Discover's decision yesterday to waive the "no surcharge" rule in its credit card transactions drew fire from consumer advocates, who disfavor what appears to be an additional tax imposed at the point of sale.  The background here is that credit card issuers traditionally have barred merchants from charging consumers a fee for using credit cards.  If interchange fees associated with credit cards are passed through to consumers in the form of increased sales prices, users of cheaper payment systems (debit cards, and to some degree, cash and checks) effectively are subsidizing credit card users.  in an odd alignment with credit card issuers, many states ban those surcharges outright.

In any event, at least in states that don't ban surcharges, Discover's announcment means that merchants now will be able to impose a surcharge on Discover card payment transactions, possibly, incentivizing consumers to use other forms of payment (possibly even other credit cards).  The complaining consumer groups miss the point, in my view.  By passing on to consumers a share of the costs of the payment system that they choose, consumers are much more likely to consider the full costs of the competing payment systems.  If this causes more consumers to use debit cards and fewer to use credit cards, that could be a good thing.  It could have positive ramifications in terms of security (by encouraging use of PIN-based debit products), reduced retail prices, and possibly decreased levels of financial distress.

Adam Levitin has a provocative paper on this point, in which he argues that reforming these rules would solve a lot of the inefficiencies related to excessive credit card use.  He has a lot of great material here, well worth the read.  My take on it is that his conclusion is a bit overstated, largely because I don't think that a substantial number of merchants will  be willing to impose surcharges anyway.  Do we really expect the merchants that rely on the use of credit cards to increase consumer spending to charge surcharges?  But the paper is well done and raises an important concern.

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