Ian Hillis
Hi everyone. Welcome to PayFAQ: The Embedded Payments Podcast brought to you by Payrix and Worldpay. I'm your host, Ian Hillis, and today I'm talking with Yael Barak, Vice President of Product Management at Worldpay, about surcharging. Welcome to the show, Yael.
Yael Barak
Thank you. Thank you, Ian, it's good to be here.
Ian Hillis
Excellent. Well, today we're going to chat about surcharging, and to get started, I'm excited to introduce our audience to Yael. She's been building and deploying global payment solutions for the last 15 years. She's worked with businesses around the world, helping optimize the payment experience in verticals such as eCommerce, omnichannel, retail, digital goods, subscription platforms, you name it, as a product manager. At heart, Yael is obsessed with customer experience and customer-centric solutions. And at Worldpay, she leads the global SMB product team. So, you know, surcharge, surcharge, surcharge. The topic is everywhere right now, and I know it's of major interest to the software platforms and their customers. Let's start with what's happening in the market right now. Why is everyone suddenly talking about surcharging?
Yael Barak
Yeah, it definitely is a hot topic. I think, you know, it's very tightly linked to rising costs in general for SMBs, and definitely, as far as costs for payment acceptance and how that impacts their ability to run their business, it's no secret that that costs are rising for accepting payments, and so merchants are looking for all kinds of options to offset those costs and just be more efficient with payment acceptance cost.
Ian Hillis
Makes a lot of sense. And so, let's take a deeper dive into surcharging. I've heard various terms out there, and let's help dispel that for our listeners. What are the different types of surcharging we might come across?
Yael Barak
Sure, so I think typically you can, you can kind of, you can bucket them into two types of solutions. One is a solution which will give a customer a discount if they use cash. And that's called “cash discount.” So, you typically see it, you'll see it in places like gas stations, for example, where you'll drive up to the pump and they'll say, the price for gas is whatever, and then the cash price is a lower price. And so basically, they're telling the customer, if you use cash, you get a discount. And then there's another type of a solution, which is a surcharge, which means you message to the customer, if you're going to use a credit card, we're going to charge you a little more because it costs us a little more to accept credit cards, and that's called a credit card surcharge. So, you will see that in like restaurants, for example, and that is a very tightly regulated solution. So, you must have, as a business, you have signage in your business that informs customers as they walk in that this is a business that surcharges for credit card transactions. It's limited so a merchant can add a certain percentage of the transaction amount to the to the final sale amount as their surcharge. And the amount of the percentage is very tightly controlled by Visa, MasterCard, and also some states have their own regulation of how much you can surcharge. So, it's very tightly controlled by both the schemes, the networks and some state regulators as well. So, the third part, which is kind of like a surcharge, but a little bit different is what you might see as convenience fees. So, when you buy a ticket on StubHub or Ticketmaster, and the price of the ticket is whatever, $50, and then there's like a $12 surcharge. And the positioning is that the convenience fee, the $12 convenience fee, is meant to pay for the services of the marketplace, the StubHub or the Ticketmaster for facilitating the sale, for facilitating maybe the verification of buyers and sellers. It really is a fee that the third-party marketplace is charging. So just to kind of circle back cash discount is when a customer can choose between paying cash or card, and the cash is a lower price point. Credit surcharge, the merchant will augment the price of the sale by a set percentage if a customer is using a credit card. And then convenience fee, which is something totally different, there's an extra fee to a transaction which is meant to pay for someone else's services, like a marketplace.
Ian Hillis
That is an incredibly helpful summary. You touched a little bit on the regulatory and compliance piece. I'm wondering if you could tell us a little bit more about that legal landscape, what's governed, what's not governed, and by whom.
