Credit Card Surcharging Part 2: Compliance: Merchants in Open Violation of Surcharging Rules

The card schemes raise prices every April and October, cuz duopoly.

Last October’s price increases already have legislators – and others – complaining, especially as inflation continues moving in the wrong direction:

Senate Majority Whip Dick Durbin (D-Ill.) and Sen. Roger Marshall (R-Kan.) urged Visa and Mastercard on Wednesday to call off their plans to increase credit card swipe fees, arguing that the move would hurt small businesses and consumers.

Swipe fees — or the fees that credit card companies charge retailers for credit card transactions — are estimated to have cost U.S. merchants $93 billion last year and are often passed on to consumers, the senators noted in a joint statement.

https://thehill.com/business/4181836-bipartisan-duo-urges-visa-mastercard-to-call-off-swipe-fee-boost/

So it’s not surprising when you see merchants (and really the merchant’s payments processor) look to foist the cost of accepting plastic unto the merchant’s customers, with conveniently fat margins for the processor.

See below.

This merchant is violating at least two card scheme laws.

First, the merchant is going to surcharge debit cards.

That’s impermissible.

The ability to surcharge only applies to credit card purchases, and only under certain conditions. U.S. merchants cannot surcharge debit card or prepaid card purchases.

Visa rules

Second, the merchant is going to surcharge 3.5%.

That’s more than Visa’s cap of 3%, and certainly more than the average cost of this particular merchant’s interchange.

Limit the amount to your merchant discount rate (MDR) for the applicable credit card or 3% whichever is lowest.

Visa rules

In classic fashion the merchant doesn’t even recognize that paying with cash comes with its own form of shrinkage that probably outweighs the cost of accepting plastic.

Or maybe the merchant is trying to save on his/her income taxes by keeping cash transactions off the company ledger.

These merchants should just raise their prices by 3% if they’re so concerned with eating the effective tax that is card payment acceptance, but that wouldn’t make their processors any money, so very few merchants are encouraged to do this.

There’s something interesting to consider.

Why is the surcharging limit now at 3%?

Isn’t that arbitrary?

There are cards that carry an interchange cost greater than 3%; wasn’t the entire purpose of surcharging to avoid shouldering merchants with the economic penalty to accept cards?

So who can determine what the surcharge is and what a reasonable number should be?

This is a legitimate question, and none of the attorneys we spoke with on the matter where able to provide much clarity. In fact, the summary could be something like “well, as soon as merchants sue the networks for antitrust violations and restraint on trade based on the surcharge cap, we’ll have an answer.”

And there’s one last piece of contradictory language that makes surcharging really mucky.

In accepting payment from any of the card brands (Visa, Mastercard, AMEX, Discover, and probably JCB) merchants are not allowed to treat a single card brand any differently than the others.

This is scheduled to somewhat change following the large class action settlement, but it’s still murky AF.

Per the language in Visa’s rules (5.5.1.7):

In the US Region and US Territories: A Merchant must not assess a Credit Card Surcharge on Visa Credit Card Transactions in a specific payment channel if either:

• The Merchant is prohibited or effectively prohibited by a Competitive Credit Card Brand from assessing surcharges on the Competitive Credit Card Brand’s products in that payment channel.
• The Merchant’s ability to surcharge a Competitive Credit Card Brand in that payment channel is limited by that Competitive Credit Card Brand in any manner and the Merchant assesses a Credit Card Surcharge on conditions that are not the same as the conditions on which the Merchant would be allowed to surcharge transactions of the Competitive Credit Card Brand in that payment channel, or on which the Merchant actually surcharges transactions of the Competitive Credit Card Brand in that payment channel, after accounting for any discounts or rebates offered at the Pointof-Transaction.

This prohibition does not apply and a Merchant may assess a Credit Card Surcharge on Visa Credit Card Transactions if one of the following:

• The Competitive Credit Card Cost of Acceptance or the Competitive Credit Card Product Cost of Acceptance to the Merchant is less than the Visa Credit Card Cost of Acceptance or Visa Credit Card Product Cost of Acceptance to the Merchant and the Competitive Credit Card Brand does not prohibit or effectively prohibit surcharging credit card transactions.
  • The Competitive Credit Card Cost of Acceptance
  • The amount of the Credit Card Surcharge imposed on a Visa Credit Card
• There is an agreement between the Merchant and the Competitive Credit Card Brand in which the Merchant waives or in any other way restrains or limits its ability to surcharge transactions on that Competitive Credit Card Brand, provided that:
  • The agreement is for a fixed duration, is not subject to an “evergreen clause” (i.e., automatically renewed unless terminated by the parties to the agreement) and is not a standard agreement generally offered by the Competitive Credit Card Brand to multiple merchants.
  • The Merchant’s acceptance of the Competitive Credit Card Brand as payment for goods or services is unrelated to and not conditional upon the Merchant’s entry into such agreement. The agreement is supported by the exchange of material value.
  • The agreement expressly specifies a price under which the Merchant may accept the Competitive Credit Card Brand’s products and surcharge those transactions up to the Merchant’s Merchant Discount Rate for the Competitive Credit Card Brand, after accounting for any discounts or rebates offered by the Merchant at the Point-of-Transaction.

Basically every merchant that accepts more than one card type is violating surcharging compliance.

It gets even more complicated for Amex:

Amex has a non-discrimination policy, but their regulations require imposing equal treatment across all Other Payment products. A payment product is defined as any charge, credit, debit, stored value, prepaid, smart card, account access devices or other payment cards, services or products other than the Card. Since the Amex requirement includes debit and prepaid products and it is against Visa and Mastercard rules to surcharge debit and prepaid products, merchants wishing to charge a surcharge would be considered non-compliant (from an Amex rules perspective) in certain scenarios.

https://empower2.fisglobal.com/rs/092-EMI-875/images/Merchant%20Surcharging%20Guide%20External%2001132023.pdf

Note: the FIS document above really is top shelf so we’re embedding it for easier consumption.

Here’s the actual language from Amex’s merchant rules (3.2) if you’re wondering:

Merchants must not impose any restrictions, conditions, disadvantages, or fees when the Card is accepted that are not imposed equally on all Other Payment Products, except for electronic funds transfer, or cash and check,

It’s clear to us that the card schemes, when taken together, have written rules that go against the intent of the law which allows merchants the freedom to surcharge.

How the hell do you police merchant enforcement?

Well, Visa hired 100,000 secret shoppers. These shoppers are creating lists of merchants in violation of the obvious surcharge rules (surcharging debit or not meeting the 3% cap) and sending the list to Visa.

Visa then sends the merchant and their affiliated payment processor a notice, alerting them to the potential fine for non-compliance; that fine ranges from $5,000 to $25,000.

Often the merchant or processor will fix this.

But likely only temporarily.

Payments is a game of whack-a-mole.

Grab a paddle.