By Robert Unger
Credit card payments are growing faster than any other payment type according to the latest Federal Reserve Payments Study, which tracks longitudinal trends in consumer and business payments.
For B2B, card payments are fueled by several payer benefits including rebates, cash flow considerations, point/rewards programs, cost savings compared to checks, extended payable float time and convenience. While sellers/suppliers may benefit as well with respect to risk mitigation and improved DSO, there is nonetheless a marked increase in the cost of payment acceptance for customers paying invoices with credit cards. This can lead to margin and profit erosion.
What are seller/supplier options for minimizing the impact of accepting card payments?
In previous Payments Help Blogs, we identified some opportunities and best practices with respect to card payments:
- Explaining and emphasizing the importance of your Effective Cost
- Negotiating interchange pass-through pricing
- Optimizing interchange with Level II and Level III data
In this blog, we will focus on surcharging card payments as another option for mitigating card payment acceptance costs, and making cards a more competitive payment receipt option.
Scott Blakely, Esq., is a principal with Blakely LLP, where he practices creditors’ rights, and advises on credit card acceptance, including card surcharge.
RU: Scott – what types of companies do you work with, and what are they telling you about card payments?
SB: We work with companies of all revenue sizes, and most industries. Since 2013, we have advised clients regarding their card acceptance strategy, including surcharge program. The past three years, customers have increased card use in the B2B space, forcing suppliers to reevaluate their card acceptance policy.
RU: What are the company dynamics, where the credit/sales team wants to accommodate customers’ payment preferences, but the finance team struggles with paying interchange?
SB: For many companies, annual card acceptance costs exceed seven figures. Credit, finance, and sales teams, with the support of management, have joined forces to evaluate card acceptance alternatives, with an eye towards making card costs comparable to other payment forms, such as ACH. Part of the evaluation for the supplier is the impact of a surcharge rollout on trade relationships, and whether sales may be lost as a result of surcharging.
RU: We’re all familiar with instances in consumer-to-business transactions where consumers have to pay a convenience fee for using a credit card, for example, when a utility charges a fee for an online payment. There are also many examples of companies offering a discount for using cash instead of a card, like at gas stations. How does surcharge differ from convenience fees and cash discounts?
SB: “Surcharge” relates to the interchange fee or cost of acceptance. In the B2B space, most companies are surcharging customers to capture as much of the card expense possible.
RU: When did surcharging become an available option for B2B payments, and can a surcharge be implemented across all the card brands, or are there exclusions?
SB: Starting in Q4 of 2013, Visa and Mastercard changed their network rules to allow surcharging. American Express and Discover have followed.
RU: Are there kind of limitations or exclusions for surcharging B2B card payments?
SB: Debit cards may not be surcharged. Cards processed outside the US may not be surcharged.
Also, in the 1980s, ten states enacted no surcharge legislation. Four of the 10 states have had their no surcharge laws challenged on constitutional grounds. In 2017, the US Supreme Court found New York’s no surcharge law unconstitutional. Likewise, the 11th Circuit Court of Appeals found Florida’s no surcharge law unconstitutional, and the 9th Circuit Court of Appeals found California’s no surcharge law unconstitutional. The momentum is further court challenges with the remaining six states as to their constitutionality.
RU: Have many companies implemented a B2B card payment surcharge, or is this still in the early adoption phase?
SB: All companies are evaluating a card acceptance strategy, including surcharging.
RU: How does surcharging work?
SB: Companies looking to surcharge must notify Visa and Mastercard 30 days prior to surcharging, and notify cardholders of the surcharge. The surcharge must be a line item percentage in the invoice. (Click HERE for a more detailed list of surcharge requirements)
RU: Can you share any results from companies that have implemented a surcharge program? In particular, what’s been the customer reaction?
SB: We recently had a call with a manufacturer that was giving notice of intention to surcharge. They had received pushback from customers. Customers threatened not to pay the surcharge, or to move to a competitor, or reduce the amount of business with the supplier. For what it’s worth, we have not seen a loss in business for our clients. Instead, there has sometimes been a change in payment form, and the customer may pay by ACH instead, for example.
The surcharge forces the buyer to reconsider their strategy and ROI. At the company level, there may be a reassessment, but there are still many factors that still favor continued use of the card despite the surcharge. Buying time can improve cash flow, so paying the surcharge may be worthwhile.
Other times a buyer may use a personal card that typically provides personal benefits. Often in this situation that card holder can be reimbursed for both the invoice and surcharge expenses, so they’ll still use the card. It really depends on the size of the customer and the card used, but sometimes payment choice changes.
RU: What are your recommendations for businesses that are confronting increasing card payments, and evaluating a surcharge program?
SB: This scenario is obviously being driven by the customer use of cards. In response to what I’ve heard from senior management in credit, sales and finance, it’s important to test the appetite of surcharge with customers.
Also, it’s very important to calculate your “cost of acceptance.” Surcharge is a response suppliers can make to recover card costs, and the amount to surcharge is based on calculating the average of the preceding six months of card costs across all card brands. Companies can apply a surcharge up to the cost of acceptance, but not more.
RU: Once a decision has been made, what are the key considerations for a surcharge rollout within the business, and with customers?
SB: Besides notifying the card networks and calculating the cost of acceptance, there are a number of things the company should consider, like updating customer agreements, especially with new customers to get agreement upfront regarding surcharge.
It’s our view as well that a best practice is to create a policy so that all team members that may touch the customer and the card know that there is the practice of surcharging to provide uniformity and consistency.
Next steps also depend on the supplier strategy. If you go all in on card payments, and expect card payments to increase, there is a threshold question of moving card payments acceptance to a portal. There’s no requirement to do so, but a portal approach is better than taking credit card numbers over the phone or the company website. Outsourcing card acceptance can reduce the burden associated with PCI compliance and addressing state privacy laws. The cost of administration for suppliers can be lowered with a portal.
RU: Any final thoughts for readers on surcharge?
SB: Because of the dramatic increase in customer card use, suppliers are forced to reevaluate their card acceptance strategy. Finance teams are mandating a strategy to recapture at least some of the card costs.
In the quest to make payments margin neutral, companies should certainly consider offering ACH too as an alternative to surcharging.
RU: Naturally, I like that message!