Yael Barak
So, it's very interesting because of the three solutions that I mentioned, the only one that has actual governance around it is credit surcharge. So, first of all, the first line of governance is by the networks themselves, Visa, MasterCard. So, they, like I mentioned before, will set limits on how much you can surcharge. The limits are typically 3% so you cannot, as a merchant, you're not allowed to charge more than 3%. I'll get into like different limitations by states in a moment. But generally, it's 3% and then you have to have particular signage in your store by the cash register that lets customers know that you are going to be surcharging them and how much you're going to be surcharging them. You're not allowed to surcharge more than your cost of acceptance. So again, if you ask yourself, how is it being monitored or regulated by the networks? Typically, it's actually through some secret shopping. They will send people to businesses that do surcharges, and they will go and buy something, and if they catch a merchant that's out of compliance, they might first give a warning, then they might do a fine, and then they might do an augmented fine. It's very fluid, but, but the rules are very clear. You, for example, you can't surcharge a debit card. Definitely cannot surcharge cash. You're only allowed to surcharge credit products, so credit cards, and then some states also came in with their own regulations. So, Colorado has its own limits. I believe it's 2% in Colorado. And there's, I think we're tracking at least 10 states right now that each of them are in different stages of regulation trying to really protect consumers from merchant abuse of the surcharging capability. They don't want merchants to be surcharging more than they should be or the consumer to experience a basically increased cost just because they choose to pay with a credit card.
Ian Hillis
There's a lot of complexity to keep track of. I'm wondering from the credit surcharge piece in particular, you touched briefly upon it earlier, but can you expand on some of the use cases, verticals, or underlying mechanisms. Where do you see that showing up typically?
Yael Barak
Yeah, so the surcharging we see, and I mentioned restaurants a minute ago, so definitely in restaurants, also in places like medical clinics, hospitals, where, you know, the transaction amounts tend to be higher, and so maybe it's driving customers towards credit cards as a as a way to, you know, fund larger transactions. And because of the cost of a transaction, of course, is typically a percentage amount. Then for the merchants, the bigger the transaction, the higher you know, in dollar value, the cost. And so, some hospitals or medical clinics are going to seek to offset the basically, the higher dollar amount cost of a transaction with surcharge and the cash discounts we see a lot at gas stations, some like bodegas, it's more of I would say, a retail type solution.
Ian Hillis
Really helpful. And, yeah, I want to go back to some of the complexities you were talking about earlier, and that is a lot to navigate. What's the role of a payments partner in surcharging? How should these software platforms be leveraging a partnership they may have from a payments perspective, when it comes to surcharging and all those nuances that you've highlighted?
Yael Barak
Yeah, so I think it's a very important question and also something to pay attention to, because the payments provider is really what protects the merchant and ensures that they're running a compliant program. So, for example, I mentioned the signage that merchants need to present at their point of sale. So, a good partner will actually send that signage out with the terminal or with the point of sale solution that is being delivered to the merchant. There's very specific requirements on, for example, how receipts should be printed out as well. So, the receipt needs to show very clearly the percentage and amount that was charged as a surcharge. It can't just fold it into the overall cost of the transaction. And then there's with Mastercard, for example, merchants need to be registered when they're in a surcharge program. So, working with a payments provider that that does all these things for you helps you mitigate that kind of overhead of having to manage that with your merchants, I think that could be a great advantage to a software platform.
Ian Hillis
You've mentioned that this is a complex and very evolving topic, and I hope that's very apparent to our listeners based on the conversation today, where can a software platform go to stay on top of these types of issues as they continue to evolve?
Yael Barak
So, I would recommend you talk to your payments partner. Your payments partner is definitely going to be able to advise you on what the rules are from the schemes and possibly also what some of the states that your merchants might be in are regulating. And your payments partner is going to also tell you what the risks are for your merchants if they do not comply with the regulation, we can't guarantee that merchants are compliant, but we can definitely give you the right information and guidance to make sure that you understand the program, you understand how to position it to your merchants, and altogether, the entire ecosystem is following the rule.
Ian Hillis
Hey, I can't thank you enough for being on the show here today. This has been highly informative, particularly against what is a very complex topic with a lot of nuances, and one that continues to evolve across all of that. So, we're grateful for your time and for you sharing the insights today.
Yael Barak
Well, thanks for having me, and it's been my pleasure.
Ian Hillis
Wonderful. We want to be a trusted resource for software providers who are out there trying to make sense of Embedded Payments and finance and to help them get the education they need to make the business decisions their customers and investors will thank them for. Thank you to everyone joining us today, and I look forward to continuing the conversation in our next episode.
Disclaimer: Surcharging is a highly regulated industry just like card processing. Worldpay for Platforms is constantly communicating with and monitoring new requirements in this industry. To understand more about what applies to your business and how to stay compliant, please speak directly with your partner manager.
