How Dual Pricing Benefits Financial Institutions’ Commercial Customers

July 7,2024

Dual pricing is a strategy where merchants present two price options for the same product or service: one for cash payments and another for card payments. The price for card payments includes the costs of card acceptance, such as merchant service fees. Coastal Payment Systems refers to this approach as Customer’s Choice, highlighting that consumers have the option to pay with cash or incur a small fee for the convenience of card usage. This pricing model is gaining traction in the US merchant payments sector as a means for merchants to counterbalance the steep costs of card payments without increasing overall prices. This article will explore the evolution and present landscape of dual pricing in the US merchant payments field, encompassing its legal and regulatory framework, advantages and drawbacks for both merchants and consumers, and the outlook for future trends.

The high cost of accepting credit cards stems from various fees involved in processing transactions. These fees include:

1. Interchange fees: Charged by the card issuer, like Visa or Mastercard, to the merchant for processing payments made with their cards. The amount of these fees varies based on card type, transaction size, and other variables.

2. Assessment fees: Levied by card networks, such as Visa or Mastercard, for utilizing their networks to process transactions.

3. Processing fees: Imposed by the merchant's bank or payment processor for managing the transactions, which may consist of monthly or annual fees, in addition to fees per transaction.

4. Chargeback fees: Incurred by the merchant's bank or payment processor when a customer contests a charge and seeks a refund.

The accumulation of these fees can increase the overall cost of accepting credit cards for merchants. Under Traditional Pricing, the processing fees that merchants pay are utilized by credit card companies to encourage their customers to use their cards by providing incentives such as cash back, travel points, or merchandise, which varies based on the card issuer and card type. Moreover, merchants often need to invest in equipment and software to handle credit card transactions, further contributing to the expenses.

Establishing the Basis for Dual Pricing

In the United States, the merchant payments sector has long been controlled by card networks like Visa and Mastercard. These networks impose a fee on merchants for each transaction, termed the merchant discount rate (MDR), along with additional charges for chargebacks and monthly statements. For merchants, particularly small businesses, these fees can accumulate to a considerable expense. Moreover, the Durbin Amendment, part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, limits the MDR that can be levied on debit card transactions.

Merchants in the United States have employed dual pricing for many decades, especially in retail and services. The approach gained traction in the 1990s and 2000s with the rising use of credit and debit cards, leading to increased costs for merchants when accepting these payment methods.

In the United States, dual pricing legality is subject to a complex array of federal and state laws and regulations. The Truth in Lending Act (TILA) is a key federal statute that mandates disclosure of credit transaction terms and forbids discrimination against credit users. Furthermore, the Electronic Fund Transfer Act (EFTA) obligates merchants to reveal the terms of electronic funds transfer (EFT) transactions, including those made with debit cards.

At the state level, numerous laws and regulations oversee dual pricing, including consumer protection laws, usury laws, and sales tax laws. Certain states, like California, explicitly prohibit surcharging, while others, such as Texas, explicitly permit it. In states where surcharging is permitted, merchants are generally required to clearly and conspicuously disclose the surcharge and apply it uniformly to all customers using credit or debit cards. However, following the Supreme Court's decision in Expressions Hair Design v. Schneiderman, merchants have been granted the right to impose surcharges on customers who pay with credit cards, as protected under the First Amendment.

Dual pricing involves offering two different prices for the same product or service, often a cash price and a card price that includes payment fees. This strategy is commonly used to mitigate the costs associated with card payment processing. Surcharging, in contrast, entails adding an extra fee to the total purchase amount when customers opt to pay using a credit or debit card, which serves to offset the card processing charges. Essentially, dual pricing provides an incentive for customers to pay with cash, whereas surcharging directly transfers the card processing expenses to those who pay with a card.

Dual pricing is a strategy merchants use to display two prices for their products or services: a lower price for cash payments and a higher price for card payments. The higher card price helps offset the costs associated with card transactions. This approach is often adopted by businesses with low-margin items, like gas stations and convenience stores. Over the past three years, an increasing variety of businesses such as restaurants and bars have started using dual pricing, thanks to new point-of-sale systems that can display both prices on the terminal, giving consumers the choice of payment method and corresponding price.

Dual pricing offers merchants significant benefits, such as the ability to recoup some expenses related to card acceptance, including merchant service fees. This strategy can lessen the financial burden of these costs, helping merchants stay competitive without increasing their prices. Moreover, dual pricing may incentivize customers to use cash, which is often cheaper for merchants to process and may decrease fraud risk.

However, dual pricing also presents challenges. The complexity of legal and regulatory frameworks can be daunting, making compliance a difficult task for merchants. Furthermore, effectively communicating the dual pricing policy to customers is crucial; failure to do so can result in customer confusion and dissatisfaction.

Dual pricing offers several advantages for consumers, especially for those opting to pay in cash. Merchants incentivize cash payments by setting lower prices, which not only reduces their own costs but also diminishes the likelihood of fraud. Furthermore, dual pricing enhances transparency, revealing the actual costs associated with card payments and enabling consumers to make better-informed choices when purchasing goods and services.

However, this can also be viewed as a disadvantage, as it may cause confusion and potentially lead to perceived discrimination among card users. Moreover, the practice might be considered discriminatory towards certain demographics, particularly the unbanked or underbanked individuals who may lack access to cash.

In conclusion, dual pricing is gaining traction as a pricing strategy in the US merchant payments sector. It enables merchants to counterbalance the expenses associated with card payment acceptance, proving particularly beneficial for small businesses offering low-margin goods or services. Nonetheless, merchants must familiarize themselves with their state's surcharging regulations prior to adopting this approach. Financial institutions allied with Coastal Payment Systems gain the advantage of comprehensive in-house customer support, which not only assists but also educates their commercial clients to ensure full compliance at all times.

Providing merchants with the choice to stick with Traditional Pricing or to adopt Dual Pricing is a beneficial feature of the Bank's Merchant program. It puts merchants in the driver's seat, allowing them to select the processing strategy that aligns best with their business needs. It's important to note that if a merchant opts for Dual Pricing and later decides to switch back to Traditional Pricing, the transition is straightforward, incurs no costs, and does not necessitate the purchase of new hardware. Nonetheless, after transitioning to Customer’s Choice—Coastal Payment Systems' version of Dual Pricing—fewer than 1% of merchants return to Traditional Pricing.