Laurence Ashworth is a professor of marketing at Queen’s University in Kingston, Ontario. |
CANADA has some of the highest interchange fees in the world. Interchange fees are the fees that companies pay each time their customers pay by credit card.
The average interchange fee in Canada is around 1.5% of the transaction value, with fees typically between 1-2.5%. The makeup of these fees can be complex, but the bulk tends to go to the issuing bank, with the rest going to the credit card networks.
Until last month, credit card networks did not allow companies to pass these charges on to customers. That recently changed with the settlement of a class action lawsuit that alleged certain banks and credit card networks conspired to set high interchange fees and prevent companies from adding surcharges or declining high-cost cards. .
Several banks, as well as Visa and Mastercard, have admitted no wrongdoing but have agreed to contribute to a $188 million settlement fund to be distributed to Canadian businesses that have accepted Visa or Mastercard since 2001.
In response to the lawsuit, Visa and Mastercard agreed to remove their no-surcharge rule, leaving the companies free to pass on interchange fees to their customers. For example, on a $50 purchase, a consumer could pay a credit card surcharge of up to $1.25.
So what does this mean for Canadian consumers and businesses? Now that companies are allowed to do so, will they add extra to cover credit card charges or will they continue to absorb the cost? What should businesses know about consumer reactions to surcharges? And what are the costs and benefits of credit card surcharges for consumers?
Anticipate customer feedback
To help businesses predict how consumers will react to credit card surcharges, we can turn to behavioral economics, which combines elements of economics and psychology to understand how and why people behave the way they do it in the market.
Behavioral economics has long noted that people show strong diminishing reactions to both losses and gains. This means, for example, that the pain of losing $10 is far greater than one-tenth the pain of losing $100. A surcharge will almost certainly increase the “pain of paying” compared to including the fee in the overall price.
As a teenager working in our family owned furniture business in the UK I remember the time a customer angrily threw his credit card at my mum after she informed him of our card surcharge credit. But the psychology of loss and gain doesn’t provide the full picture here – part of the reason the customer was so angry was because he blamed us for the surcharge.
It’s a reaction companies should rightly fear. Blame can significantly reinforce perceptions of injustice. Nobody blames companies for adding taxes, but chances are customers will blame companies if they add surcharges on credit cards.
This means that consumers are unlikely to accept credit card surcharges, especially if they are simply added to existing prices. In fact, the UK banned credit card surcharges in 2018 on the grounds that surcharges were just a “scam fee”.
Suggestions for businesses
While companies can make an educated guess about how customers will react to surcharges, it’s hard to fully predict. To play it safe, most businesses in Canada will probably refrain from adding a surcharge for credit card use at this time.
According to a survey by the Canadian Federation of Independent Business, most businesses either don’t plan to add the surtax (15%), don’t know if they should (40%) or will simply follow what others are doing in their industry (26 percent). About one in five businesses (19%) said they intended to use the surcharge.
For businesses considering using the surcharge, there are better ways to implement it than simply applying it to existing prices. One approach is to reframe the situation for consumers by offering a cash or debit discount, instead of adding a surcharge for credit cards.
For the same reason that a separate credit card surcharge increases the ‘pain to pay’, adding a discount – usually seen as a small separate gain – will have an outsized positive impact on customer feedback.
While prices can be adjusted for this process to end up being objectively the same as an additional credit card surcharge, a settlement discount is also much less likely than a surcharge to be viewed as unfair by credit card users. credit.
A second option is for companies to reduce their prices before adding the surcharge, ensuring that customers are aware of the reduction. As long as customers perceive that a business made an effort to lower prices first, a credit card surcharge is more likely to be seen as a charge on the business, rather than an attempt to company to increase its profits.
Fees improve decision-making
If implemented appropriately, surcharges also have the potential to improve consumer decision-making by enabling them to make better decisions about their credit card usage.
Credit cards provide benefits to consumers at a cost. In exchange for convenience, credit, rewards and other benefits, customers pay annual fees, interest and, built into the prices, interchange fees.
Currently, interchange fees, which are substantial, are hidden from consumers, meaning consumers cannot fully account for the costs of their decision. Additionally, customers who pay with cash and debit cannot avoid interchange fees when companies are forced to include them in prices while they receive none of the benefits.
Credit card surcharges would therefore allow consumers to avoid the cost if they do not perceive the benefits as sufficient. In other words, surcharges or discounts might actually help consumers make better decisions by allowing them to properly account for the costs of using the credit card.
Laurence Ashworth is a professor of marketing at Queen’s University in Kingston, Ontario. Read it original article with full hyperlinks on The Conversation Canada. Photo of the author provided by The Conversation Canada.
