Surcharging

 

The subject of surcharging is one that has caused a great deal of confusion in our industry for quite some time. However, because the United States District Court for the Eastern District of New York preliminarily approved a proposed settlement agreement in the In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation in November 2012, we are starting to see some clarification from the card associations.

As a result of the settlement agreement, Visa and MasterCard recently changed their Operating Regulations, giving merchants in the U.S. the ability to surcharge credit card transactions beginning January 27, 2013. To help understand the new rules, see the following summary of the rule changes.

What is a surcharge?

A surcharge, sometimes called a checkout fee, is an additional fee that a merchant adds to a consumer’s bill when he or she uses a card for payment.

Can U.S. merchants add a surcharge to transactions made with a credit card?

Under the settlement, U.S. merchants have the option of adding a surcharge to credit card transactions. However, merchants must decide if they want to surcharge at the “brand level” or the “product level,” but not both. A brand level surcharge applies the same surcharge to all credit card transactions for a particular brand (Visa or MasterCard). A product level surcharge applies to a particular type of Visa or MasterCard credit card (e.g., Visa Signature, Visa Signature Preferred, World Elite MasterCard).

Is surcharging limited to credit card transactions?

Yes, surcharging continues to be prohibited on debit and prepaid card transactions.

What are the rules for “brand level” surcharges?

  • The surcharge must be the same for all credit card transactions of that brand, regardless of issuer.
  • The surcharge must be no greater than the merchant’s average discount rate for that brand’s credit card transactions.
  • The surcharge cannot exceed 4% in any event.
  • For merchants that accept multiple brands of credit cards, additional requirements apply (see below).

What are the rules for “product level” surcharges?

  • The surcharge must be the same for all transactions of that particular product, regardless of the card’s issuer.
  • The surcharge must be no greater than the merchant’s average discount rate for credit card transactions of that particular product, minus the regulated debit interchange rate (currently 0.05% + $0.22).
  • The surcharge cannot exceed 4% in any event.
  • For merchants that accept multiple brands of credit cards, additional requirements apply (see below).

How should merchants handle surcharges for other payment networks?

For U.S. merchants that accept credit or charge cards from other payment network brands, including American Express, Discover, and PayPal, surcharging practices are subject to a competitive “level playing field” limitation.

  • If the merchant accepts a competing payment network brand (e.g., MasterCard) that is as or more expensive to the merchant than another brand (e.g., Visa), the merchant may surcharge one brand’s (MasterCard’s) credit card only in the same way as the merchant would be allowed to surcharge the competing payment network’s (Visa’s) credit card.
  • If the merchant accepts a competing payment network brand of credit card that prohibits the merchant from surcharging in a particular channel of commerce (i.e., either face-to-face or non-face-to-face), the merchant may not surcharge one brand’s credit cards unless it also surcharges the competing payment network’s credit cards regardless of the cost of that card to the merchant. In this case, the amount of the surcharge on the competing brand must be at least the lesser of the cost to accept the competing brand’s credit cards or the surcharge imposed on the first brand’s cards.

Do merchants who surcharge have to register or disclose their surcharging policies?

Yes, Visa and MasterCard require that merchants who decide to surcharge credit card transactions must satisfy the following notification and disclosure requirements.

  • The merchant must provide 30 days advance written notice to Visa, MasterCard, and the acquirer.
  • The merchant must provide clear disclosure to its customers that it is imposing a surcharge, including the amount, and that the surcharge is not greater than the merchant’s discount rate.
  • The dollar amount of the surcharge must be provided on the transaction receipt.
  • In addition, MasterCard and Visa also now require that the surcharge amount be included in the transaction that is sent to MasterCard and Visa. As a result, merchants are effectively required to have a credit card terminal or other POS system that can provide the transaction surcharge as part of the credit card transaction.

Do acquirers have to register or disclose merchants that decide to surcharge?

Yes, MasterCard requires that acquirers register merchants with MasterCard so they can help monitor compliance.

How do merchants register with MasterCard?

A merchant can satisfy its disclosure obligation to MasterCard by clicking here and providing the information requested.

How do merchants register with Visa?

Merchants who choose to surcharge must notify Visa 30 days prior to beginning to surcharge; click here to notify Visa.

How do merchants notify Clearent?

Merchants who choose to surcharge must notify Clearent 30 days prior to beginning to surcharge. Please email Clearent Customer Support and include your business name and merchant number.

What have Visa and MasterCard communicated about these changes?

The settlement agreement required Visa and MasterCard to provide a written notification to their merchants. The official notifications can be found at the links below:

Do any laws exist that pertain to surcharging?

Yes, 10 states have laws that limit or prohibit surcharging. These states include California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas. Please consult your legal advisor to make sure you comply with applicable state and local laws.

Where can I find more information on the surcharging rule changes?

Visa has created numerous resources on this topic, including Frequently Asked Questions and other documents that can help merchants decide if they should surcharge their customers. These resources can be found at www.visa.com/merchantsurcharging.

MasterCard also provides additional information on its website at www.mastercard.us/merchants/support/surcharge-rules.html.

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