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The Green Sheet Online Edition

February 25, 2013 • Issue 13:02:02

Insider's report on payments
Are your merchants surcharging card customers?

By Patti Murphy
ProScribes Inc.

Did you hear about the big-box store surcharging customers who pay with credit cards? Me neither. But if recent news reports about merchant surcharging are an indication, it's a hot-button issue that has some folks waiting with bated breath for a consumer backlash.

"Any seller that implements a surcharge is doing so at its own peril," said Edgar Dworsky, Founder, ConsumerWorld.org, an online consumer resource guide.

Credit card surcharging has been a contentious issue for decades. For years, both Visa Inc. and MasterCard Worldwide have banned merchants from assessing surcharges, although they do allow merchants to offer customers discounts for paying with cash.

When signed into law in the 1960s, the federal Truth-in-Lending Act contained a prohibition against merchant surcharges for credit card purchases, but that prohibition expired in 1984.

Since then, at least 10 states have enacted laws banning surcharging for credit and debit card payments. There is also an anti-surcharging bill before the state assembly in New Jersey, and talk of similar legislation in at least six other states.

The current row over surcharging derives from the preliminary settlement of a class-action suit brought by retailers in 2005 against Visa, MasterCard and several large banks regarding interchange.

The settlement, proposed in the summer of 2012, would award $6 billion in cash payments to retailers. Plus Visa and MasterCard agreed to reduce interchange fees by the equivalent of about 10 basis points for an eight-month period, which is supposed to be worth about $1.2 billion, according to published reports.

The settlement also promises changes in MasterCard and Visa rules that have banned surcharging. And both card brands lifted their surcharging bans as of Jan. 27, even though the settlement has yet to be finalized.

The devil is in the details

Judge John Gleeson, of the U.S. Eastern District Court of New York, who is overseeing the case, gave preliminary approval to the settlement in November 2012. However, several large retailers have said they're not keen on accepting the terms.

Yet it's the elimination of prohibitions against surcharging began Jan. 27 that has people talking. Of course, as the saying goes, the devil is in the details, and in this case the details are the criteria.

First, surcharges must be calculated using the merchant's cost of card acceptance during the previous quarter, but cannot exceed 4 percent. Merchants also must post customer notices at each point of entry and POS, and provide written notification to the card brands of their intent to surcharge at least 30 days before they begin surcharging.

Also, because these criteria have been effected through changes to the card brands' rules, they lack uniformity, said Donna Embry, Senior Vice President of Payment Alliance International, during a presentation at the recent Northeast Acquirers Association's Winter Seminar & Outing.

For example, MasterCard requires that it be notified by the merchant's acquirer of any surcharging plans, but Visa does not, Embry said.

Embry's presentation created quite a buzz at the NEAA event, even though she noted that the settlement won't have much of an impact on acquirers and processors, aside from the MasterCard notification requirement.

Meeting the criteria is only the first in a long line of steps any merchant who wants to surcharge credit card payments will have to follow, however. "The technology issues associated with doing this are so pervasive; I don't see how retailers will really be able to implement without violating other rules and getting slapped with fines," said industry consultant Paul Martaus.

Martaus expects most retailers will follow the lead of Wal-Mart Stores Inc., which along with several other major retailers, said it doesn't plan to surcharge - for now. He also noted that "most merchants already factor in the cost of interchange, and AmEx acceptance" when they price items, calling into question the rationale for surcharges.

Widespread surcharging isn't likely

Mallory Duncan, Senior Vice President and General Counsel at the National Retail Federation, agreed merchant surcharging will not be widespread. "While there conceivably could be exceptions, merchants in general have no intention of surcharging," Duncan said.

So why all the hoopla in the media and elsewhere? Duncan suggested it was a PR campaign intended to rile consumers. "The lawsuit sought to bring down swipe fees and the prices paid by consumers, not to increase prices. The card companies' new surcharging proposal runs 180 degrees counter to the intent of the lawsuit," Duncan said.

Duncan pointed to several "obstacles" likely to keep most merchants from surcharging Visa and MasterCard credit card payments, including:

  1. Several states prohibit surcharging card payments.
  2. Visa and MasterCard require that retailers have the same card acceptance policies in all stores. Thus, chains that operate in states that prohibit surcharges would have to forego surcharging even in states that allow it.
  3. The settlement requires that merchants who surcharge Visa or MasterCard payments also surcharge American Express Co. payments, but AmEx contracts bar merchants from surcharging AmEx cards.
  4. Under the settlement's terms, surcharging is not permitted on all MasterCard and Visa cards, but rather only on select premium cards - those with the highest interchange rates. Yet merchants have no way to distinguish premium cards from regular MasterCard and Visa cards.
  5. Reprogramming POS terminals to deal with surcharging is costly and time consuming.

"Small retailers are too busy running their stores to jump through the hoops required by Visa and MasterCard and could not afford the expense," Duncan said. "The bottom line is that very few retailers would be able to surcharge, and the vast majority don't want to surcharge even if they could."

No surcharges, please

Ten states prohibit merchants from surcharging credit or debit card payments. These are:

  1. California
  2. Colorado
  3. Connecticut
  4. Florida
  5. Kansas
  6. Maine
  7. Massachusetts
  8. New York
  9. Oklahoma
  10. Texas

Legislation banning card surcharges is under consideration in at least four states and is being discussed in several others. States where anti-surcharging legislation is pending are:

  1. Illinois
  2. Hawaii
  3. Rhode Island
  4. New Jersey

end of article

Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at patti@greensheet.com.

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.

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