As legal and regulatory restrictions have become relaxed in recent years, we’ve been noting the increasing prevalence of surcharges on payment cards here in the U.S.

Perhaps it was inevitable that the practice would become more commonplace in our market, which is known around the world for relatively high rates of card interchange and a relatively light touch in financial services regulation (Yes, you heard that right. Spend a little time in Europe or Australia if you are skeptical).

Beyond the anecdotal observation that we all seem to be experiencing surcharging more often (with varying degrees of disclosure), it’s been difficult to determine how commonplace the imposition of these fees actually was. We recently got some high-level data from a report by J.D. Power noting that, “many smaller business owners…are seeking more support and guidance from their merchant services providers and passing along their processing costs to customers.”

Surcharging is a tricky issue with a lot of different stakeholder perspectives to consider. In this episode, Emily Tsitrian, co-founder of Yeeld, joins Bryan Derman and Drew Edmond to share industry insights on this emerging practice and how businesses can best implement surcharging while staying compliant.

Bryan Derman: Hello everyone, I’m Bryan Derman, a partner at Glenbrook and your host for this episode of Payments on Fire. As legal and regulatory restrictions have become relaxed in recent years, we’ve been noting the increasing prevalence of surcharges on payment cards here in the US. Perhaps it was inevitable that the practice would become more commonplace in our market, which is known around the world for its relatively high rates of card interchange, and a relatively light touch in financial services regulation.

Beyond the anecdotal observation that we all seem to be experiencing surcharging more often, with varying degrees of disclosure, it’s been difficult to determine how commonplace the imposition of these fees actually was. We recently got some high level data in a report from J.D. Power that indicates 34 percent of respondents in their most recent Merchant Satisfaction Survey were utilizing credit card surcharges, with Power noting that many smaller business owners are seeking more support and guidance from their merchant services providers and passing along their processing costs to customers.

From my perspective, surcharging is a tricky issue with a lot of different stakeholder perspectives to consider. Payment processing is a legitimate input cost that merchants should take account of when setting their prices. Legislatures, courts, and regulators have upheld their right to differentiate their prices by payment method. That said, the vast majority of larger merchants have abstained from surcharging, perhaps due in part to their ability to use their scale to control payments acceptance costs. Smaller merchants seem to be leading the charge on surcharging. On the other hand, when interchange has been regulated, I’m thinking here about the debit card interchange caps imposed several years ago by the Durbin Amendment, the available evidence shows that little or none of the cost savings were passed on to consumers in the form of lower prices.

Consumers who sometimes believe they have a constitutional right to airline miles and cashback rewards are typically irked by surcharges and also appear to modify their behavior to some degree in response to them. The J.D. Power study points out that consumers are taking notice of surcharges and that 41 percent of credit card users say they decided not to use a card method at a large or small business because of a surcharge.

As we have always said at Glenbrook, if you want to change consumer behavior, you need to have a big change in convenience or a large financial incentive. It looks like a surcharge of around 3 percent is considered large enough by many consumers to alter their behavior. It certainly exceeds the value of most any rewards program they could earn on a card. Finally, while the card networks permit the practice of surcharging, after quite a lot of litigation and only under a specific set of rules, I think it’s fair to say they don’t necessarily favor it or appreciate it.

My goodness, what is a poor payments consultant to make of all these cross currents? Well, if you’re Glenbrook, you reach for perspective from people who are in the trenches of the battle. So today we’re pleased to welcome to the pod, Emily Tsitrian, the co-founder of Yeeld, a firm that helps businesses with the development and integration work necessary to deploy and operate payments infrastructure.

As part of that important mission, they recently released an API that assists merchants in implementing surcharging. Emily, welcome to Payments on Fire.

Emily Tsitrian: Really glad to join you, Bryan. Excited to be here.

Bryan Derman: Great to have you. Also joining us for this session is Drew Edmond, an Associate Partner at Glenbrook who works extensively in the merchant space.

Drew Edmond: Always a pleasure to be on the pod.

Bryan Derman: Great to have you, Drew. Before we dive into the topic du jour, we always like to start these conversations by asking guests how they found their way into the payments space.

