The Executive Interview Series provides readers with exclusive insights from movers and shakers in the payments industry. The Payments Industry is under continuous transformation, as such this series provides diverse perspectives on everything from strategy to payments technology and to the future of the industry.
In this interview, TSG’s Market Intelligence team-members Alecia Muth and Alex Ferguson sat down with CardX CEO Jonathan Razi to learn more about him and his thoughts around the surcharging landscape and its potential widespread adoption.
BACKGROUND: Jonathan Razi is CEO and founder of CardX. As CEO, Jonathan is responsible for defining and executing the CardX mission. He oversees strategy, compliance, marketing, and product development. Jonathan’s thought-leadership has established CardX as the foremost name in its field. A noted expert, Jonathan authored the CardX brief in U.S. Supreme Court. Jonathan earned a J.D. from Harvard Law School and a B.A. from the University of Chicago.
Q: Alex FergusonHow did you get into payments?
A: Jonathan RaziYou may know I was trained as a lawyer, so I’ve always been interested in what I would call the intersection of technology and regulation. From my point of view, that’s exactly the kind of opportunity that credit card surcharging is, so when the rules came out, I recognized this had huge, broad-based policy support—I’ve sometimes said previously this might be the only policy that’s supported by both Elizabeth Warren and the Cato institute—but it wasn’t going to go anywhere as a product unless someone lowered that compliance barrier to entry. I thought that was a perfect fit for my background and my training, and CardX is positioned as equal parts a payments company and a regtech company.
Q: Alex FergusonDescribe your biggest contribution to the payments industry.
A: Jonathan RaziWell, I take a lot of pride in how we’ve shaped the surcharging landscape. We were the only payments company to contribute a brief in the Supreme Court. That 8-0 victory opened a lot of new states to our model, and we continue to shape state law: most recently, we initiated the process that got us an official opinion letter allowing us to serve the state of Oklahoma. It’s been personally rewarding for me that, now when you see people recap the history of surcharge laws to date, you see CardX etched into the legal history of this matter. That’s really exciting for me, and we’re not done yet.
Q: Alex FergusonIn the next five years what do you think is the biggest opportunity in the payments industry?
A: Jonathan RaziTransparently speaking, I think the least interesting areas of payments are the areas that are totally price-competitive, and the most interesting are feature-competitive. I love the surcharging space because it is fundamentally feature-competitive. The merchant is paying zero on credit, so it’s going to stay feature-competitive going into the future. And that opens the door to a lot of exciting innovation: for us, that means delivering automatic compliance as well as seamlessly meeting up with how our merchants are doing IT and operations currently. There’s a lot of opportunity for differentiation there, and it’s all about making surcharging as easy to do as traditional merchant processing.
Q: Alecia MuthWhat do you see CardX doing in the next 5 years to fit in the feature area, and how you’re going to work with acquirers, the card brands, and so on and so forth?
A: Jonathan RaziGreat question. Without giving too much of a sneak preview just yet, there are great reasons for us to vertically integrate processing services. I think some of those next-generation models for payments infrastructure are very aligned with surcharging, and there’s a strong complementary strategy for surcharging and also certain real-time payments models you’re going to see in the coming years. So, we’re excited, let’s put it that way.
Q: Alex FergusonHow would you describe the current state of surcharging and what do you think the general state of it will look like in 5-10 years?
A: Jonathan RaziWe’re currently in 46 states. By my calculation, those states represent 94% of the country’s population. Within 5 years, I would say we’ll be in all 50 states, that’s something I’m working on personally with these states. What’s exciting in terms of the trend itself, beyond the regulatory strategy, is we’re just now reaching critical mass. 2019 was the first year that, in addition to the thousands of SMB (small or medium-size business) merchants we serve, we saw large enterprise adopt our solution. So large enterprise since about Q1 or Q2 2019 through the present has been a big part of our revenue growth. Seeing category leaders jump in and start surcharging is contributing a lot of acceleration because surcharging has now been proven out at scale, and we’re going to see that continue to speed up.
Q: Alecia MuthAbout what percentage of merchants do you think are surcharging today?
A: Jonathan RaziIt’s tough to give an estimate now in terms of percentage of all American businesses. But I’ll tell you, Alecia, as much as we’re talking about surcharging, it is still a small fraction of the total market opportunity. In fact, the majority of merchants you talk to still don’t know that surcharging is an option. So we’re actually out there raising awareness. For that reason, with as much traction as we’ve already seen, we are just now breaking into the space. I’d say if you imagine a twelve-round boxing match, we’re in round two.
Q: Alecia MuthOf the merchants that you talk to, how many of them actually know what surcharging is and aren’t mixing it with cash discounting in some non-compliant fashion?
