Passing the buck: Changes in credit card surcharges

  • By C. Michael Kvistad <i>Anderson Hunter Law Firm</i>
  • Wednesday, December 4, 2013 9:28am

A class action settlement agreement required MasterCard and VISA to change their rules concerning passing on surcharges by Jan. 27. A major outcome of the settlement authorizes merchants to pass on credit card surcharges to customers who use MasterCard and Visa credit cards. The settlement does not apply to debit cards or pre-paid cards, nor to American Express and Discover, which already allowed such charges. There is a wide mix of often incongruent rules and credit card agreements that must be navigated before a merchant can pass on that surcharge. In addition, proper notice must be given to customers.

The surcharge is capped at 4 percent, but merchants must comply with fairly detailed rules required by MasterCard and VISA. The surcharges may be applied at the brand level, such as for all MasterCard or VISAs, or at the product level, such as one rate for World Elite MasterCard and another for other MasterCards. However, as discussed below, caps may be further limited if the merchant accepts other credit cards.

Merchants must give MasterCard and VISA, and the merchant’s acquirer (the credit card processor) at least 30 days notice of their intent to impose the surcharge. The surcharge must be disclosed at the point-of-entry, point-of-sale, and on the receipt. Essentially, a sign disclosing that the merchant imposes a surcharge on MasterCard and VISA credit card transactions at the rate of X% must be posted by the entrance and by the cash register. The dollar amount of the surcharge must also be stated on the receipt. An online retailer should post the notice on its home page and on the point-of-sale page.

Notwithstanding the above, the merchant must review its own contracts with MasterCard and VISA because the contracts may prohibit the merchant from imposing any surcharge. There are, however, certain conditions, not discussed here, that the contract must have prior to prohibiting the surcharge.

In addition to the merchant’s own contract with MasterCard and VISA, the merchant’s agreement with other credit card providers may effectively prohibit the use of a surcharge. For instance, suppose Merchant accepts VISA and Discover Card. Merchant wants to impose the credit card surcharge and complies with VISA’s requirements. One of VISA’s requirements, however, is for Merchant to impose the same surcharge on its transactions using other credit cards, including Discover. Discover allows surcharges, but does not allow Merchant to discriminate between methods of payment, whether they be by credit card or debit card. VISA does not allow surcharges on debit cards, so Merchant cannot comply with Discover’s surcharge rules. Therefore, Merchant cannot impose the VISA surcharge. As you can see, this situation may be repeated with other cards.

Before imposing a surcharge on customers, merchants must take into account customer responses. Deciding whether customers will view the additional surcharge as being “nickeled and dimed” may come into account, depending on the line of business. Merchants may prefer to incorporate that cost into the price of their goods and services. Some national merchants had contemplated imposing surcharges, but so far it’s been a slow tide. However, just recently, several merchants supported the plaintiffs in a Federal New York State case who, on Oct. 3, obtained a preliminary injunction prohibiting the New York State Attorney General from enforcing New York’s ban on merchant surcharges.

Although Washington does not ban credit card surcharges, if you count New York, at least 10 states do, including California. The rules concerning multi-state merchants maintain some flexibility. Merchants who conduct business in multiple states may impose surcharges in states that allow surcharges even if they also do business in states that prohibit them. California may prohibit surcharges on credit cards, but it authorizes providing a discount for other means of payment, including cash and check. Ostensibly this allows a surcharge in form, if not name.

The rules are complicated and require research and attention to detail. In addition, credit card agreements are full of legalese. It’s imperative that merchants communicate in writing with their credit card companies concerning the passing on of the surcharges. I would seek written approval from my credit card companies prior to imposing any surcharges, even if I gave proper notice. MasterCard’s and VISA’s websites provide explanations of their requirements, but do not provide details on the interaction with American Express or Discover. Although the various credit card companies should assist you, legal counsel may be recommended given the complexity and interaction of rules.

C. Michael Kvistad is a partner at the Anderson Hunter Law Firm, P.S., in Everett practicing in the areas of real estate, construction law, and collections. The discussion in this column is not intended to be a substitute for specific legal advice in this area of the law. The law firm provides representation in all civil matters. He may be reached at 425-252-5161 or mkvistad@andersonhunterlaw.com.

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