Effective January 27, 2013 merchants in the U.S. region and U.S. territories have the option of adding a surcharge to Visa and MasterCard credit cards. Yet despite the media hype over these recent changes allowing merchants to charge up to a 4% surcharge on credit card transactions, the reality is few merchants are expected to implement additional fees at the point of sale.

Most merchants will likely take a wait and see approach before contemplating adding surcharges, letting their closest competitors try it first.

Another issue is that new application software to support surcharges has not yet been widely developed. One of the many stipulations if a merchant chooses to implement surcharge fees is that they must use a payment application which supports the following mandated POS functionality:

• POS application must capture the Surcharge Fee separately from the Purchase (Sale) Amount within the request message to the Host (Processor).
• POS application receipts (merchant and cardholder copies) must print both the Sale (Purchase) Amount and the Surcharge Amount (Fee).

The processor host must develop, support and publish technical specs to terminal manufacturers, POS and payment gateway providers who must then update their payment solutions. Given EMV requirements are already consuming development resources, meeting these additional surcharge functionality requirements is going to take time and will likely be rolled into EMV development efforts.

Merchants must also adhere to these additional requirements:

• Merchants must first notify Visa, MasterCard and their Acquirer of their intent to surcharge at least 30 days prior to implementing surcharging. You may notify Vantage by emailing us at support@vantagecard.com. Merchants should submit notifications to Visa at www.visa.com/merchantsurcharging and to MasterCard at www.mastercardmerchant.com.
• Surcharge fees must not be more than the merchant’s effective discount rate. To meet this requirement, merchants will need to calculate their average effective real rate for the preceding one to twelve months with the maximum surcharge cap being 4%. Vantage clients can use PayView to look up their effective real rate.
• Implement surcharges in a manner which ensures a level playing field amongst all general purpose credit cards (Visa, MasterCard, Discover and American Express). To further clarify, a merchant cannot have surcharge fees on Visa and MasterCard but no fee for American Express or Discover transactions – the surcharge fee must be the same for each Brand accepted by the Merchant. Additionally, PayPal currently does not allow surcharges. If the merchant accepts the PayPal Brand, they cannot implement surcharges on any of the other card Brands.
• Surcharge rules only apply to credit. Merchants are NOT allowed to surcharge on Debit (Signature or PIN) or Pre-paid cards.
• Display notification to its cardholders at the Point-Of-Sale (POS) or Point of Interaction (POI) (a.k.a. POS signage). POS signage must be displayed at the register/checkout for store fronts, and via the payment acceptance web page for electronic commerce merchants. See Sample Surcharge Disclosure.

If merchant chooses to surcharge, they must clearly disclose to their customers at the point of store entry or at the point of interaction (sale) and the dollar amount of the surcharge on the transaction receipt. The surcharge amount must be electronically printed on the cardholder’s receipt in order to allow the entire transaction (surcharge and amount of goods or services) amount to be submitted in the authorization and clearing records.

• Merchants must continue to comply with all applicable state laws that prohibit surcharging and state/federal laws regarding deceptive or misleading disclosures. Keep in mind that the states prohibiting surcharging for credit cards include California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas.
• Must return original purchase - surcharge fee when a Refund (Return) is conducted.
• Government and education merchant categories have additional surcharge rules including Visa registration and service fee descriptor requirements.

Merchants can review additional information about surcharging credit cards at www.visa.com/merchantsurcharging and www.mastercardmerchant.com.

As part of the Merchant Class Action Litigation Settlement, Visa and MasterCard will make changes to their merchant acceptance practices.

Visa and MasterCard will change their rules effective January 27, 2013 pertaining to the surcharging of credit transactions at the point of sale. Please review the detailed communications on surcharging in their entirety at www.mastercardmerchant.com and www.visa.com/merchantsurcharging.