A: Jonathan RaziA minority of merchants know how to do it the right way. And I think there’s still a lot of thought leadership and education to be done in our industry as well. I don’t think it’s very well understood, and I actually harbor no hope that it’ll ever be perfectly understood perhaps by anyone except us. I can count on one hand the people that could tell you that New York and Maine have special requirements, that Minnesota has special requirements, and that Minnesota’s requirements are actually different than New York’s and Maine’s, let alone the people who have built that understanding into the product. The way I would put it is, we’re experts so that our merchants and our partners don’t have to be.
Q: Alex FergusonHave interchange fee changes historically impacted the adoption of surcharging? Given the potential substantial upcoming interchange changes, how do you think this may impact surcharging?
A: Jonathan RaziThe coming rate changes are definitely going to contribute to a lot more adoption for surcharging. With previous rate increases, meaning prior to the option to surcharge, if a merchant was committed to accepting cards, they were in a really tough spot when rates went up: either they accepted as a business owner that their margins were going down, or they had to raise their prices on all customers. This made them less competitive and penalized customers using cash and debit, who were now paying more for someone else’s rewards. They now have a much better option when rates increase, which is to pass on the credit card fee only to those getting the rewards and convenience of credit. I think that’s a much better pricing strategy. Even more concretely, my understanding is that, with the coming rate changes, they are raising costs in card not present and especially for rewards cards. Card not present is already where two-thirds of our merchants are, so we are disproportionately focused on online payments. That’s a great space for surcharging, and it’s also really challenging to do it right and we’re very differentiated there. These increases are going to cause a lot more card not present merchants to look at options for eliminating credit card fees.
Q: Alex FergusonSpeaking more generally, describe the card brands’ stance on surcharging.
A: Jonathan RaziI’m happy to say I’ve co-presented with several of the major brands and work with all of them. I describe surcharging as fundamentally pro-card. That’s because surcharging grows acceptance in verticals like logistics or wholesale distribution where margins are so slim that, if you don’t have the option to pass on the fee, you don’t take cards at all. With surcharging, merchants like those are introducing card acceptance for the first time. That’s all net-new card volume, which the brands are excited about. And they also like that, if a merchant chooses CardX, the merchant is guaranteed to comply with the card brand rules, so we’re very aligned there.
Q: Alex FergusonWhen talking to merchants about surcharging, what are the biggest hurdles?
A: Jonathan RaziTwo things: the compliance barrier to entry and frictionless operation. I mentioned earlier that CardX is equal parts payments and regtech. That’s because the compliance overhead, between both the card brand rules and state laws, is so complex that it’s virtually impossible for merchants to do it themselves. They need a regtech solution that performs that whole scope for them. So, with CardX, it’s almost like they’re getting a regtech solution for free because it’s monetized by the payments that run through it. Beyond the compliance point, in order to do surcharging well, it’s very important to have zero friction, and to also excel at reconciliation and reporting; those are places we see people falling down, too.
Q: Alex FergusonAre there specific verticals that can benefit from surcharging more than others?
A: Jonathan RaziYes, definitely. It’s very much a vertical-focused strategy for us. If you think about merchants that have high average tickets, low gross margin, and high use of credit relative to debit cards, those are a strong fit for surcharging. Some examples of verticals that meet that profile are insurance, industrials, technology, professional services (such as law, medical, and accounting), and residential or commercial contractors. Those are all merchants that fit that bill. We don’t focus on restaurants and retail.
Q: Alex FergusonHow has surcharging been received by consumers to date? As surcharging continues to become more common, how do you think consumer perception will change?
A: Jonathan RaziConsumer reception has been strikingly positive when the merchant’s messaging is done correctly. To me, there are three pillars that make that successful: one, the costs are transparently disclosed. Two, the consumer has a no-fee option in the form of a debit card. And, three, the consumer understands the merchant is only passing on the cost that they pay to us as the provider—so they know the merchant isn’t profiting on the fee. As an example, we had a major client announce our solution to 4,000 of their repeat payers using our template messaging, and they informed our team that they received zero complaints, which I think is the best testimonial possible.
Q: Alex FergusonHow do you feel the covid-19 pandemic will impact surcharging?
A: Jonathan RaziHealth and safety are first: our #1 priority is the well-being of our employees, and we’re being vigilant, listening to the experts, and following best practices. We all hope the health crisis is resolved soon, and we take the economic effects seriously too. Merchants that are facing adversity are telling us, if they’re planning for slower growth or facing declines in revenue, it’s even more important for them to cut costs, and we’re also hearing from ISOs and agents that want to help these businesses with options for cutting credit card costs. We’re ready to help them any way we can, and I empathize tremendously with other business owners.