As merchants are well aware, accepting credit card payments comes with a price: swipe fees. These fees, which usually range from 1.5 percent to 3 percent of the amount charged, cut into a merchant’s bottom line. Now merchants will be able to recoup this lost revenue by charging customers who pay with a credit card an extra fee. But these surcharges may have unanticipated negative consequences.
Effective Jan. 27, all three of the potential legal barriers to credit surcharges have been removed for Idaho merchants who accept Visa and MasterCard credit cards. First, federal law has permitted credit surcharges since 1984. Second, although 10 states prohibit credit surcharges (including Colorado and California in the West), Idaho allows credit surcharges. Third, in a change of policy, Visa and MasterCard will permit merchants who accept their cards to impose surcharges, under certain conditions.
Visa and MasterCard’s change in policy is part of a settlement of an antitrust class-action lawsuit filed by merchants. Although the settlement is not yet final, the policy change has taken effect. With 30-day advance notice to Visa and MasterCard and the merchant’s bank, a merchant can charge customers who pay with a Visa or MasterCard credit card a surcharge to recoup the swipe fee. Calculating the permissible surcharge is complex, but in general, it can equal the lesser of the swipe fee or 4 percent.
The policy also requires merchants to disclose the surcharge to consumers. The merchant must prominently display notices of the surcharge at the store’s point of entry and point of sale. In addition, the merchant must clearly identify the surcharge on the receipt.
If a merchant also accepts other credit cards like American Express or Discover, the policy is more complicated. To ensure a level playing field among credit cards, the settlement requires merchants to apply a formula that takes into account the costs and surcharge policies of the other credit cards accepted. The merchant may be required to apply the other credit cards’ surcharge policies to its Visa and MasterCard surcharges, while still complying with Visa and MasterCard’s policies. If the various policies conflict, it might be effectively impossible for a merchant to impose any surcharges.
Finally, charging credit surcharges may have negative impacts on a merchant’s business, both by lowering revenue and by imposing costs. Customers may interpret the credit surcharge as nickel-and-diming them, which could hurt sales, diminish goodwill and tarnish a merchant’s luxury image. Customers who are incentivized to pay out of pocket rather than on credit may be thriftier and less inclined to make impulse buys. If merchants start imposing credit surcharges rather than absorbing swipe fees into overall pricing as they currently do, this could exert downward market pressure on pricing. Finally, the likely increase in customer usage of checks and cash could impose additional costs, including the risk of theft, the burden of making bank deposits and the risk of dishonored checks.
Merchants who accept Visa or MasterCard now have the option to charge credit surcharges. However, it might be better to keep doing business as usual.
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Wendy Gerwick Couture, associate professor of business and commercial law at the University of Idaho in Boise. wgcouture@uidaho.edu
