CREDIT CARD PROCESSING
Understanding Dual Pricing Legalities
After the 2008 financial crisis, lawmakers defined new regulation to prevent another market downturn not seen since the Great Depression. Part of that legislation included new rules on how much the payment networks can charge for using debit cards, which was seen as being equal to using cash in today’s virtual world.
QUICK LINKS: PayLo Beginnings I Processing Types Defined I Savings I Card Brand Compliance I State Compliance
The Durbin Amendment
It all starts in 2011 with the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Durbin made two significant changes to the merchant services industry: First, it capped interchange fees charged to merchants for debit card payments made by consumers in the United States, dropping the average rate from $0.55 to $0.21 per debit transaction. Second, Durbin explicitly states that offering discounts for using a specific form of payment is legal.
Battling Rising Processing Fees
Durbin set the landscape for what would happen next, an unintended consequence of trying to do the right thing. By federally mandating that lower rates are required for debit card transactions, it also did not allow the same for credit card transactions. Issuing banks and payment networks made up for the lost revenue on debit card transactions by raising the fees associated with credit card transactions. For the consumer, this was a win-win; not only did it not affect a cardholder, but now issuing banks offered incredible cash-back rewards, points, and other incentives for using credit cards. For the merchants accepting these payments, however, their rates continued to climb beyond what Durbin had intended. Those incentives and rewards cardholders enjoyed needed to be funded from somewhere.
Enter the second important piece of Durbin; allowing discounts to be offered for using specific forms of payment. Durbin allowed for incentives or discounts for paying with specific payment types, like cash. A Cash Discount allowed a merchant to incentivize a customer to not pay with a credit card and avoid the payment network fees. But with attitudes about carrying cash changing in an increasingly digital world, if the customers didn’t see the value in paying with cash, they would still default to paying with a credit card. This would still burden a merchant with the cost of accepting those expensive rewards cards.
The Birth of PayLo
In 2016, PayLo was rolled out to a test market in Los Angeles, California to solve this problem. What PayLo would achieve would change the landscape of payment acceptance. PayLo allowed a merchant to offer a discount for cash payments, and if the customer chose to pay with a card, a fee would be assessed that was no more than the cost of payment acceptance for that merchant. This meant that the cost of accepting those credit cards, an average of 4% of gross sales, was passed to the cardholder and presented as a convenience fee for taking a more accessible form of payment. This concept had been introduced previously; movie theaters, on-line ticket sales, utility companies, and rent payment sites had been doing this for a long time, and the concept was sound. It primed the customer to accept these fees more readily because it was becoming increasingly prevalent. Since PayLo’s debut in the market, the rules surrounding Cash Discount programs and the like have changed. Increasing scrutiny in card brand rules and regulations, local and state laws, and consumer attitudes towards convenience and service fees have impacted programs and forced many to evaluate how to run a successful
The Evolution
Since PayLo’s debut in the market, the rules surrounding Cash Discount programs and the like have changed. Increasing scrutiny in card brand rules and regulations, local and state laws, and consumer attitudes towards convenience and service fees have impacted programs and forced many to evaluate how to run a successful program. Today, PayLo has evolved to become PayLo Dual Pricing, a new way of offering a cash discount that allows for more flexibility from the consumer and protects a merchant from compliance issues from various regulatory bodies. PayLo Dual Pricing is set to directly benefit the merchant at every step of the payment journey, so they don’t need to worry about how to accept payments but instead focus on running their business.
Traditional Pricing VS Surcharge and Cash Discount
Merchants have been looking for ways to decrease their costs to accept payments since the first card was swiped. Some merchants set minimum transaction amounts that prevent a customer from using a card for sales under a specified dollar amount, and some merchants don't allow specific cards to be accepted. While both of those options sound great, they have restrictions set in place by the payment networks. A set Minimum Transaction Amount can only be a maximum of $10 and cannot discriminate against card brand types or issuers. As well, MTAs can only be applied to credit card transactions.
Merchants are not without options, though. A merchant can choose to implement one of four pricing options; traditional pricing, surcharging, cash discounting, or dual pricing. With surcharging, cash discounting and service fee pricing, however, there are many more points of potential failure that could result in a merchant receiving fines, or worse: closure and a ban from accepting cards. Merchants choosing to utilize surcharging or cash discounting must implement a series of changes in their business, and if those changes are not done correctly or employees at that business are not trained, it could spell disaster for that business.
Traditional Processing
Traditional processing refers to a variety of pricing plans where a merchant is responsible to pay for all related fees and dues for processing electronic payments. Three Tiered Pricing, Interchange Plus and Flat Rate pricing all either deduct funds after each batch or at the end of the month. The current average processing rate hovers around 4% of all sales. Aside from the standard fees for the card brands, other fees from acquirers or even the ISO/ Sales agent can increase a merchant's month end costs.
Surcharging
Surcharging is the practice of adding a fee to a credit card transaction at the time of checkout. Surcharges ONLY apply to credit cards, and it is illegal to apply the fee to debit cards, EBT cards, and gift cards. Merchants that run a surcharge program are required to register with their acquirer and wait 30 days after registration before they can start applying the surcharge. Proper disclosure is also required at the point- of-sale and the point-of-entry.
