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No, The Interchange Settlement Won’t Kill PayPal POS Plans, But It Raises Retailer Pricing Problems

October 3rd, 2012

But back to the PayPal problem, which—even if it’s easily fixed—points to a bigger issue with surcharges and the interchange settlement. The reality is that the surcharges for plastic won’t necessarily affect the prices customers actually pay. They’ll just change the prices retailers advertise and put on shelf tags—and what retailers call the difference between that and what the customer pays.

Post-settlement, retailers will be able to tack on a surcharge for paying with plastic. Pre-settlement, retailers can already give customers a discount for not using plastic. That’s increasingly common among non-merchants who take plastic, such as doctors and dentists, as well as some restaurants and gas stations—though the gas stations typically discount for gas but not for any other items customers buy in the convenience store attached to the gas station.

So the only difference between a surcharge and a discount is in what the “official” price is: the price before the cash discount or the price before the plastic surcharge.

And the official price may already be a dead concept, because that surcharge or discount is just the most recent thing making it meaningless.

For example, some grocery chains (Safeway jumps to mind) already have two prices on the shelf tag: the price for loyalty-card holders and the non-loyalty price. Yes, it’s impractical to add a third price (loyalty/cash/plastic). But that would also be inadequate if a retailer wants to be exhaustive, especially as both loyalty programs and consumer price-comparison services get smarter.

What happens when CRM data triggers an automatic coupon or discount for a particular customer buying a particular product? Suddenly the price is lower still, but only for that combination. Or what about when retailers have a competitor price-matching policy or give an even deeper loyalty discount for being super-loyal? Then the shelf-tag price becomes just an upper limit, especially as customers start using mobile phones to scan products.

Although an upper-limit shelf-tag price sounds like a nightmare when it comes to showrooming—won’t everything in the store look like it’s less expensive online?—that’s only a problem as long as those shelf tags are credible. Piling up discounts for cash, loyalty, super-loyalty, competitor-matching, coupons, etc., turns price comparisons on their head. If customers know their in-store price will probably be lower than the shelf or price tag, and they know the E-tailer’s final price may (or may not) tack on sales tax and shipping, it gets harder and harder for them to make a comparison that kills the in-store deal.

Besides, comparisons aren’t always rational. All these discounts tend to go over big with shoppers regardless of what the final price is. As JCPenney learned when it went to its no-coupons policy, it’s really hard to get customers out of an every-discount-is-better mindset.

Ironically, the one thing that won’t fit into a pile-up-the-discounts approach is a surcharge for plastic. As loyalty programs teach customers to expect discounts, that one sticks out like a very sore thumb. A discount for cash? Sure, that’s just another discount. A surcharge for plastic? How dare you, Mr. Retailer!

That’s part of the reason big chains are mostly planning to avoid plastic surcharges. Well, that and the fact that cash is inconvenient to handle and easy to steal.

But settlement or no, chains still have to deal with the rest of the problems surrounding the concept of an official price—the one no one will expect to pay.


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