In summary, and subject to any limitations identified on the above websites or in the upcoming rules changes, U.S. merchants may surcharge Visa and MasterCard credit card transactions (not debit or pre-paid card transactions) at the brand level or the product level, but not both, with the following conditions: (1) surcharges cannot exceed certain levels (generally the gross merchant discount rate also known as myrealrate); (2) merchants that accept cards of other payment network brands (i.e., American Express, Discover) are subject to competitive “level playing field” limitations; and (3) merchants must satisfy notification and disclosure requirements to both the payment card network and the merchant’s acquirer at least 30 days prior to surcharging. In addition, a U.S. merchant that surcharges must provide clear disclosure to the merchant’s customers at the point of interaction.

For additional information including a list of the states that prohibit surcharging, please visit: http://blog.vantagecard.com/post/Payment-Card-Usage-Surcharges.aspx.

In the proposed settlement of the Payment Card Interchange Fee and Merchant Discount Antitrust Litigation case, merchants would win the ability to impose surcharges on customers who use card payments.

However, according to analysis of the proposed settlement, the ability to surcharge customers includes numerous restrictions and requirements:

• The surcharge amount will be limited by a cap established by Visa and MasterCard and by card type (debit card surcharge allowances to differ from credit card surcharge allowances)
• Merchants will be required to notify Visa and MasterCard before surcharging begins.
• Merchants post signs notifying customers that they surcharge
• Merchants must include the surcharge amount of any fee on receipts
• Merchants are not allowing a surcharge on Visa and MasterCard cardholders greater than charges to customers paying with American Express or Discover cards. For practical purposes, since AmEx prohibits surcharging, merchants would be forced to drop this payment choice.

Of course these surcharge rules will not apply in the 10 states that prohibit that practice by state law to protect consumers. The states that prohibit surcharging for credit cards include California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas. If more merchants implement payment type surcharges at the point of sale, we can expect consumer advocacy groups to push for even more state regulations to prevent what they will frame as gouging consumers with fees.

Then there is the question of how payment surcharge fees will hurt sales. It is argued that surcharging can cause consumers to think twice about their purchase at the checkout counter, reduces the amount of goods and services consumers will buy and lowers the average sale transaction. In highly competitive consumer markets, customers are expected to respond negatively to payment surcharges. Therefore, surcharge fees are expected to be market-driven and seen in environments where consumers have little choice but to pay them.

Merchants have long been able to offer a cash discount, pricing as an additional reward for cash carrying customers, rather than a penalty for those paying with plastic. And recent industry changes already allow merchants greater flexibility to steer their customer's payment choice.

• MasterCard and Visa Settled with Department of Justice to allow merchants more options to steer consumer payment choices
• Merchants also won Card Acceptance changes under the Dodd-Frank Act

Instead of surcharge fees, today’s best practice for implementing payment steering policies include offering a discount or benefit to encourage your preferred payment method, offer a promotion after the transaction is completed (like a credit on the billing statement or rebate) or use a separate coupon or voucher.

Visa and MasterCard have agreed to new changes that will allow merchants greater flexibility to steer their customer’s payment choice.

The Dodd-Frank financial regulations signed into law in July allow merchants to set a $10 minimum card purchase. Now, announced in a Justice Department consent decree, Visa and MasterCard have agreed that merchants can:

• Offer consumers an immediate discount or rebate or a free or discounted product or service for using a particular credit card network, low-cost card within that network or other form of payment;
• Express a preference for the use of a particular credit card network, low-cost card within that network or other form of payment;
• Promote a particular credit card network, low-cost card within that network or other form of payment through posted information or other communications to consumers;
• Communicate to consumers the cost incurred by the merchant when a consumer uses a particular credit card network, type of card within that network, or other form of payment.

Visa and MasterCard can still require merchants to accept all cards within their brands. However, now merchants will be able to offer discounts for lower-cost cards or other forms of payment. Of course, merchants may refuse to accept card payments.

American Express did not settle.