Surcharging or discounting? The name should matter less than the underlying intention
10 August 2010
I just came back from vacation having visited family and friends in Lithuania. There, at one of the retailers, I saw a rare sight - a list price and a discounted price if paying cash instead of a card. In Europe, I am very used to having to pay extra if paying by card, particularly a credit card. A number of online merchants, and especially the airlines, charge more for a purchase by credit card than they do for a debit card - a practice called 'surcharging'. And having recently spent 6 months in Denmark, I learned to remember that I should add a card fee to the retail price I see in front of me, whether buying a coffee or paying a taxi fare. (The good thing about Denmark though is that you can pay by card for virtually everything - I stopped carrying cash at all after the first couple of months). Card companies understandably don't like surcharging and explicitly prohibit such practices in many markets. If price discrimination is unavoidable, the card companies prefer 'discounting', i.e. cheaper prices for payment methods other than cards. The Frank-Dodd act in the US, which includes an amendment giving the Fed the rights to regulate debit interchange fees, has an explicit provision that the card networks cannot prevent merchants from offering discounts for different forms of payments. This is all well and good as long as the discounts truly reflect the differences in processing costs for different forms of payment. What we want to avoid is the type of 'discounting' when a plumber gives you one quote if you pay by cheque and a 17.5% discount (exactly the VAT amount in the UK) if you pay cash - we all know what's going on here. In addition to many other advantages, cards create an electronic record of payment, and unfortunately, that is not always desirable by some of the merchants in some parts of the world. When I worked in Russia a few years ago, I was told by the locals that cash was worth ~10% of its face value on the Russian black market, which by the way, according to some observers, was among one of the reasons behind an enormous popularity of kiosks accepting cash for payments, such as mobile top-ups and utility bills. As we continue the debate about interchange and cards more broadly, it is worth remembering that cards have value beyond a simple payment function. They have also played an important role in reducing the share of 'black' or 'grey' economies in many emerging markets, a point perhaps not entirely irrelevant to keep in mind in the developed markets, such as the US or the UK, as well.