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.

Upon preliminary approval of the largest antitrust settlement ever at $7.25 Billion, the end is nearing for the Payment Card Interchange Fee and Merchant Discount Antitrust Litigation battle now in its seventh year. But some large retailers oppose the deal claiming they are being forced to forfeit their rights to sue over the card companies’ practices in the future. Filing their concerns in a federal appeals court to challenge the preliminary approval, a decision allowing plaintiffs to begin signing up more than 7 million eligible merchants, the court decided to defer the matter until after final judgment in the case had been issued, a decision expect late in 2013.

As expected, the federal judge has now granted preliminary approval of a $7.25 billion class-action settlement in the Payment Card Interchange Fee and Merchant Discount Antitrust Litigation case saying opponent’s arguments were not persuasive enough to derail the deal.

Calling opponent’s concerns voiced so far "overstated", the U.S. District Court Judge did note the bar for preliminary approval is significantly lower than for final approval, a decision not expected until next year.

Under the settlement, millions of merchants would receive payments totaling $6.05 billion. Those merchants on direct Interchange pass through pricing will also see a temporarily reduced swipe fee by an amount equal to $1.2 billion. And merchants in states that don’t prohibit by law will be able to charge extra fees to customers who pay with credit cards.

The judge’s preliminary approval decision allows plaintiffs to begin signing up more than 7 million retailers that might be eligible to participate in the settlement. It also means rule changes, including the ability to impose surcharges on customers who use card payments, are set to take effect in 60 days.

Yet all this could become void if final approval isn’t granted. Everyone following the case expects that opposition to the settlement will grow louder as the final approval date draws closer. Ever since the proposed settlement was announced some big box retailers and national trade associations have come out against the deal arguing that it grants overly broad releases to Visa and MasterCard.

Some have noted that the big box retailers that opposed the settlement are doing so because they are starting a competing payment network called the Merchant Customer Exchange. American Express has voiced similar concerns saying they worry the settlement would hinder their ability to bring antitrust claims against MasterCard and Visa in the future.

However, not all large merchants and trade groups are against the deal. Plaintiffs in favor of the settlement said the objectors are misinformed or have other agendas. Attorneys who negotiated the deal on behalf of merchants defended the settlement, arguing that it includes substantial reforms for merchants that will put downward pressure on Interchange rates. While still other large merchants including Kroger Co., Walgreen Co. and Safeway Inc., have struck their own deals to settle with the card companies already.

In the seven-year old Interchange lawsuit (Payment Card Interchange Fee and Merchant Discount Antitrust Litigation case), a proposed settlement was announced on July 13, 2102, with an October 19, 2012 deadline to formally request approval from the court. If a preliminary approval is given at that time - a notice of the settlement will be sent to about 7 million U.S. merchants who accepted Visa or MasterCard credit cards since 2004. Then the judge overseeing the case must give a final approve before it can be implemented, which is not expected until the second half of 2013.

In the meantime, opposition to the settlement has grown claiming the settlement doesn’t do enough for merchants. Some trade groups have announced plans to fight the settlement in court. Both Target and Wal-Mart released statements criticizing the proposed deal. And recently US Senator Durbin, who led the amendment to the 2010 Dodd-Frank Act to have debit card Interchange regulated by the Federal Reserve, warned that the settlement would damage future legislative reform efforts.

Industry analysts are not surprised by Durbin’s comments or that some retailers object to the settlement yet don’t believe it will mean that the settlement won’t get approved. Many believe that the arguments against the settlement have already been considered in the long negotiations that lead to the proposed deal. Visa told investors that they expected the federal judge to grant preliminary approval to the settlement in the fall.

If the proposed settlement in the Payment Card Interchange Fee and Merchant Discount Antitrust Litigation case is approved, merchants will receive billions of dollars, a temporary Interchange rate reduction and the ability to surcharge card payment transactions. In return, the agreement releases Visa and MasterCard from future legal claims regarding Interchange, network rules, merchant fees and related issues by merchants.

Both the National Grocers Association and the National Association of Convenience Stores say they will oppose the agreement on the basis that the agreement does not address how Interchange is set or the complexity of Interchange fee schedules. Target and Wal-Mart are not plaintiffs in this case, but have criticized the proposed settlement for similar reasons and because it would grant Visa and MasterCard releases from future legal claims, even by merchants who aren’t part of the settling class.

Over the next few months, the judge will make a decision to approve or reject the proposed settlement. The next step is a “fairness hearing” in Brooklyn federal court. Despite some objections, most analysts don't expect enough merchants will opt out of the settlement deal to derail it. One reason is that without a settlement, it will take many more years and cost a lot more money to take the case all the way to trial. Another may be that the largest retailers have secured a collective bargaining provision to negotiate lower Interchange rates directly with the payment networks. It has been reported that 15 of the top 100 retailers representing 80% of Visa and MasterCard credit-card volume have already agreed to a separate settlement with the card networks. And while merchants give up their right to sue the networks and credit-card issuers over similar issues, lobbying efforts at both the federal and state levels are expected to continue for merchant rate Interchange reductions and simplification.

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.

An estimated 7 million retailers will be affected by a proposed settlement in the Payment Card Interchange Fee and Merchant Discount Antitrust Litigation case.

According to Reuters, it has been announced that Visa and MasterCard along with their card issuing banks have agreed to settle the Payment Card Interchange Fee and Merchant Discount Antitrust Litigation case with U.S. retailers for $7.25 billion. If approved by the judge, it would be the largest antitrust settlement in U.S. history.

According to reports, the settlement will include provision to allow stores to surcharge customers extra in an attempt to steer customers toward less expensive payments (although certain states laws prohibit the practice), will pay stores $6 billion and will lower interchange fees by the equivalent of 0.10% (10 basis points or $1 per $1,000 in sales) for 8 months valued at $1.2 billion with an additional $525 million paid to stores suing individually.

Stay tuned for more coverage on this settlement. But be careful. In the 2003 Visa and MasterCard settlement of a lawsuit by stores over the the "honor all cards" rules, $3 billion was paid out and many merchants gave up a third or more of their take to law firm solicitations. Just be patient. The details will come out on what if anything merchants need to do. In regards to the lower Interchange, as we continue to preach, move to a direct Interchange pass through service provider to take advantage of these savings (have we mentioned that's what we do?)

Visa Inc and MasterCard Inc are moving closer to a settlement in a seven-year old case named In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation. Most analyst are predicting a settlement and possibly by the end of July. One of the possible settlement outcomes could be a reduction in interchange fees which is expected to have a negative impact on bank stocks. If your holding bank shares of major card issuers, be warned. If you are a small merchant, we will keep you posted here about what it means to you and anything you will need to do.