Surcharging Card Transactions

1 Jun 2015

Surcharging has been making its way back into the news recently.  As the result of settlement agreement in In re Payment Card Interchange Fee and Merchant Discount Litigation, in January, 2013 Visa and MasterCard revised their rules to permit merchants to surcharge credit card payments under certain conditions and within certain limits.  Although the effective date was more than two years ago, it will come as no surprise to those in the industry that credit card surcharging remains a highly contested topic.

Several states ban surcharging outright and a majority of state legislatures have considered legislation regulating surcharging.  In addition, lawsuits have been brought in four states challenging the statutory bans based on first amendment grounds.  The argument set forth in these cases boils down to this: surcharging prohibitions effectively regulate how merchants communicate their prices to customers, and thus violates the merchants’ right to free speech.  At the district court level, California and New York have sided with the plaintiffs and granted injunctions preventing enforcement of the surcharge prohibition statutes, while Texas and Florida have upheld the surcharge prohibition statutes.  Each of these cases has already been, or will likely soon be, appealed.

In most states, surcharging remains a viable option so long as the merchant’s acquiring bank supports the practice.  Surcharging can be in the form of a fixed or variable charge to all credit transactions, referred to as brand level surcharging, or a fixed or variable charge to all transactions of the same product type, known as a product level surcharge.  For those merchants interested in surcharging, several requirements set by the card brand rules must be met.

The merchant and its acquirer must provide the card brands with at least thirty days advanced notice that the merchant is going to surcharge.  In addition, adequate disclosures must be provided to the customer.  Generally the disclosures should include the surcharge dollar or percentage amount, a statement that the surcharge is being assessed by the merchant and is only applicable to credit transactions, and a statement that the surcharge is not greater than the applicable merchant discount rate for the credit card transaction.

In addition to the disclosure requirements, merchants may only surcharge credit transactions.  Current card brand rules cap the surcharge a merchant may apply to a payment.

Merchants that would like to take advantage of the new authority to surcharge card transactions should carefully review the relevant rules and laws and monitor legal developments.  If properly implemented, surcharging can be a useful tool for merchants to cover the costs of accepting credit cards.

– James Kramer, Jaffe Raitt Heuer & Weiss, P.C.

James Kramer

James Kramer

James is a member of the firm's Electronic Payment Group, Corporate Group and Business Transactions Group. James counsels clients on contractual, regulatory, and compliance matters as well as on purchases, sales, mergers, and acquisitions. He routinely advises and negotiates on behalf of financial institutions and entities in the electronic payments industry.

What to Do in the Face of a Dispute

9 Mar 2015

What do you do when your exclusive agent starts referring merchants to a different processor?  What if your residuals from your ISO are cut off, or if you don’t receive the hold-back payment from the buyer of your merchant portfolio?

These are the kind of disputes that regularly arise in the payments industry and which require immediate attention.  What should you do when faced with them?

First, gather up all relevant documents, including written agreements, emails and letters concerning the dispute as well as information that supports the other side.  Then, reach out to a lawyer knowledgeable and experienced in the industry.  Knowledge of the payments business is critical because courts will look to industry standards in interpreting contractual ambiguities.

Should you file a lawsuit right away?  We typically recommend, instead, that a demand letter be sent.  A demand letter lays out in some detail what your grievances are, why the contract or parties’ dealings support your position, and what you want the other side to do.  If you are the recipient of a demand letter, gather up the same materials and get them to your counsel right away.

The principal goal of a demand letter is to begin a discussion to reach a resolution of the dispute.  A resolution of a dispute, however, is not the same thing as capitulation.  It involves compromise and negotiation.  Why compromise?  Because litigation is expensive, time-consuming, distracting and the end result is always uncertain.  A negotiated resolution to a dispute is far preferable to one costing tens of thousands of dollars and dragging on for months if not years.

Of course, some disputes cannot be resolved amicably or are of such dire importance that immediate court intervention is necessary.  Under such circumstances, litigation may be the only recourse.