Was your experience similar to Drew’s and mine, Emily, where you knew from the time you were a very small child that you were destined to become a payments geek?

Emily Tsitrian: Probably not as a small child. I will say that I studied economics in college, and so I’ve always just been really fascinated by money movement, liquidity, the concept of money, and the transfer of money. It honestly wasn’t until I started working at Stripe a few years ago that I really grew to understand the role that payments specifically at the front door of the entire economy plays and just how the world operates day to day.

And since co-founding Yeeld with Mira Boora in 2022, I’ve come to appreciate really how complex it is and also the vast amount of information and innovation that’s happening in this space.

Bryan Derman: That’s great. We all get to this place in our different ways and Stripe is certainly a nice route. The important thing is we’re here. So tell us a little bit about Yeeld, which was founded relatively recently. What were your motivations in starting the company and, what are you working on and how do you make the world a safer place for payments?

Emily Tsitrian: So, Mira and I actually worked together at Stripe. And when we were there, we saw just a huge gap in the market where services were needed to help companies of all sizes integrate payment solutions so that they could actually focus on what their core business did and have the payments piece of it be really effective.

So, after leaving Stripe, we decided to team up to start a consulting firm, at first, with the focus on the more technical side of payments acceptance and, increasingly, embedded finance. So we had this theory early on that we would start with professional services, offer consulting, and then slowly introduce our own solutions to the market as we grew and customers were telling us exactly what we needed.

And so as a result, we’ve decided to start with one of the most asked for technology solutions out there, which is, of course, credit card surcharging.

Bryan Derman: Okay. So you recently put out an API to enable surcharging among your merchants. And why did you do that? Were merchants asking you for it actively?

Emily Tsitrian: It’s probably been, in the maybe 250 plus projects that we’ve done, the number one request from the merchants in the over two years we’ve been in business, both from direct merchants who are wanting to surcharge directly for a consumption of their product, as well as, increasingly, SaaS platforms that are creating payments acceptance solutions for their customers.

The ask has been both for the technical solution to be able to compliantly add a surcharge to a payment, but also advisory on how to think about it, how to decrease friction, and how to stay compliant on a state by state regulation basis, and if and when a surcharge should be applied. And so, based on all of this demand, we just decided, you know what, let’s just gather this data ourselves and build an API to let merchants know if and when they can apply a surcharge.

Bryan Derman: I like the fact that you’re thinking about compliance there. What do you see as the driver for its popularity, at least, here in the US recently?

Emily Tsitrian: It does seem that interchange fees have been climbing pretty dramatically in the United States, especially in the past two to three years. And to your earlier point, it’s really hitting the SMB to mid-market companies the hardest and taking the largest margin out of what are already really tight margins in this segment.

They don’t have the mass negotiation of interchange that larger companies do, and so they’re disproportionately affected by this. And so surcharging has emerged, I think, as a way for merchants to still offer the convenience of credit card payments, everybody loves using credit card payments for all of the reasons, but also recouping some of the increasing fees associated with accepting these payments, which also has the impact of encouraging some customers to switch to lower cost payment methods, such as debit cards or increasingly ACH or bank transfers.

And across the board, we’ve seen many, many merchants pursuing this type of surcharging.

Drew Edmond: Yeah, as someone that lives in New York, it’s hard to go into a small business these days without really seeing surcharges. It’s become really, really prevalent there. I don’t know how that parallels to other cities across the US right now, but even in just conversations that I’ve had in the industry, I think, one kind of interesting, I don’t know, phenomenon might be too strong of a word for it, but just seeing that the surcharging kind of starts in clusters in some cases where, people that run businesses are also going out and going to small businesses and if they start to see maybe other restaurants or other people in their industry start to use surcharging, they say, Well, if they can do it, why don’t I do it? They’re saving on those costs. They’re passing it through. It seems like that business is still sticking around. Are you seeing that in the online world, where merchants are clustering in certain verticals or industries?

