Merchants who accept Visa credit cards are being asked to comply with a surcharge cap because the card network giant is concerned about the consumer experience, the company’s CEO Ryan McInerney said Tuesday.

In a call with analysts to discuss Visa’s fiscal third-quarter results, one analyst asked the company’s executives to comment on recent news that the card network company imposed a 3% surcharge cap on merchants. To date, Visa has said very little publicly about the cap, but Payments Dive has reported it was put in place in April.

“It's no surprise that we don't feel great that customers get surcharged, but, of course, in certain jurisdictions in the U.S., and around the world, merchants have the ability to do that and some choose to do it,” McInerney said on the webcast. “Many choose to do it and then they choose to pull back on it because it's not a great customer experience.”

The change hasn’t been well-received by many of the processing companies and sales agents who provide intermediary services that allow merchants to process credit card transactions. Some of them have even mentioned the possibility of litigation over the issue. Still, most say there is little they can do to push back against Visa, the biggest U.S. card network company.

McInerney went on to explain why Visa put the cap in place. “The small adjustment that we made that you reference was one just making sure that when consumers do get surcharged it's something that's fair and equitable and that was the purpose of the change,” he said during the call.

Visa’s concern stems from the growing practice of some retailers, restaurants and other merchants to institute a surcharge on credit card purchases to recover the interchange and processing fees they are charged when customers use the card to pay for goods or services. Merchants who use the surcharge approach tend to be smaller businesses.

While the interchange fee imposed by Visa’s network on behalf of card issuers is about 2.25%, according to the industry research firm Nilson Report, some payment processors tack on additional fees and then sometimes merchants themselves may dip in for a cut of the income. As a result, consumers are sometimes facing 4% surcharges on their final tabs if they use a credit card.

Merchants have pushed back in a variety of ways, including by asking their customers to shoulder the additional fees. Some merchants are also turning to dual pricing structures where customers can pay different amounts, depending on whether they use cash or a credit card.

At a Midwest Acquirers Association summer conference last week, where processors gathered for panel discussions and a trade show, there was a lot of chatter about how merchants can deal with the changing scene with respect to surcharges. 

While surcharges were banned in some states in the past, the tide has largely turned with many states now allowing surcharging. In fact, New Jersey’s legislature took the trend a step further this month and passed a bill that would limit credit card surcharging to the cost of processing the transaction, if it becomes law. That measure largely reflects rules already imposed by Visa and Mastercard.

Meanwhile, on the federal level, card company interests are at war, once again, with merchants over the Credit Card Competition Act, which seeks to inject more competition into an industry dominated by Visa and its no. 2 rival Mastercard. That bill proposes to require that a network unaffiliated with those two behemoths be available for processing any credit card payment.

A law passed in conjunction with the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act has tried to impose more competition in the debit card industry with similar rules. One of those regulations was clarified by the Federal Reserve last year to underscore that it applied to online debit transactions as well.

That clarified rule went into effect at the beginning of this month. Since it went into place on July 1, it has had little impact on Visa’s operations, McInerney said on the webcast with analysts.

In the fiscal third-quarter earnings report Tuesday, Visa said net income jumped 22% over the year-ago quarter to $4.2 billion as consumer spending remained resilient. The company’s revenue for the quarter rose 12% to $8.1 billion.

By Lynne Marek on July 26, 2023
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