Litigation starts with preparing a complaint which sets forth facts and the plaintiff’s claims.  That document is filed with the court and is served on the other side.  The other side usually has 20 to 30 days to answer depending on the state.  The next step is usually written discovery, meaning a set of questions which need to be answered.  Following written discovery, usually depositions are taken where lawyers question witnesses under oath.  Once all discovery is complete, the parties often will file motions for summary judgment.  A motion for summary judgment asks the court to rule that there are no issues of fact requiring trial and that, as a matter of law, you are entitled to prevail on your claims.  Preparation of a good motion for summary judgment is an arduous task requiring the summation of all of the evidence gathered through the discovery process.  If the court finds that it is unable to grant summary judgment for either side, then the case will proceed to trial.

Litigation can be a lengthy, costly and distracting process.  It will consume many hours of internal personnel time.  Conventional wisdom says that 99% of commercial litigation matters get resolved before trial.  There is, therefore, no reason why a resolution could not have been reached at the demand letter stage rather than after 12 months of discovery and tens or hundreds of thousands of dollars of expense.  If you provide your lawyer with all relevant information at the outset of the dispute, significant costs may be avoided with little, if any, difference in the ultimate outcome.

 — Eric A. Linden, Attorney and Partner, Jaffe Raitt Heuer & Weiss, P.C.

Holli Targan

Attorney & Partner

Aggregator Rules Evolve

11 Dec 2014

 It’s been awhile now since Visa and MasterCard revised their rules to permit merchant aggregation of payment transactions.  Recently MasterCard refined the concept yet again, this time to increase the annual dollar volume limit a sub-merchant may process to $1,000,000, and to institute a few other tweaks to the merchant aggregator program.

 A refresher:  Back in 2011 Visa and MasterCard revised their rules to permit small internet and face-to-face merchants to be aggregated under a master merchant.  Both card brands treated the aggregating entity as a merchant.  So in addition to special rules relating to aggregators, all requirements imposed on merchants also applied to the aggregators themselves.  These “master merchants” are permitted to provide payment processing services to smaller “sub-merchants”.  MasterCard calls this a Payment Facilitator or “PayFac”.  Visa uses the Payment Service Provider or “PSP” nomenclature.  Once a sub-merchant’s annual volume hit $100,000 per card brand, that sub-merchant was ineligible for aggregation, requiring a contract directly with the acquirer. 

 The aggregator model has enabled small merchants to accept payment cards.  It also has enabled a broader array of companies to offer payment processing services.  All sorts of entities are electing to become aggregators.  Previously any non-bank company that desired to generate revenue by providing payment processing services to merchants was required under the card brand rules to become an independent sales organization, or ISO.  The aggregation rules now allow those entities to become aggregators instead.   In some instances traditional ISO companies are qualifying as aggregators.  And companies that have created software that caters to a certain merchant vertical are bundling their software offerings with payments under the aggregator construct.

 This past October, MasterCard revamped its PayFac standards.  PayFacs are now classified as a type of service provider, rather than a merchant.   The permissible submerchant transaction volume was raised from $100,000 to $1,000,000 in annual MasterCard volume.  Entities with higher annual volumes must enter into direct merchant agreements with an acquirer. 

 In addition, the revised rules state that performing a credit check when screening a prospective merchant or submerchant is not required if the entity has annual MasterCard transaction volume of $100,000 or less.  Further, the new standards specify clauses that must appear in contracts between PayFacs and submerchants, and mandate that submerchant contracts must include all provisions required to be included in a standard merchant agreement.

 We have observed an interesting evolution in the contract terms entered into between PayFacs and acquiring sponsor banks.  As the acquirers gain experience with the PayFac model, that is reflected in a shifting of the terms under which acquirers are willing to sponsor aggregators.  History proves that nothing ever stays the same in the payments business; we expect this new aggregator model will continue to morph and have an effect on the payments landscape for some time to come.

 –Holli Targan, Attorney and Partner, Jaffe, Raitt, Heuer & Weiss, P.C.

Holli Targan

Attorney & Partner

FinCEN Rules that ISOs and Processors Are Not Money Transmitters

2 Oct 2014

In the age of greater regulatory scrutiny on the ISO business, here’s a shout-out to FinCEN, who recently ruled that ISOs and processors are not money transmitters under the Federal Bank Secrecy Act (BSA).

In a refreshingly straight-forward administrative ruling dated August 27, 2014, the Financial Crimes Enforcement Network (FinCEN) clarified that an ISO company’s activities marketing card processing services to merchants does not make the company a money transmitter under FinCEN regulations.   Because the ISO neither accepted nor transmitted funds on behalf of the merchants it solicited, nor on behalf of the sponsor bank, it did not satisfy a critical component of a money transmitter:  that of transmitting funds.  

