How and when to add convenience fees to credit card transactions has been fiercely debated since Jan. 27, 2013, when surcharging became legal in the United States as part of a class action settlement against Visa Inc. and MasterCard Worldwide. The ruling was subjected to further scrutiny by some U.S. states and territories, leading to additional stipulations and restrictions.
Payment card surcharges, also known as checkout fees, are restricted in 10 states: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas. Merchants operating across multiple regions have the option of imposing surcharges in regions that support the practice.
Many state regulations remain in flux due to ongoing litigation. California's restrictions were overturned and subsequently appealed by the state. Similarly, a ruling supporting Florida's surcharge limits was reversed on appeal and remains subject to further actions by the court, legal analysts have noted. "Each state restriction was based on a historical event," stated David Leppek, Chief Executive Officer of Transaction Services LLC (TrxServices), an Omaha-based ISO and payment technology company. "California has not overturned the law but made it illegal to enforce; Florida overturned it and New York overturned it, but upon appeal says [surcharging is] prohibited," he said. "Some legal analysts expect the surcharging decision to be escalated to the Supreme Court."
"It's interesting to observe federal versus state statutes," said Cleveland Brown, CEO of Payscout Inc., a global merchant service provider based in Los Angeles with additional U.S. offices in Georgia and New Jersey, and international offices in Brazil and China. "Consumers are becoming more educated about the associated costs of supporting credit card rewards, points and miles."
Brown believes individual retailers will have to assess the impact of surcharging on their customers' experience. Merchants in verticals with high-ticket items pay a hefty toll in interchange fees for selling their products, especially e-commerce, he said.
These merchants also accept cash, prepaid, debit and check products, and Brown feels they are justified in charging a convenience fee to consumers who prefer to pay with credit cards. "It would be different if there were no [payment] alternatives," Brown said. "And surcharges could potentially discourage someone from getting into more debt by incenting them to pay with a different product."
Tracey Kitzman, Special Counsel at Cohen Milstein Sellers and Toll PLLC, sees surcharging as a solution that promotes equality across all payment types. Consumers who prefer to pay with cash, debit or prepaid products will no longer have to subsidize those who use credit cards, she stated. "I serve on the board of my preschool, and we can't raise tuition 3 percent across the board to accommodate the few parents who pay by credit card," she said. "If you want the convenience, cover the costs so we can treat all parents equally."
TrxServices developed a surcharge processing solution with customized terminal software and payment gateway with net deposit credit card and gross deposits debit card settlement reports, Leppek noted. Similar solutions, such as Limitless by Berwyn, Pa.-based JetPay Corp., have been introduced to improve processing efficiencies by automating cash discounts and credit card surcharging, according to the company's website.
Merchants in U.S. states and territories where surcharging is legal must comply with rules and conditions, such as:
Visa and MasterCard created additional brand-specific guidelines for surcharging and invite consumers to report any irregularities, such as being charged checkout fees in states that prohibit the practice, to their state attorneys general.
Visa Core Rules and Visa Product and Service Rules prohibit surcharging outside the United States unless there are local laws or variances that require merchants to participate, such as those in Australia and New Zealand, according to Visa's website.
MasterCard advises merchants to fully review rules before surcharging MasterCard brand card products to ensure that all criteria have been met. "Merchants are permitted to apply either a brand-level surcharge or a product-level surcharge to MasterCard credit cards," the MasterCard website states.
Both Visa and MasterCard allow brand-level and product-level surcharging. Brand-level surcharges involve the same uniform percentage on all MasterCard or Visa credit cards. Product-level surcharges pertain to a surcharge on a particular MasterCard or Visa credit product. "In both circumstances, the level of the surcharge is subject to a cap," MasterCard wrote.
Both card brands encourage merchants to consult card company websites and payment acquirers for further clarification concerning compliance requirements.
Australia has been surcharging credit card transactions since 2003; payments analysts suggest that U.S. merchants and acquirers may benefit from the country's experience. "Australia went through a learning curve, initially surcharging a massive amount and later creating a cap on what consumers are being charged," Brown said. "It's a matter of looking at what other countries and competitors are doing."
Brown cited Square's smartphone dongle as proof that small merchants are willing to pay higher interchange rates for convenience. Consumers may be willing to pay for convenience and reward points, he said.
In a report published in April 2008 titled Reform of Australia's Payments System: Preliminary Conclusions of the 2007/08 Review, The Reserve Bank of Australia revealed that surcharging credit cards had considerably improved "price signals to cardholders about the relative costs of different payment methods." The bank also anticipated surcharging to gradually erode payment card interchange fees.
"Over the years, merchants have negotiated, and ISOs and MLSs have sold closer to zero with interchange plus pricing, so the only remaining option is to shift the cost from the merchant to the consumer," said George Sarantopoulos, CEO of Brooklyn, N.Y.-based Access One ATM Inc. "Obviously surcharging works better at a used car lot than a fine dining restaurant. "
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