Blog: New Credit Card Surcharges Could Impact Prepaid Market (February 2013)

By Lori Breitzke, E&S Consulting LLC

A proposed settlement agreement in the In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation—filed in 2005 on behalf of approximately 7 million merchants alleging, among other claims, that MasterCard and Visa had separately colluded with banks to eliminate competition and increase interchange (swipe) fees for credit card transactions—may have a negative effect on the prepaid card market. In November 2012, the U.S. District Court for the Eastern District of New York gave preliminary approval for a settlement agreement that required $7.25 billion in payments to merchants as well as changes to Visa and MasterCard operating rules. Under the altered rules, U.S. merchants, beginning Jan. 27, 2013, have the ability to impose a surcharge fee for credit card transactions at a rate of up to 4 percent of the transaction total.

The option for merchants to collect surcharges on credit card transactions has the potential to curb prepaid card usage and undermine industry efforts to promote such cards as a replacement for cash. While merchants cannot collect surcharges for check, debit and prepaid card transactions, as is permitted for credit card transactions, many consumers may not differentiate between prepaid cards and credit cards. Provisions in the settlement call for merchants to indicate, via in-store signage and, in the case of online retailers, notifications on Websites that a surcharge will apply to their transactions. Customers may, upon learning of merchants’ surcharge policies through these vehicles, mistakenly assume the additional fees apply to “credit” cards that are in truth prepaid cards and therefore beyond the scope of the rule, eschewing the latter in favor of paying cash for their purchases. This could affect signature prepaid cards, in particular, since you have to hit the “credit” button to continue the transaction.

Small Merchants Most Likely to Surcharge

Large retailers likely will decline to impose surcharges on credit card transactions as a means of maintaining their competitive edge; Walmart, Target, Macy’s, Sears, McDonald’s, The Gap, JC Penney, Neiman Marcus, The Home Depot and Lowe’s already have said publicly they have no plans to jump on the surcharge bandwagon. However, smaller merchants may well levy surcharges to compensate for the higher credit card transaction fees levied by their acquirers. Should they decide to do so, they run the risk of losing business to identical merchants that have opted out of surcharging.

The issue for prepaid program mangers/issuers is that the onus is on merchants to discern the difference between prepaid cards and credit cards, but it’s difficult for them to do so. MasterCard maintains that each type of card features a distinctive hologram that makes it easy to determine if a card presented at the point-of-sale is a credit card or a prepaid card, and Visa holds that its use of two separate product codes to differentiate between the various card types should be of help to merchants here. But to the average cashier, the holograms on prepaid and credit cards look very much alike, and the product codes are maintained at the network/brand level. Until the point-of-sale system is updated to prompt a cashier for a surcharge on credit cards, merchants have no way of truly knowing which type of card—credit or prepaid—has been presented to them. By this juncture, it may be too late for them to salvage a prepaid card sale.

New complications stemming from the preliminary settlement are certain to surface with time, and at least some will center on prepaid cards. For more information on how the surcharges will affect acquirers and merchants, the rules that apply to each and other pertinent issues, see E&S Consulting’s blog at http://www.eandsconsultingllc.com/blog/.

Lori Breitzke is founder and president of E&S Consulting, a payments industry consultancy that advises merchant acquirers, retailers, card marketers and issuers in a broad range of payment and financial services domains, including prepaid program management, competitive research, training, marketing, POS hardware and software management and partner recommendations. She can be reached at [email protected].

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