The ruling also set forth a four part test to determine whether payment processing activities fit within a payment processor exemption to the money transmitter definition.  In order for the payment processor exemption to apply, the processor:

 1.  must facilitate the purchase of goods or services,

2.  must operate through clearance and settlement systems that admit only BSA-regulated financial institutions,

3.  must provide the service pursuant to a formal agreement, and

4.  must have an agreement with the seller or creditor that provided the goods or services and receives the funds.  

The question of whether or not ISOs and processors qualify as money transmitters under Federal law has dogged the industry for some time.  This ruling finally clarifies that traditional ISOs do not qualify as money transmitters, and that as long as processors satisfy the above conditions, they will not be deemed a money transmitter under the BSA. 

Unfortunately state law still must be reckoned with, and remains murky.  Each state has its own money transmitter law, and a similar ruling would need to be obtained from each state to fully settle the issue.  But the FinCEN action will make an easier case in front of state regulators that the activities of ISOs and processors should not render them money transmitters under state statutes.

–Holli Targan, Attorney and Partner, Jaffe, Raitt, Heuer & Weiss, P.C.

Holli Targan

Attorney & Partner

Top 4 Legal Concerns for Merchant Cash Advance Businesses

19 May 2014

The number of companies that have entered into the merchant cash advance (“MCA”) business has grown rapidly over the past year. An industry that seemed all but dead in 2008 has re-emerged and may be stronger than ever. With traditional lending institutions still cautious about lending, especially to startups and emerging businesses, MCA businesses have helped to fill the void in providing much needed capital to businesses shut out from the traditional lending institutions. Further, with independent sales organizations’ (“ISOs”) close relationship with merchants, ISOs are able to provide a value-added service while securing an additional source of revenue.

But ISOs should proceed with caution. There are many legal issues and uncertainties involved in offering cash advances. Set forth below are 4 legal concerns that an MCA business must be aware of when entering into an MCA arrangement with a merchant.

1.      Structuring Transaction as a Sale Rather Than a Loan

The most important legal concern for MCA businesses is structuring the transaction as a sale rather than a loan.

By structuring the transaction as a sale, rather than as a loan, the MCA business can avoid having to apply for the commercial lending licenses. In addition, the state usury laws may be inapplicable. Therefore, it is imperative that businesses thinking of offering cash advances to seek advice from a knowledgeable attorney.

2.      Tread Lightly in California

A majority of the litigation concerning cash advances has come out of California. The most prominent is Richard B. Clark, et al. v. AdvanceMe, Inc. under which AdvanceMe agreed to a settlement payment of $23.4 million and forfeited the right to pursue further payments from the plaintiff merchants. The litigation in California should make MCA businesses especially cautious when conducting business in California. .

3.      Drawing the Line on the Length of the Merchant Contract

With the increased interest in the MCA industry and the entry of new participants, businesses offering MCA services have to find ways to differentiate themselves from the competition. Obviously, pricing is a major form of differentiation. Another not so obvious form of differentiation is the sheer length and complexity of the merchant contract. A merchant may well choose a deal with a 4 page contract over one with 16 pages. Be mindful about finding the right balance between being legally protected and not scaring off business with a lengthy document.   

4.      Avoid Enforcement Action

States can impose harsh penalties on businesses that offer commercial loans without lender licenses or that charge usurious interest rates. However, there are few cases that address the issue of what constitutes a sale as opposed to a loan in the MCA context. Therefore, it is important that your MCA business adheres to the best practices discussed above so that if a court decides a case that is harmful to the MCA industry as a whole, you will avoid the attention of state attorney generals.

— Andrew Hayner, Jaffe, Raitt, Heuer & Weiss, P.C.

Holli Targan

Attorney & Partner

Holli Targan honored as one of the most influential women in the payments industry

13 May 2014

PaymentsSource, the leading information resource for news, trends and analysis in the payments industry, has honored Jaffe attorney and partner Holli Targan as one of the year’s Most Influential Women in the Payments industry for 2014

Ms. Targan was honored at a reception held April 22 during the 26th Annual Card Forum & Expo in Orlando, Florida and was a featured panelist at the Women in Payments Leadership Exchange. Selected for her achievements in a traditionally male dominated industry, Targan is one of only 20 women recognized for helping redefine the way people and businesses handle money.