Cash Discount
Cash Discount is the practice of offering a discount to customers who pay with cash instead of using a card. Unlike Surcharging, a Cash Discount is applicable to ALL card types and does not require registration. The discount on a transaction is applied on the point- of-sale device, where the posted price is discounted on payments made with cash. The discount applied is often the same rate for payment acceptance made with a card, between 3-4%.
The Dual Pricing Difference
Dual Pricing, however, is a way for merchants to reduce their overhead while staying completely compliant with the payment networks. Merchants using dual pricing have two options, displaying the card price in store or displaying both the card and cash price in store to the customer. The higher of the two prices is the Card Price, and the lower of the two is the Cash Price. That transparency alleviates the burden from the customer to decide how they want to pay by having to calculate their cost at the time of checkout.
From there, the payment terminal or point-of-sale device displays to the customer their final sales total in both Card Price and Cash Price options, further simplifying the experience for the customer. There is no added fee associated with a making a card payment, the prices are just simply different from cash pricing.
If this sounds incredibly similar to cash discounting, that's because it is! Dual pricing takes advantage of a truly compliant cash discount program, backed by payment network endorsements and presenting it to the customer more clearly. Under cash discounting, only one price is shown to the customer, and the sale amount in cash is not presented as an option until after checkout. With dual pricing, customers can always see the difference in price based on their choice of payment, allowing them to decide how they want pay. They can use a credit card and earn points or cash back rewards, or benefit from an immediate discount by paying with cash. The secret lies in the presentation to the customer. By clearly showing how their payment choice makes an impact on their wallets, it creates less friction and engages the customer more with the business. For small businesses who rely on more cash in-hand, this affords them the opportunity to thank them for shopping small.
Business Savings
The cost of processing credit cards adds up. All in, your typical business owner is facing:
- Interchange+ Margins
- Interchange Costs
- Card Assessment Fees
- AVS Cost Voice Authorization
- Cost Payment Handling Fees
When the burden of these fees is transferred from from one business owner and dispersed to many customers, the savings to the business is cumulative and significant.
Card Brand Compliance
Visa has the strictest rules among the major card brands that operate in the United States. Because of this, PayLo Pro closely follows and complies with all of Visa's requirements surrounding Surcharging, Cash Discounting and Dual Pricing. Visa's rules are clear: any increase in price from the posted price of an item or sale at a business is considered a surcharge. A merchant is allowed to post a notice of a discount for cash ONLY if the discount is for the posted price. For example, a posted price for a doughnut is $2.00, and the Cash Discount price can be set below $2.00. If the posted price is $2.00 and when payment is made via a card the price is above $2.00, it is considered an illegal surcharge. Surcharging is allowed in 48 states and illegal in two. In those 48 states, merchants are required to provide their acquirer 30 days notice before they can surcharge on a sale. Visa and the major card brands consider Dual Pricing to be a variety of Cash Discounting. The posted regular or card price is allowed to be higher than the cash price. If only one price is posted at the business, it must be the regular or card price and any sales made in cash must be lower than that posted price. It is strictly prohibited by Visa's Rules to add a fee or increase the price for payments made by card on the posted price. When it comes to assessing a convenience or service fee, like a ticketing service uses, only limited circumstances and MCCs are permitted to use them.
Excerpts from Visa's Rules and FAQ Web page
Excerpts from Visa's Rules and FAQ Web page
..."A MERCHANT MAY OFFER A MONETARY BENEFIT IN THE FORM OF A DISCOUNT... AS AN INDUCEMENT FOR THE CARDHOLDER TO USE AS A MEANS OF PAYMENTS OTHER THAN A VISA CARD."
-Visa Rules 1.5.4.14: Incentive to Use Other Payment Methods: US Region
"A MERCHANT IS PERMITTED TO OFFER DISCOUNTS FOR PAYING IN CASH, HOWEVER THE DISCOUNT MUST BE GIVEN AS A REDUCTION FROM THE STANDARD PRICE."
-Visa Frequently Asked Consumer Questions
A MERCHANT MUST NOT ADD ANY AMOUNT OVER THE ADVERTISED OR NORMAL PRICE TO A TRANSACTION, UNLESS APPLICABLE LAWS OR REGULATIONS EXPRESSLY REQUIRE THAT A MERCHANT BE PERMITTED TO IMPOSE A SURCHARGE. ANY SURCHARGE AMOUNT, IF ALLOWED, MUST BE INCLUDED IN THE TRANSACTION AMOUNT AND NOT COLLECTED SEPARATELY.
-Visa Rules 1.5.5.2 Surcharges
State Laws & Regulations
Only two states have explicit rules that affect Dual Pricing: New York and Maine. Additionally, in Connecticut and Massachusetts, surcharging is strictly prohibited. In Maine, their surcharge ban is left for open interpretation and a Dual Pricing program is allowable under the law and covers merchants choosing to surcharge. In all 50 US states, Dual Pricing is a 100% legal and allowable practice subject to following specific guidelines from either the card brands or local laws. All Dual Pricing merchants must also still comply with Card Brand Rules.
