Assessing Surcharges on Credit Card Transactions

February 28, 2013

Why you should think twice before doing this!

The topic of surcharges has really come to the forefront with the recent announcement that the federal district court preliminarily approved a class settlement that resolves the antitrust claims involving Visa and MasterCard interchange and the merchant acceptance rules in the U.S. and its territories. This preliminary settlement allows merchants to legally add a surcharge to their credit card transactions starting January 27, 2013 through July 20, 2021.

As a result, now, more than ever, the Merchant Services industry is all a buzz with talk of surcharges. More and more you hear about businesses wanting to add surcharges to their credit card transactions in an effort to either re-coop the cost of processing credit card transactions or encourage customers to use cash. Who wouldn’t jump at the opportunity to add a surcharge to offset the cost the merchant pays to run the transaction? While on the surface this seems like a simple and obvious way for the business to add to their bottom line, there are numerous factors that come into play that could make this a tricky or even costly choice for the merchant.

At ABC Financial, we have closely been watching the class action suit and potential settlement for well over a year. Like you, we wanted to know if surcharging would be allowed, and more importantly, would it be something our clients could use to increase revenue. After carefully researching the recent release of surcharge allowance regulations, ABC would not only caution, but discourage, clubs from jumping on the surcharge band wagon. There are several strict and confusing rules within the regulations that will impact a clubs ability to effectively utilize, manage and benefit from the surcharge practice. Simply put, any ‘gain’ in revenue will come with a large price tag. Here are some examples:

1. Visa and MasterCard will now require merchants to notify and register with both the card brands as well as the merchant’s bank — called the “acquirer” — 30 days prior to implementing a surcharge. This registration process is mandatory and will spotlight the merchant along with all their transaction processes for full transaction rule/compliancy review, not just regarding surcharges. You are now ‘registered’ with Visa and MasterCard and are on their radar as a result. Not only will they be auditing your surcharge practices but ALL processing practices.

2. U.S. merchants may assess a surcharge on credit card purchases that does not exceed the merchant’s cost of acceptance for the applicable credit card surcharged with a maximum surcharge of 4 percent. Do you even know what this means? We had to stop and think through it carefully ourselves! Here’s more on what will be a very confusing limitation of surcharging.

  • Visa specifically states that the surcharge is no greater than the merchant’s average discount rate for Visa credit card transactions for the proceeding one-month or twelve months and does not in any event exceed 4% (even in the cases where the merchant’s average discount rate exceeds 4%).
  • MasterCard specifically states that the surcharge is no more than the lesser of the merchant’s average MasterCard merchant discount rate (calculated historically or based on the previous month) or the maximum surcharge cap, which will be posted on the MasterCard’s website.

The below websites can be viewed for additional details on surcharging but you will be hard pressed to find any site out there that will break this down into laymen terms or clarify how you decide to calculate off one month OR twelve months and how you keep up with this surcharge rate going forward. Your historical average or one month cost of acceptance is a continuous moving target.

3. The merchant will see a discount/processing fee added to the surcharged amount charged to the customer. So while most merchants want to add a surcharge to offset the processing cost of the transaction, you will in fact pay a discount rate/processing fee on the surcharged amount as well. In the end, while the merchant will benefit from increased revenue, it will not be to the extent originally expected because processing fees will increase with the decision to surcharge.

4. Retailers are permitted to apply a surcharge to only credit card purchases and cannot impose a surcharge for purchases made using a debit or prepaid card. This would require you knowing up front what type of card you are accepting. Most credit cards are not marked with “debit” or “prepaid” even if they are a debit or prepaid card. What happens when one of your front desk, training or sales staff runs a debit/prepaid card as a credit card or the customer misstates the card type? Further causing a challenge, it does not matter if you run the debit/prepaid card as a credit card. If it is a debit card or prepaid card it cannot face a surcharge regardless of how it is processed!

5. E-commerce merchants (this would apply to MYiCLUBonline) must alert shoppers about any surcharge on the first page or point of sale that references credit card brands.

6. Brick-and-mortar merchants (which would be the clubs) must disclose surcharging at the point of entry/store entrance, at the point of sale and on the sales receipt. The disclosure on the receipt must list the amount of the checkout fee or surcharge, the fact that the merchant is imposing the charge and that the fee is not greater than what it costs the retailer to accept credit cards. Any surcharges charged MUST BE refunded if a refund is processed on the sale. How would you feel walking into an establishment and seeing the sign “We impose a surcharge on credit cards that is not greater than our cost of acceptance”?

7. Merchants must surcharge Visa and MasterCard on the same terms and conditions as any equal or higher cost competitor that imposes limits on surcharging. This also means that if the merchant accepts a card brand that does not allow surcharging — such as American Express or Discover — the merchant will not be allowed to surcharge the Visa and MasterCard credit card transactions. All card brands are subjected to a competitive “level playing field” limitation so they all must be treated equally when applying or not applying a surcharge.

8. If you conduct business in multiple states and you decide to implement a surcharge, you must do so for all of your locations in all of the states in which you do business. There are currently laws limiting surcharging in: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas. This means, if one of your locations is within these states, then none of your locations can add a surcharge.

In summary, a participant that engages in this surcharge would have to:

  • Expose themselves to more scrutiny by the card brands
  • Keep track of what credit cards they take and whether or not they all participate in the program
  • Know the current processing rates for each card brand to determine how they qualify with the rules above
  • Understand the rules regarding notification to the credit card company and the consumer
  • Know what states allow or don’t allow surcharges as well as other rules and regulations imposed on merchants wanting to add a surcharge

There would be no feasible way for ABC to keep track of this information or to calculate the surcharge rate that could be imposed, so that responsibility would lie solely on the business owner that chooses to go down this path.

What ABC Financial Recommends
ABC Financial recommends a “cash discount” as a more viable option to the members that pay by ACH rather than surcharging credit card transactions. This option would still reduce the clubs cost by encouraging the use of bank accounts which eliminates credit card fees altogether. Additionally, it removes the risks associated with possibly violating the rules and regulations governing the addition of a surcharge. These risks include potential fines and losing the right to accept credit cards all together.

We at ABC want to help in the continued success of all of our business partners, and we believe the cash discount option is a better way to achieve your goal of reducing cost without adding complexity or risk.

For more questions or concerns about assessing a surcharge on credit card transactions, please contact your ABC Financial Account Executive.

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