Read PaymentsSource article by Ed McKinley regarding Holli’s achievements in this dynamic industry sector.


–          Jill Miller, Jaffe Raitt Heuer & Weiss P.C.

Holli Targan

Attorney & Partner

Are you complying with the Fair Credit Reporting Act?

29 Apr 2014

As an employer, you must comply with the Fair Credit Reporting Act (“FCRA”) if you hire an outside third party, known as a “consumer reporting agency” to perform credit and background checks on employees and applicants.  The information provided by a consumer reporting agency to an employer is referred to as a “consumer report” and such report can contain anything from information on an employee or applicant’s creditworthiness and reputation to information regarding their criminal history.  While the FCRA contains many requirements related to consumer reports with which employers must comply, three basic notices employers are required to provide are:

1.            Notice prior to obtaining a consumer report.

After obtaining written permission from an applicant or employee to obtain their consumer report, you must provide them with written notice that you might use information in their consumer report for decisions related to their employment – such as hiring, retention, promotion, reassignment, etc.  This notice must be in its own document and cannot be contained within an employment application.

2.            Notice prior to taking adverse action.

Before you reject a job application, reassign or terminate an employee, deny a promotion, or take any other adverse employment action based on information contained in a consumer report, you must give the applicant or employee a notice that includes a copy of the consumer report you relied on to make your decision and a copy of the FCRA document “A Summary of Your Rights Under the Fair Credit Reporting Act.”

3.            Notice after taking adverse action.

If you take adverse action based on any information contained in a consumer report, you must notify the applicant or employee of that fact.  This notice is called an “adverse action notice” and the FCRA sets forth specifics as to when and how the notice must be sent, in addition to what information the notice must include.

The FCRA is complex and contains potentially significant consequences for non-compliance.  As an employer, you should review your processes and procedures to verify that you are not only sending out the appropriate FCRA notices but that you are in full compliance with all applicable provisions of the act.

Heather Maldegen-Long


Durbin Regulation Ruling: Appeals Court Overturns Lower Court Decision

21 Mar 2014

 Today the District of Columbia Court of Appeals upheld the Federal Reserve Board’s regulations interpreting the Durbin Amendment, and in so doing reversed the lower court’s decision invalidating those rules.  Last July, Judge Leon of the U.S. District Court concluded that the Board’s regulations violated the Durbin Amendment statute’s plain language.  Today the Court of Appeals disagreed, holding that the Board’s rules are a reasonable construction of the law. 

The court noted that it reviewed the Board’s interpretation of the law directly, according no deference to the lower court’s ruling.  In an opinion that is a marked departure from the lower court’s combative tone, today’s opinion logically analyzes each of the arguments advocated by the merchants and by the Federal Reserve Board, concluding that the Board’s interpretation of the Durbin Amendment language should stand.

The court remanded back to the Board one aspect of the Durbin regulation, requiring an explanation of the Board’s interpretation of the fraud prevention adjustment.  In the meanwhile, the existing regulation remains in place.

Thus, unless and until today’s decision is appealed to the Supreme Court, both the interchange fee and the anti-exclusivity aspects of the current regulation govern.

 –Holli Targan, Partner, Jaffe, Raitt, Heuer & Weiss, P.C.


Holli Targan

Attorney & Partner

CFPB Proposes Regulating Nonbank International Money Transmitters

29 Jan 2014

On January 23, 2014 the Consumer Financial Protection Bureau (CFPB) published a request for comment on a proposed regulation that would establish the CFPB’s supervisory authority over certain nonbanks that transfer money internationally.  If adopted, the rule would bring large participants in international money transfers within the CFPB’s supervisory jurisdiction.  Comments on the proposed rule are due 60 days after publication in the Federal Register.

Large participants in international money transfers are defined in the proposed rule as companies that send at least one million aggregate annual international money transfers on behalf of U.S. senders to a designated recipient in a foreign country.  A company would be able to dispute whether it qualifies as a large participant.  Any company that meets the “large participant” criteria will be subject to examination by the CFPB.  Exams may involve site visits by CFPB staff, exam reports, supervisory letters, and compliance ratings.

