Merchant steering, which is a practice where retailers offer discounts to consumers if they use certain payment methods, could be getting eclipsed by surcharges and tipflation.
The PYMNTS Intelligence report “Credit Card Surcharges: How Cardholders React to Extra Costs” detailed the impact of merchant surcharges on cardholder satisfaction. It found that 56% of credit card users who say being asked to pay a surcharge made them highly likely to switch to another merchant. It also showed that surcharges are well-entrenched, as 85% of cardholders knowingly paid surcharges during their credit transactions.
Separately, the PYMNTS Intelligence report “Tipflation Is Changing Spending Habits of 1 in 6 Consumers” found that consumers across all income groups are cutting back on spending due to tips driving up the cost of goods and services. Data showed that 29% of consumers say tipping has gotten out of hand as it seems they are universally being prompted at the point of sale to sign off on some level of suggested tipping.
Seventeen percent of consumers said they have cut back on spending because tips are increasing costs. Of those who have trimmed their spending, 60% cut back their spending on food from table-service restaurants. Six in 10 consumers who are tipping less this year noted price increases drive their behavior change. Only 18% of consumers overall said wages have kept pace with inflation.
The PYMNTS Intelligence report “New Data Finds Income Drives Credit Usage for Essential Goods and Services” found that 47% of “choice financers,” who choose to use credit rather than finding it necessary to do so, pay for essentials with their cards.
Tipflation, inflation and the pressures of carrying more debt are pressuring spending at least in some respects, and at least in recent months. Walmart management warned Tuesday (June 25) that the current quarter’s comp sales growth will be weaker than it has been in recent quarters. May’s consumer spending overall was up only slightly from a decline seen in April.
Amid these macro trends, much attention is being paid, especially in courtrooms, to the ways in which credit card transactions, and the economics of those transactions, may be refashioned. A $30 billion so-called “swipe fee” settlement in the works between Mastercard, Visa and retailers was rejected by a judge Tuesday. Under the terms of the settlement, interchange rates would have been capped on credit card payments, and merchants would have been able to steer their customers to that enterprise’s preferred payment methods, with additional leeway to offer discounts or even pass along a surcharge on purchases made with certain credit cards.
Through the past decade, steering has been allowed, and conventional wisdom held that merchants would incentivize customers to embrace certain payment methods — cash or certain cards — with discounts.
However, the Federal Reserve Bank of Atlanta announced in a blog post this week that “after more than a decade, merchant steering with discounts remains rare.”
“In the years since 2012, discounting at the retail point of sale to steer consumers toward the merchant’s preferred — usually lower cost — payment instrument has remained rare,” the Fed said in the post. “New data from the Survey and Diary of Consumer Payment Choice, released June 3, show that the practice was unusual in fall 2023, with fewer than 5% of payments of any type receiving a discount.”
The percentages have barely budged, up only about 1% year over year for cash and credit card payments, and up about 0.5% for debit.
“Merchants that discount may need to trade off increased administrative costs against any savings that result from steering consumers to use lower-cost payment instruments,” the Fed said in the post. “Acceptance cost consists of an amalgamation of many items, among them hardware, software, theft prevention and employee training.”
The card networks themselves have contended that steering toward less proven options, or cheaper alternatives, may compromise security. In the meantime, the promised cost savings — at least for consumers, and as evidenced by the Fed data — have not materialized from the merchants.
