Why Does Credit Cost More?

“I paid with my card, why did it cost me more?” This question is getting pretty common – and it’s no longer a simple one to answer, unfortunately.

Items or services sold cover the costs of running a business. It’s how business works. Historically, no matter how you paid, the price was the same. That’s changing.
It’s becoming more and more common here in New Zealand for merchants (that’s the place you’re shopping at) to pass on certain costs to customers, usually in the form of a surcharge.

So the question remains: why? Why does this surcharge only apply if using credit or contactless payment methods (PayWave etc)?
To answer that, we have to look at Visa and Mastercard. They provide the vast majority of ‘credit’ services for banks around the world – and there’s a cost associated with that. Any card that just has swipe (pure, simple old EFTPOS) isn’t backed by these two companies. Ones with chips on them, ones with contactless chips… Debit and Credit cards, however – those are backed by Visa or Mastercard. And these companies charge a fee for the privilege of accepting their cards.

That’s right. A fee just to be able to have a customer use one of those cards in the store (or on the website). Unlike EFTPOS, where the payment provider (Worldline, Eftpos NZ, Windcave etc) charges a flat fee every month, these two companies charge a percentage of every single transaction. And the percentage varies merchant to merchant, based on how often people use the facility in their shop. Oh, and this percentage is on top of the monthly fee they already pay. Dumber still is the fact with a Debit card the fee is only incurred if you use tap-n-go – if the card is inserted into the machine instead of using contactless, it’s just an eftpos transaction (instead of ‘credit’).

So, for the merchant, a sale normally covers item cost, staff labour, running costs, and payment platform (monthly merchant fees). When it incurs the ‘credit fee’, however, there’s a few percent of the transaction amount taken by Mastercard or Visa. An item that normally has $25 profit might suddenly have $20 instead, just because the customer used a card that has that fee. The merchant doesn’t think it’s fair to raise the price for everyone, and make people who don’t incur the extra cost subsidise the ones that do – so they turn on surcharging, and pass that extra cost on to only the customers who incur it.

Is it an elegant solution? No. Not by a long shot.
Is it the fairest one? Yes. Or, at least, the fairest one that’s been come up with so far.

So next time you see a prompt that says “Do you accept a surcharge of $x.xx for this transaction?”, spare a thought for the merchant who has to decide which course of action they want to take regarding that cost increase. Guaranteed it was not an easy decision.