If this topic sounds familiar, it may be because last October CFPB regulations relating to remittance transfers went into effect.  That remittance rule imposes consumer protection requirements on international money transfers, while this regulation distinguishes larger participants in the market and subjects them to supervisory authority.  This rule would authorize the CFPB to examine for compliance with the earlier remittance transfer rule and for compliance with other consumer financial laws.  In addition, the CFPB would coordinate with State regulatory authorities in examining larger participants of the international money transfer market. 

International money transfers may be cash-to-cash transfers, or may be initiated using credit cards, debit cards, or bank account debits.  The transfers may use websites, agent locations, stand-alone kiosks, or phone lines.  Funds sent abroad may be deposited directly onto prepaid cards, credited to mobile phone accounts, or transferred to consumers’ nonbank accounts identified by email addresses or mobile phone numbers.  All such transfers would come within the ambit of the proposed rule.

The CFPB requests comment on all aspects of the proposed rule, including on any appropriate modifications or exceptions to it.  In particular the CFPB asks whether measures other than the number of transfers should be adopted to determine who qualifies as a “larger participant”, and whether a threshold other than one million transactions is more appropriate.  Submitting comments provides a great opportunity to influence the ultimate regulation.

Industry participants and regulators alike have grappled with the burgeoning money transmitter market and regulatory environment.  This proposal adds one more brick to the wall of regulation sure to surround the industry.

–Holli Targan, Attorney and Partner, Jaffe, Raitt, Heuer & Weiss, P.C.

Holli Targan

Attorney & Partner

CFPB Settles with ISO for Violating the Telemarketing Sales Rule

25 Oct 2013

Once again, an independent sales organization (“ISO”) has been sued by a Federal agency for violating the Telemarketing Sales Rule (the “TSR”). Once again, the government claimed that the ISO provided substantial assistance to merchants while it knew or consciously avoided knowing that the merchants were engaged in abusive telemarketing practices. However, unlike the lawsuits filed this past summer (which are described in our blog posts dated June 20, 2013 and June 24, 2013), the agency involved is the Consumer Financial Protection Bureau (“CFPB”).

On October 3, 2013 the CFPB filed a complaint and settlement order against Meracord LLC (“Meracord”). The TSR prohibits debt-relief service providers (“DRSPs”) from charging consumers fees before settling any of their debts. The CFPB zeroed in on Meracord through investigations into several DRSPs that allegedly charged illegal fees. In building its case against those DRSPs, the CFPB discovered that Meracord had processed at least $11 million in unlawful fees from October 2010 to July 2013. The complaint alleges that more than 11,000 customers were charged upfront fees by the merchants in violation of the TSR, and nearly 5,000 of them had none of their debts settled. The CFPB alleged that Meracord knew that it was transmitting advance fees to DRSPs that had not yet settled consumers’ debts and that were not entitled to advance fees.

At the time the complaint was filed, the CFPB, Meracord and Meracord’s chief executive, Linda Remsberg, agreed to an order that will: (1) permanently bar Meracord and Mrs. Remsberg from processing payments for debt-settlement companies and for members of the related mortgage-settlement industry; (2) impose a civil money penalty of $1.376 million upon Meracord and Mrs. Remsberg, jointly and severally; and (3) subject Meracord and Mrs. Remsberg to submitting additional compliance reports with the CFPB.

This is the first action taken by the CFPB against an ISO, which indicates that there is a new federal agency that ISOs must be cognizant of. The CFPB’s initial foray in the enforcement of the TSR should be seen as another warning sign that the federal government is serious about its enforcement of the TSR and it will hold payment processors accountable for their merchants’ failure to comply with the TSR by using the “knew or consciously avoided knowing that the merchants were engaged in abusive telemarketing practices” TSR language.

With the federal government’s recent actions regarding enforcement of the TSR, it would be in payment processors’ best interests to familiarize themselves with the TSR. Due diligence on merchant activities should be investigated to make sure that merchants are not violating the TSR. Although this routine may be burdensome, it pales in comparison to the alternative of possibly being shut out of the industry and having to pay millions of dollars in fines.

— Andrew Hayner, Jaffe, Raitt, Heuer & Weiss, P.C.

Holli Targan

Attorney & Partner