In the payments space, one of the hottest topics of discussion in the first quarter of the year has been Visa’s policy changes surrounding its cash discount program. April 15th, historically a date whose import has been defined by being the last calendar day upon which most Americans have to file their income taxes, this year takes on new significance for those in the merchant acquiring ecosystem, for it’s the effective date upon which Visa’s new cash discount rules get implemented. Though the rule changes are rather simple and straightforward – ‘tweaks’ if you will, constituting no more than 185 words in Fiserv’s letter to its merchant acquiring partners – what’s driving the buzz is what’s not in Visa’s new rules, especially regarding whether or not, or how, Visa will change its enforcement of cash discount compliance at both the merchant acquirer and merchant levels. This uncertainty is driving much speculation. Changes to how aggressively Visa will police its new cash discount rules, e.g. how it implements compliance actions for policy violations, is anyone’s guess. But if policing gets more aggressive, it could be disruptive to many merchant acquirers’ businesses, causing operational headaches, and even the potential to rough-up valuations. In my opinion, Visa has opened the door for a liability shift away from merchants and toward its acquiring partners.
Visa doesn’t like cash discounting. It knows, or its egg-heads working deep inside the card giant’s headquarters know, that there’s a difference between how a consumer perceives a purchase as a function of whether they use cash (physical money) or credit. In behavioral economics, this difference in perception is attributed to one of the underlying tenets of Prospect Theory: loss aversion. The act of paying with physical currency, or thinking about paying with physical currency, is felt by the consumer as a loss, right there and right then. And the intensity of a perceived loss ranges from 1.5 to 2.5 times greater than a perceived gain of the same magnitude. Visa knows that when consumers make purchases with credit cards, the loss is attenuated by the delay in time before the money must be paid back. This translates into consumers making more purchases, more frequently, and spending more money than they otherwise would (generally) with cash. Bottomline, Visa, its bank network, and its merchants have much to gain from consumers using credit instead of hard currency.
But Visa also realizes, or more accurately, was forced to realize through class action litigation, that merchants feel loss aversion too (tongue-in-cheek of course, the real issue being that merchants felt the card brands charged too much money for card acceptance and won redress through the courts). Thus the rapid rise in adoption over the past few years of cash discount programs which were intended to provide merchants a sanctioned method to recoup card acceptance costs by pushing them off to the consumers making the purchases. This came in the forms of a surcharge if they purchased with credit cards, or a discount if they paid in cash.
And truth be told, an equilibrium has been achieved in the past few years whereby the consumer, merchant, and card networks have learned to live with cash discount programs as the new reality.
But of course there were abuses. And now Visa is addressing those abuses with its rule changes.
Changes
The two most obvious rule changes affect how much a merchant can charge a consumer to use credit cards in lieu of cash (now capping the added fee at 3%, down from 4%), and mandating that the surcharge is displayed prominently to the consumer at checkout to ensure the consumer has the ability to opt out (use cash or debit instead) before completing payment.
But the other change to Visa’s cash discounting policy, seemingly procedural in an effort to create an efficiency in merchant registration for the cash discount program, is the one I’d keep an eye on. Visa previously mandated that merchants and the ISO or MLS who acquired the merchant, both register with Visa to be eligible for its cash discount program. Now, the registration for the program is 100% the responsibility of the ISO or MLS. This subtle, and, at least on paper, innocuous operational change, could be an indicator of a shift in liability for compliance violations.
Speculation & Consequences
The consequences of stricter policing and a liability shift for non-compliance to the merchant acquirer, away from the merchant, would not just be operationally disruptive. Merchant acquirers would need to beef-up compliance education for sales reps and invest in better merchant monitoring, both of which would become new (or increased) cost centers. It could also have the unintended consequence of putting payments companies that leverage cash discount programs at a disadvantage when it comes to raising capital because of margin compression on one hand, and greater risk exposure on the other. Simply put, it could make these types of assets less profitable and more risky to buyers and lenders.
Though the liability shift is pure speculation, I do think the change in the cash discount registration process opens the door, and I wouldn’t be surprised if Visa puts something like that in play. It would be politically and operationally shrewd to shift policing and accountability away from the merchants, and instead, place it 100% on the doorstep of its acquiring partners, and make them not only liable, but the ‘bad guys’ in charge of enforcement.
