iscover Financial Services announced in early February plans to eliminate the contested "no surcharge" rule on Discover card transactions. A spokeswoman for the company said that Discover will notify merchants of this development in June, and the policy will take effect this October.

The no-surcharge rule (which Visa U.S.A. and MasterCard International also enforce) prevents merchants from adding additional fees to credit and debit card transactions in order to recoup the costs of accepting those cards. It primarily refers to high-priced rewards cards but could also be applied to lower cost debit cards.

The counsel representing merchants in several class action lawsuits that contest the no-surcharge policy announced their intention to drop Discover from the litigation, pending follow through on the rule change. A Discover spokeswoman said that the move should not be viewed as a settlement. Instead, Discover's intention is to create "greater transparency that will enhance competition and benefit consumers, merchants and issuers."

Gary Friedman, an attorney for one of the merchants, called Discover's decision a "significant development for the merchant class and potentially a pivotal step in the evolution of the payments industry." He said, "We applaud Discover's willingness to engage in real competition."

Discover's spokeswoman said, though, that it's unlikely Discover will see any change because merchants rarely impose surcharges. Dropping the ban will most likely be a moot point because Discover's operating regulations still state that merchants can't assess fees on Discover Card transactions unless they do the same for all card brands.

"We hope that [Discover's move] is a sign that all of the [card] companies will be open to more change in the future," said J. Craig Shearman, National Retail Federation spokesman. Depending on the card company, it may be. MasterCard, for example, has softened its rhetoric and has signaled that changes are to come.

"The no-surcharge rules were put in place to protect consumers, and ... consumers do not like to be surcharged for choosing to pay with a credit or debit card," a MasterCard spokeswoman said. "We also understand that there are some situations in which merchants would like to have the ability to surcharge customers." Because MasterCard has to balance the needs of both consumers and merchants, it cannot rule out a change some time in the future, she said.

Visa's stance on surcharging has not changed. "Visa believes that allowing merchants to surcharge consumers is the wrong approach and unfairly penalizes cardholders who choose to pay with plastic," said Rhonda Bentz, a Visa Vice President. "Merchants have many options at their disposal that don't increase costs ... through check-out fees." These include cash discounts and not taking Visa cards, she said.

Not accepting cards is not a realistic option for merchants, Shearman said, because Visa has clearly demonstrated its market power, and its rules bar cash discounts almost across the board.

From both technical and consumer standpoints, implementing surcharges at the POS would be difficult, said Paul Martaus, President of Martaus & Associates, a consulting firm for the bankcard industry. Not only would merchants have to update their processing system, but they also would have to disclose the fees to customers and give them the option to abort the purchase.

Americans for Consumer Education and Competition (ACEC) led by former congresswoman Susan Molinari, said that surcharging plastic transactions is not the proper route. "Consumers who pay with plastic shouldn't be discriminated against for preferring an easy and safe choice of payment," she said. "They're not going to tolerate an unfair checkout fee." ACEC is funded in part by Visa.

Mark Reinhardt, another merchant attorney, said, "The users of high-price cards should pay high charges to finance their frequent flier miles and rewards points. Consumers should be able to avoid these charges ... by using low-priced cards."

The no surcharge class action litigation has been combined with another group of merchant lawsuits against the credit card companies involving Visa's and MasterCard's interchange pricing structures. Merchants contend that the card Associations and their member banks secretively and unfairly set interchange pricing at supracompetitive levels and without regard to market levels.