants would flippantly raise prices just because they can surcharge, given it would hurt demand for their goods. Given they already include payment costs in the overall price of a good/service, then allowing surcharging is just about making that plain to the customer?