Emily Tsitrian: I think your observation is absolutely true for more like brick and mortar and in-person payments where it tends to become just the cost of doing business in particular geography. For online, we’re seeing it really across the board. But we’re also seeing it emerging is a value add for payments processors to say, Look, if you go with our particular payments processor, we will allow you to compliantly add a surcharge. Or SaaS platforms or other payfac-type solutions that serve the SMB space, the accounting space, the QuickBooks for X industry and so these platforms are actually competing with the payments processors themselves and so it’s starting to become a cluster in almost like a horizontal slice of the market in addition to, I think, the geographic trend for in-person payments.

Drew Edmond: That’s really interesting, I think, being able to pass that through, and that competition, you’re kind of saying, Hey, my value prop is you essentially don’t have to pay for my service, and continue to do it, right? So, it’s great for PSPs going in and saying, you basically get your payments for free and all these other things. But, yeah, that’s an interesting input into just how merchants or platforms might think about the cost of choosing these platforms and the value-added services they provide.

Bryan Derman: So if you surcharge credit, I’ll give you that for free and I’ll throw in the debit for free. And if I’m compliant, I won’t surcharge that. We’ll come back to that. Is there any other clustering? Do you see it in particular verticals, Emily? Early days, but-

Emily Tsitrian: Yeah, we are starting to see it in a lot more of B2B type verticals. So things like services that do accounting, servicing commercial organizations. So I think that that’s probably because interchange, as you all know, tends to be high for business clients and the person that’s got the credit card is going to be less sensitive to a surcharge if it’s your company credit card.

So, we’re definitely seeing the trend more on the B2B side than the B2C side, and specifically for services-based industries.

Bryan Derman: We’ve had a chance to research the phenomenon a little bit and one of the findings that comes up pretty clearly is that consumers hate surcharges, right? So I wonder, are your merchants worried about it, that their customers will dislike it? And in fact, isn’t it their best customers who will hate it the most? Those with the big reward cards and stuff, right? They’re the points junkies.

Emily Tsitrian: Oh, I love those credit card points, Bryan. I’m right there you. Yeah, you’re absolutely right. I think any B2C industry where the product they’re selling is a bit more commodified, they are rightfully the most anxious about introducing additional friction or customer experience at checkout, as well as any sort of subscription-based service that is going to store a credit card and then charge them on a recurring basis.

So think about a music subscription or a box of home goods subscriptions. Anything where you’re doing surcharging for a stored payment method has got a little bit of extra complication, especially as regulations change. So I think that that anxiety is fair in those cases. But it all has to go back to the elasticity of demand, right?

If what you’re providing is super niche and very needed, such as a legal service, a medical service, insurance service, your accountant, I think that you’re going to just have lot more success passing on that credit card fee to a consumer who values the product enough to pay it, or is happy to change to a lower cost payment method like ACH, which we do see in these cases as well.

Bryan Derman: Is that the case when, if you looked at the merchants who are utilizing your API, do they also tend to install ACH, pay by bank, whatever you want to call it, as an option alongside it?

Emily Tsitrian: They do, and in fact, the regulations say that you have to offer a lower cost payment method, so you could offer just debit cards, that would be perfectly acceptable, but ACH is getting more and more popular. And so ACH has a lot of other perks as well, dealing with Chargebacks and disputes is a little bit less, it’s a little bit higher just barrier to fraud and customer experience. So we see about a 10 to 20% changeover of a customer who would otherwise pay with their credit card and is moving to ACH, depending on the industry. But that tends to be a mutually beneficial thing for the customer as well as the merchant.

Bryan Derman: Okay, so most do it. A few change their behavior in response to the fee. Is there a group that just decides to shop somewhere else? It’s harder to measure, but I’m probably not going back to that diner where they dropped the surcharge on me at the last minute, I’ll find another place to eat. We all love to support the little guy, unless it’s going to cost us like 16 hotel points.

Emily Tsitrian: I think you’re right. What we see, I think, is, if the value is there and the convenience of paying credit card is there, customers will do it. I live in Chicago where I think every single high-end restaurant is charging that 3 percent fee plus the 20 percent service fee. And I will happily pay it because I love the service that I’m getting.

But I think as you start to approach more of a commodity type market, like groceries or just the necessities of day-to-day life, we’re just not going to see it. And I think that the merchants are just going to figure out how to absorb those credit card fees themselves.

