Surcharging Card Transactions

1 Jun

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.

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