GAO Interchange Study Option 3: Loosening Restrictions on Merchants for Card Acceptance

Prohibiting card networks from imposing rules on merchants, such as those that limit merchants’ ability to discriminate among different types of cards or levy a surcharge for credit cards is one of the most popular remedies designed to hold Interchange rates in check.

The GAO reports that removing the anti steering rules appears to have various advantages. Merchants could surcharge or refuse certain cards, make cardholders using rewards cards more aware of and to bear more of the cost of the rewards from which they benefit. This option also may require the least intervention, as merchants could decide whether to add surcharges or refuse certain cards based on their own customer mix. In addition, the potentially anticompetitive effects of these rules are also the subject of a current DOJ investigation and some private lawsuits. Changing these rules would solve these outstanding issues.

This option still presents many challenges. For one, certain states prohibit surcharging for credit cards including California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas.

Consumer protection issues are certain to arise if merchants improperly implement surcharges, fail to disclose or advertise pricing without surcharges. Others are concerned about the ability of merchants operating in less competitive markets to set surcharges at a higher level than would be needed to cover their merchant discount fees, thus resulting in a new stream of revenue for merchants.

This option would allow merchants to discriminate among cards and add a surcharge for more expensive credit card transactions, only if merchants can determine the card type and its associated Interchange rate. Trying to train staff to identify specific higher Interchange rate card types, like rewards cards at the point of sale and then clearly communicate their surcharge policies is problematic. In addition, Interchange rates vary not just by card type (debit, credit, rewards, business, etc.) but also by the data submitted with the transaction like address verification (AVS), how the approval code was obtained and the timeliness of the transaction for settlement. So merchants may have to set surcharges at effective or real rate levels, discouraging all card types equally and not having the desired effect.

Many merchants of various sizes reported that they would not apply surcharges or refuse certain cards because they feared losing business, or because they thought that this could slow their checkout times. Would you shop at a store that refused to honor your reward card, when another merchant would? Today merchants can opt out of accepting credit cards and only accept the lower costs signature debit cards yet few do so. Competition among merchants will mean that surcharges wouldn't be adopted on a large scale either.

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