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

The fight over the interchange settlement is heating up again, with the biggest settlement opponent apparently trying to swing PayPal onto its team. On September 28, the National Association of Convenience Stores' lawyer, Douglas Kantor, claimed that the settlement's terms would hobble PayPal's in-store payments hopes. (PayPal hasn't said anything on the subject, which suggests how much of a reach this is.)

But even Kantor admitted PayPal could fix the problem with a simple change in its merchant terms. A much trickier problem for retailers post-settlement may be deciding what price to put on each item—or whether there even is a single official price.

Kantor told PaymentsSource that, under the settlement, retailers could levy a surcharge on customers who use a payment card. But the surcharge would have to apply to all payment brands, including PayPal, even though PayPal reportedly prohibits retailers from levying a surcharge for using its in-store POS system. Kantor's conclusion: Merchants will have to choose between PayPal or an interchange surcharge—and Visa and MasterCard crafted this provision to cut the legs out from under PayPal and other smaller Visa/MC competitors.

"PayPal is a tiny player that doesn't set the market," Kantor told PaymentsSource. "Visa and MasterCard set the market, and their rule prevents competition."

We're pretty sure PayPal just loves hearing itself called a payments pipsqueak. We're also sure PayPal has plenty of time to change any contract terms that would get in the way of its post-settlement POS plans, presuming the settlement ever actually goes into effect.

And we're very sure this tap-dance is really about interchange, which NACS's convenience-store members want reduced. It's also about surcharge avoidance, because convenience-store owners know that would mean either that a lot of customers would walk away from the POS unhappy about being nickel-and-dimed—or that they'd simply walk away.

The interchange settlement isn't the only legal proceeding that has players in the payments process complaining about someone else being victimized. On Tuesday (Oct. 2), a coalition of banking trade groups argued in federal court in Washington, D.C., that consumers aren't getting the benefit from interchange caps on debit-card transactions.

"The merchants have claimed all along that imposing government price controls on interchange fees would directly benefit consumers, yet there is absolutely no evidence that consumers are benefiting," said a statement from the bankers' groups. "So while consumers have gotten nothing from the retailers, the merchants are back asking the courts to add even more to the $6 billion windfall they are now enjoying."

That's the type of "you're grabbing interchange money from consumers that we used to be able to grab from consumers" argument that restores our faith in bankers.

But back to the PayPal problem.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.