So it’ll be interesting to see if that trend continues or if there’s some kind of merchant collusion to all sort of increase your fees together so that it becomes less of a factor.

Bryan Derman: That’s it. I’m changing my default tip to 17%.

Drew Edmond: Well, it is interesting to think about it from all the different stakeholder angles, right? That’s where you’re getting at, and it’s a little bit of a trade war, if you will, to use some topical analogies, but a little bit of tit for tat.

And I think from the consumer side, it’s, Okay, we have what options do I have? I can tip less, I can switch to a lower cost payment and hopefully not incur the surcharge, unless the business is incorporating it incorrectly type of thing. Banks are, I think today, a little bit in a strange gray area in that they don’t want to come out and be against small businesses and things like that, so they’re not going to have a loud voice against surcharging. But ultimately, if this has a remarkable shift from credit to debit as a result of more surcharges, that’s lower revenue for the banks and things like that. And we know the card networks don’t love surcharging. They’re very adamant about that.

So, very interesting collection of perspectives on the topic from different stakeholders in the ecosystem, I would say. I want to see how this plays out long term, because I think it’s still pretty new in that, not that surcharges are new, but I think the prevalence and consumer awareness of it, you just see people talking about it more, you see more articles being written about it.

I’m thinking like, all right, one year, five years down the road, what does the world look like as a result? I don’t know. I mean, nobody has a crystal ball, but I don’t know if you have any thoughts on the evolution of how this might affect the ecosystem.

Emily Tsitrian: Yeah, I’m old enough to remember a lot of the legislation from the late nineties, early two thousands around credit card fees and cash discounts. And it went through a wave of evolution there. And I think we’re in another wave of that. I don’t see a lot of Americans shifting away from credit cards. I think we are so in this cycle of revolving credit card usage that I don’t see the use of credit cards going down anytime soon. And so I think it’ll be interesting to see, to your point, how the regulations evolve and if they tend to favor more of the consumer of not having to pay that fee or if they tend to favor for the SMB and the merchant for having the right to raise their fees based on the impacts. I think both trends are going to push against each other. And we will see a trend one way or the other, but it’s to your point, very early days and we’ll see how this all plays out.

Drew Edmond: For sure. And I think we haven’t really talked about, we, kind of the royal we, Glenbrook, the payments industry haven’t talked a ton about the Credit Card Competition Act in a little while, but I know that’s re-bubbling up in this administration. And so, if that comes into play, if that starts to have any sort of impact on merchant processing fees, we know what happened last time with Durbin in terms of lowering fees and how that didn’t really trickle its way down to the consumer. So, do the fees go down, but the surcharges stay? I think there’s a lot of interesting vectors here.

Emily Tsitrian: Definitely.

Bryan Derman: Personally, I have a pretty free market attitude about these things. It is a merchant cost just like inventory and raw materials and all of that. And they probably do at some point have a right to recapture that, to price for it one way or another. And I think most people are pretty smart and as consumers can make a good decision about whether they want to pay a fee or not or paying another way. But to make that good decision, you have to have complete and clear information. And I haven’t always found that to be the case with some surcharging merchants.

So, Emily, I’m interested in what you’re doing within the API to keep it compliant, as you said, and to, I hope, present a best practice model for good disclosure of what’s going to happen to the cardholder.

Emily Tsitrian: I completely agree with you, Brian. So our API delivers guidance for what should be in that customer facing messaging in the UI of the payment screen because that piece is also highly regulated as well. Not only the amount, the card brand, the type of card, the location, but also what you must display to the consumer.

In general, customers must be told about the surcharge as well as given a very easy option to change to a lower cost payment method. So this aspect is part of our advisory and implementation for the API product, as well as the technology solution itself. And I do want to note, we have actually seen an uptick of card networks getting a little bit more aggressive about enforcing the rules and passing down fines, which can be substantial, even to the point of mystery shoppers going online and checking for compliance for different vendors in different states. So it is something merchants should definitely be aware of as they decide to take on surcharging.

