For those of us who earn miles, points, or cash back on credit card purchases, the past two years have witnessed an unsettling series of events that all seem to be leading to one eventuality: the onset of surcharges for Visa, MasterCard, and American Express payments.
Over a year ago, Visa and MasterCard settled one of the largest private antitrust lawsuits in U.S. history, paying out $5.7 billion to merchants who claimed that both companies had colluded with banks to eliminate competition and increase the price of credit card transactions. Part of that settlement allows for merchants to add a surcharge when customers pay with a credit card.
However, the settlement also stipulates that any merchant who decides to tack on a surcharge to Visa and MasterCard transactions must also do the same for American Express, if they accept American Express. In turn, American Express has its own rule stating that all electronic payments must be treated equally, meaning surcharges would then have to be added to debit cards transactions as well. In a truly bizarre Catch-22 scenario, both Visa and MasterCard specifically prohibit surcharges on debit cards, rendering the entire argument moot.
That is, until this past Thursday. Just one week after a judge finally approved the Visa and MasterCard settlement from last year, an agreement was also reached in a separate class-action lawsuit involving American Express. While there will be no massive payout in this settlement, American Express has quietly relented on their requirement that surcharges be levied across the board, including debit card transactions.
This essentially clears the way for retailers to establish a two-tier pricing system, one for cash, checks, and debit cards, and another for credit cards. While some merchants claim that this will allow them to offer a discount to those paying with cash, there are serious doubts as to whether any savings will actually be passed down to consumers.
Many businesses already take credit card swipe fees into account by building them into the price of goods and services they sell, and there may be little incentive for them to offer a real discount for cash transactions rather than to simply tack on an additional surcharge for credit card transactions.
So what does this all mean for credit card rewards programs? Well, first off, it may get a little more confusing at the register in the future. If the price differential between cash and credit card is large enough, any rewards you earn may be completely worthless given the extra money you are paying up front. While it remains to be seen if the two-tier pricing system catches on with mid-to-large-size retailers, this certainly has the potential to become a game-changer.
In countries like Australia, credit card surcharges are ubiquitous and seemingly arbitrarily set by the retailer, raising the possibility of deceptive pricing. Often times, it makes absolutely no sense to use a credit card given the considerable difference in price, and while traveling across the country, I found myself relying more and more on cash.
If there is a substantial shift in the U.S. to cash and debit card payments, credit card companies may be compelled to lower their fees, which, in turn, may force them to reduce the rewards and benefits offered on even the most premium of products. We witnessed the same effect on debit card rewards programs when the Durbin Amendment went into effect, reducing the swipe fees that banks collected from merchants.
It is still too soon to become alarmed, however, as some states still maintain a ban on all credit card surcharges, despite the settlements. Lawsuits challenging these bans may alter the payments landscape in the future, but that could take years. In addition, a judge must still approve the American Express settlement, not to mention the possibility of further delays due to the appeals process.
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