Visa Inc. and MasterCard Worldwide enacted a rule change Jan. 27, 2013, allowing merchants to surcharge customers up to 4 percent on credit card transactions to cover the costs of interchange fees. The new surcharging rules - revealed by Visa Dec. 20, 2012, and by MasterCard Dec. 21, 2012 - were instituted as part of a $7.9 billion preliminary settlement agreement in the class action lawsuit brought on behalf of 7 million retailers against the card companies.
The merchants alleged the two card brands are violating the Sherman Antitrust Act by unlawfully fixing interchange fees and rules. The proposed settlement was given preliminary approval by the Federal Eastern District of New York in November 2012.
Many retailers, both in and out of the class, are objecting to the terms of the proposed settlement. The district court has scheduled a final approval hearing for September 2013. In the meantime, as part of the preliminary agreement the two card companies are implementing two of the provisions in the proposed settlement immediately: enabling merchant surcharging and contributing to the Interchange Rate Relief Fund.
"As a party to the settlement agreement MasterCard is required to ... permit merchants in the U.S. region and U.S. territories to apply an extra fee, also known as a surcharge, to customers who pay with MasterCard credit cards," the company stated when it disclosed the new rule.
Visa said it will require merchants who surcharge to disclose surcharge practices at the store entry point and at the POS. MasterCard also requires merchant disclosure, and it is reminding merchants that acquirers may also impose notification requirements. While both card companies allow merchants to surcharge credit card transactions, they prohibit surcharging for debit and prepaid card transactions.
MasterCard allows merchants to add surcharges up to "the lesser of the merchant's average effective merchant discount rate that the merchant pays its acquirer for MasterCard credit acceptance or the maximum surcharge" of 4 percent. Visa also caps surcharging at 4 percent.
However, merchants must handle surcharging of all credit card transactions in the same manner. Thus, if a merchant accepts cards from a competing network that does not allow surcharging, the retailer cannot surcharge Visa or MasterCard credit card transactions either. When surcharging is permitted, the cost imposed must be the same for all cards.
"The amount of the surcharge on the competing payment network brand must equal at least the lesser of: the cost to accept the competing brand's credit cards or the surcharge imposed on Visa Credit Cards," Visa stated in a memo to its U.S. merchants.
An attorney on the court appointed team that negotiated the settlement confirmed the preliminary agreement also requires Visa and MasterCard to set aside 10 basis points from all of their U.S. credit card transactions for the next eight months and contribute the money to an interchange relief fund set up by the court. If the settlement is not approved the money collected for the relief fund will still be divided among the class retailers.
The attorney called the card companies' acceptance of settlement terms prior to final agreement "unprecedented." Doug Kantor, an attorney representing the National Association of Convenience Stores, one of the class-action plaintiffs objecting to the settlement, agreed it is unusual for terms of an agreement to go into effect before it is final.
"I think the card companies anticipate that a lot of merchants are going to be upset by this settlement," he said. "I think they are trying to find ways to lock in the settlement as a done deal that can't be changed. They may be trying to box in the merchant who may not like the settlement by getting that merchant to accept the terms of the agreement before it is final."
Kantor said he anticipates few merchants will elect to surcharge, in part because the credit card companies are making it difficult for retailers to do so, and in part because customers don't like to be surcharged. Kantor said some retailers believe that if they do surcharge, the card companies will publicly complain that retailers are being unfair to consumers. Also, nearly 40 percent of Visa and MasterCard merchants affected by the settlement are located in states that ban surcharging.
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