Bryan Derman: Yeah, I had some experience with this years ago. I was actually pretty deeply involved, when we first started surcharging at ATMs for non-customers using our bank’s ATM. And I can tell you the networks were very aggressive about setting rules and enforcing them back then. We had physical signs on the ATMs and then if the cardholder decided to proceed, another disclosure statement came up on the screen before they finalized the transactions. We had to code all the surcharges separate from the cash withdrawals. We had to break it out on receipts. I think most of those requirements remain in place for ATMs today. I feel like with POS surcharging, and I’m mostly reacting to physical world, literally POS, half the time, I don’t know that surcharge is coming until I’ve presented my card and, happen to look at the receipt and see that stray 3 percent on there or 2.99 or whatever it might be, and that doesn’t strike me as quite the right way to do it. Are you seeing people go after that? Just the sort of upfront disclosure of the surcharge, so I have a chance to make that decision.

Emily Tsitrian: Yeah. So, that is not right. Consumers are savvier than I think we often give them credit for. And so when we implement our surcharging API and advise our customers, we really advise against having this experience. It hurts brand reputation. It’s not compliant. It’s just, it’s risky. So that experience isn’t good, but also it does, as I mentioned, put the customer at legal risk.

I have also experienced that as well, Bryan. I think that it’s happening more sneakily than it should. I expect to see the card networks tighten up the enforcement of that. But I also suspect that a lot of merchants are surcharging on debit because you just tap the card, you put in the number, and they’re not actually saying, is this a debit card?

That is also not compliant, and so, that’s one of the ways our surcharging API can help, is to just make sure we’re really checking to see, is this actually a credit card or is it a debit card?

Bryan Derman: No, I think, I think what we see at gas stations is technically not surcharging. I think that’s cash discounting.

But if you want to say, what should this look like? You can say, here’s price one, here’s price two. Make a good decision. And you see people do that at the pump. I don’t want to go inside. I don’t carry any cash, whatever. I’m going to do my card. Somebody else says I’m going to go inside, I’m going to give somebody cash, and I’m going to buy a Slurpee and two candy bars while I’m there. Whatever it is. Do your thing, but do it with complete information, it seems to me, like we did at the ATM.

Drew Edmond: I think there’s some confusion too sometimes just with terminology and the specificity that the rules are written compared to just the day-to-day average person and their understanding of things, right? Like the phrase credit card gets used for just general cards a lot.

You see it all the time where it’s like, pay with a credit card here. It’s like, no, they really mean pay with a card here. They may include debit cards. And so I think that both from a merchant perspective of knowing how the rules should be enforced for them, as well as just your average small business owner. They’re not reading the thousand-page Visa operating rules every day to know exactly how the rules should be stated. I think there just needs to be more of that education, probably, within the realm of this topic. And, to kind of touch on what Brian was talking about with the cash discounting, there is this whole realm of these different type of fees, right?

We’ve got cash discounting, as was mentioned, convenience fees, surcharges, service fees, these are all different types of fees. They all have different guidelines and governing bodies and jurisdictional exceptions and things like that. So how much do you find yourself, and your team find themselves, explaining these differences or making sure that the framework is in the mind of these merchants as they’re implementing them?

Emily Tsitrian: We do a fair bit of general education about those sorts of topics. It’s a really good flag. But to tell you the truth, by the time a merchant has reached out to us for help, they’re already pretty clear that surcharging is the path that they want to go down. It makes the most sense in their business, rather than doing the convenience fee or cash discount. One thing I will say is when we work with customers, we do make sure they’re implementing it correctly and that the API works well with their specific type of integration of, what is the payment surface, where is their customer located, do they do upfront costs, is it a recurring cost, is it an invoice, do you charge them off session, on session? So there’s a lot of nuances that rather than just, I am selling a product and I will do a surcharge. So our advisory services are intended to help with that as well as the API, just keeping it really nice and compliant.

Bryan Derman: I like the idea of doing it in software, because you can do it once, do it right, roll it out, and the system helps manage the merchants that way. It seems to me, probably reduces risk for PSPs and acquirers that way. Use Yeeld or somebody else’s product and I’ll know that you’re doing it properly and you’ll keep both of us out of trouble. Nice.

