In November 2012, Visa and MasterCard agreed to alter their credit card surcharging rules as part of a settlement related to the class action case In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation. Also known as a "check-out fee," a surcharge allows merchants to pass on to consumers the costs associated with accepting credit cards. Visa and MasterCard issued final surcharge rules in January 2013, which provide additional details on how merchants in the United States can surcharge their Visa and MasterCard transactions starting January 27, 2013.
These rules are potentially a significant benefit to merchants that pay an estimated $40 billion, annually, on credit card swipe fees. However, before surcharging, a merchant should consider the expected response from customers and how surcharging will impact its competitive position in its industry. Due to these concerns and the other issues summarized in this client alert, there has not been widespread adoption of surcharges by merchants in the marketplace.
Surcharging with Visa and MasterCard
Although Visa and MasterCard basic rules now permit surcharging, Visa and MasterCard can still prohibit surcharging under individual contracts. Credit card companies that were not party to the settlement (e.g., American Express) still prohibit certain surcharging practices. Furthermore, the contracts that govern transactions with other credit card companies may impact a merchant’s ability to surcharge Visa and MasterCard transactions. In addition, before surcharging Visa and MasterCard transactions, merchants must verify that surcharging is permitted in the states in which transactions are made.
Therefore, in order to surcharge Visa and MasterCard transactions, merchants in the United States must navigate a maze of conflicting private contract obligations and public laws. The purpose of this client alert is to provide a basic outline of the private rules and state laws that govern surcharging Visa and MasterCard transactions. This client alert also addresses some of the pitfalls that merchants may encounter as they try to implement a surcharging policy.
Basic Rules: Notify, Limit, and Disclose
The Visa and MasterCard rules that govern surcharging are part of their respective International Operating Regulations manuals. As outlined below, the basic rules require merchants to notify Visa and MasterCard of their intent to surcharge, limit surcharges pursuant to the rules, and disclose surcharging practices to customers.
To surcharge, a merchant must notify Visa or MasterCard at least 30 days prior to implementing a surcharging policy.
Surcharging is still not allowed on any debit card or pre-paid card transactions or where prohibited by state law. The landscape of current state law is discussed below.
Merchants who surcharge on Visa or MasterCard transactions must add an equivalent surcharge to all credit cards that charge an equal or higher transaction fee. As discussed below, conflicts with other credit card contracts may restrict a merchant’s ability to surcharge.
Surcharging percentage caps apply, which are generally limited to the costs that the merchant pays to accept cards (and in any event, no greater than 4% per transaction).
A merchant may either surcharge at the “Brand Level” or the “Product Level.” The ability to surcharge at the “Brand Level” means merchants may surcharge every Visa or MasterCard branded product at the level of the overall cost of accepting Visa or MasterCard products. The ability to surcharge at the “Product Level” means merchants may surcharge specific Visa or MasterCard products at the percentage level associated with those specific products. For instance, a merchant might add a 2% surcharge for all Visa products. Or it might add a 3% surcharge on Visa Signature, a 2% surcharge on Visa Traditional, and a 1% surcharge on Visa Traditional Rewards. (These percentages are used for illustration purposes only. The percentages that a merchant may charge will depend on the costs that the merchant actually incurs from accepting different credit card products.)
Merchants must disclose their surcharging policy to their customers at the point of entry, the point of sale, and on the receipt.
Specific rules govern what qualifies as adequate disclosure.
Individual Merchant Prohibitions
The rules outlined above are the general rules governing Visa and MasterCard transactions, but nothing in the settlement forbids Visa or MasterCard from prohibiting surcharging in individual merchant contracts. In order for Visa or MasterCard to prohibit surcharging in an individual contract, the following conditions must be met: (1) the contract has a fixed duration, (2) the contract does not contain an evergreen provision, (3) the contract is individually negotiated, and (4) the surcharge prohibition is supported by “independent consideration.”
State Laws on Surcharging
The Visa and MasterCard settlement does not override state law. Surcharging is prohibited in the following eleven states: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, Texas and Utah. Also, laws that would ban surcharging in states where it is currently permitted are pending in approximately 20 additional states. Lastly, since the settlement is limited to the United States, surcharging is still prohibited in transactions outside of the United States.
It was initially anticipated that merchants who operated in numerous states would not be able to surcharge if the merchant operated in at least one state that prohibits surcharging. However, Visa and MasterCard explicitly state in their surcharging rules that merchants who process transactions in multiple states may surcharge in the states where it is allowed while simultaneously avoiding surcharging where it is prohibited.
Cash Discounts and Convenience Fees
State surcharging laws often have exceptions that vary by state. Utah, for instance, allows surcharges for transactions larger than $10,000. In California, surcharging is prohibited, but cash discounts are allowed. Also, some states that specifically ban surcharges provide an exception that allows merchants to charge convenience fees. Although the Visa and MasterCard settlement did not address Visa’s or MasterCard’s convenience fee policies, most credit card contracts limit convenience fees to a flat rate of around $5. Thus, charging a convenience fee is not a strong alternative to surcharging in the states that prohibit surcharging.
Surcharging with Other Credit Cards
In addition to state laws prohibiting surcharging, another obstacle to a merchant’s ability to surcharge is the terms of other credit card companies that the merchant uses. While other credit cards may permit surcharging, if other credit cards have different or additional surcharging rules, a merchant may be unable to surcharge on any of its credit cards.
A quick case study illustrates how different credit card surcharging rules may be incongruent (with percentages used for illustrative purposes only): Merchant A currently accepts American Express and Visa credit cards and debit cards. Merchant A wants to add a 2% surcharge to Visa credit card transactions. Visa’s rules permit this surcharge, but require Merchant A to add the same 2% surcharge to American Express transactions. Merchant A's American Express operating agreement allows such surcharging for its transactions, but only if every one of Merchant A’s card-based transactions (including debit card transactions) are treated equally (this is typical for American Express operating agreements). Since Visa’s rules do not allow Merchant A to surcharge Visa debit cards, Merchant A is not able to comply with American Express’s rules for surcharging. Thus, Merchant A cannot surcharge Visa or American Express transactions. This same dynamic could be applicable to each different credit card a merchant accepts.
Because of the complexity of operating under different credit card rules and different state laws, Smith Anderson encourages merchants to speak with an attorney before implementing a surcharge policy.