I said at the top that there’s this J.D. Power study and they’re estimating that 34 percent of merchants, I take that to mean merchant locations, are currently surcharging. Does that number feel right to you? Maybe on a location basis, not a dollar basis. And where do you think that will go over the next year or two or three? Just to crystal ball it a little here.

Emily Tsitrian: That number seems a bit high to me. I think you might be right that it’s like your average merchant in a location rather than the total dollar value flowing through merchants and of that percentage, I would be shocked if most of them were surcharging compliantly. So I think that’s definitely a risk. I do think based on our experience, we will see the most growth here within the B2B sector and within a couple of years, I could see it close to 40 to 50 percent of surcharging.

That’s just captures the amount of demand we’re seeing for especially niche and specialized B2B services. And as we mentioned before, business cards tend to have a really higher interchange rate. I think they’re the most sensitive to it. And it’s just a space where you’re not going to have a lot of friction because most likely you’ve already purchased the service, and now you’re just needing to pay for it. So it’s sending that invoice for services rendered or a contract that you’ve just signed. So that’s where we’re going to see the trend.

Bryan Derman: That’s an interesting perspective. And so we got this interesting little arm wrestling match going because first the buyers figured out that they could make money and capture rebates by convincing their suppliers to take cards and now, here’s a chance for the empire to strike back. The supplier said sure, I’ll take your card. My surcharge is 2.99 percent. Sure you want to do that? And they’ll figure it out from there, and we’ll find out who has the leverage in each relationship as they go about that. Interesting. I’m sure it will be a mosaic where it doesn’t just roll out one way everywhere.

Okay, so let me ask you a big hypothetical. And, Drew, you’re welcome to answer this one, too, if you have insights. Let’s say you were the CEO of one of these big card networks. What would you do about surcharging?

Emily Tsitrian: I would personally work on creating just the best consumer and the merchant product experience possible and still compete on a value-based basis. Having a valuable product that’s tech forward, that’s innovative, that’s sticky, and really just let the free market and the legislation work out the surcharge regulation.

Drew Edmond: I think that’s right. This all really came about from a lawsuit, right? This came from basically a free speech lawsuit saying that businesses have the right to do this. So I don’t think there’s much in the way of fighting the law at this point, from a card network perspective.

So I think that’s right to let it play itself out from a free market perspective and let’s see how things shift in terms of consumer behavior and of course the legislation piece that we talked about earlier.

Bryan Derman: Seems to me they have worked pretty hard to draw lines around it and lay out the rules. I’m not exactly sure why they get to make all the rules about it. But, I’m glad somebody is looking after disclosure as a rule. You can do it here, not there. You can do this much, but no more. Sort of interesting to see whether that will all be stable. Maybe some of that gets challenged in court as well.

Drew Edmond: Well, there are some differences, right? The 4 percent cap on Mastercard versus 3 percent on Visa and things like that. So it’s not like they’ve come to the same exact conclusion on how this should work. So I’m curious if it changes over time and standardizes across brands.

Bryan Derman: Yeah, that’ll be interesting. I don’t know that I’ve seen people charge differently for brands, but again, it’s hard to see, right?

It’s like a Glenbrook field exercise. Let’s go out to the same establishment four times and use different brands of cards and see what they do to us.Then we’ll go a fifth time and use a debit card and see what happens.

Drew Edmond: Yeah, I’ve never seen on a sign at a merchant saying it’s different per brand and if you’re going to set a flat rate, you’re going to have to go with the lowest common denominator anyways.

Emily Tsitrian: Yeah, what I tend to see more is merchants just don’t take Amex, but that tends to shut out an entire category. Just depends if that makes sense or not.

Bryan Derman: If you’re surcharging bank cards, you probably don’t want anything to do with Amex. That would be consistent anyway.

Well, it seems like we’ve hit another topic here that we’re going to be watching throughout this year and most likely well beyond. So Emily, thanks so much for joining us, shedding a bit of light on it. We will watch with interest to see where it goes.

And to all of you out there listening in payments universe, thanks for joining us and until next time, keep doing your good work, keep the world safe for payments, and bye for now.

Emily Tsitrian: Thank you.