Surcharging Credit Card Transactions

creditcard swipe

In 2012, Visa and MasterCard settled a multi-billion dollar legal dispute between banks and retailers over credit card processing fees. As part of the settlement deal, the credit card companies had to reduce surcharging credit card transactions for 8 months at a fixed rate. They also concluded that surcharging credit card transactions, which are charges used to cover processing credit and debit payments (which are set by credit card companies and deducted from the transactions by banks who issue the cards), gave merchants the freedom to pass along surcharges to customers if they choose to do so.

The key phrase being ‘choose to do so’. The ‘check out fee’ for the customer could be anywhere in between 1.5% to 3% of the customer’s total purchase. However, ten states have laws restricting any type of surcharging of credit card transactions. These states are California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas. For example, it is prohibited to charge a customer the surcharge inside a Target store in New York, but it’s allowed inside a Target store in New Jersey. This makes for holes in the system.

While merchants pay $50 billion annually in surcharges for credit card transactions, and clearly would be benefiting from these surcharges to help lessen the load; many retailers chose not to. In fact, several large retailers opted out of the surcharges immediately. These companies include McDonald’s, Target, and Walmart. In the end, small businesses were left with the choice to decide whether they wanted to surcharge their customers  or not. Most small businesses followed suit with the larger retailers, fearing being the first in their area to start charging customers. Not only that, but business owners are aware they need repeat business to survive. If retailers started surcharging the credit card transactions to their customers—it makes the decision much easier for the customer to choose a competitor who has not elected to do so.

The bottom line is that no consumer wants to pay any hidden extra surcharges or taxes. This is evident when we look at competitive gas pricing. It’s no secret that fuel prices are cut throat competitive—and in most major cities, paying at the pump with a credit card over cash has resulted in higher prices. People are willing to travel and switch it up in the search for only a few cents off their gallon of gas. This too could be applied to surcharging credit card transactions; and the disadvantages to stores opting to surcharge could end poorly for the business.

So how is a consumer made aware that the retail location they are currently shopping in  surcharges the credit card transactions?  According to the settlement agreement, retailers must post signs making customers aware—and also inform Visa and MasterCard 30 days prior to charging the fee. American Express carriers would also be surcharged, including debit. Consumers using PayPal on the other hand, cannot be surcharged.

Consumers may not see extra fees on their receipts any time soon. Merchants continue to struggle in a battle against the courts and inflated surcharges put in place by two major card companies (Visa and MasterCard), which control over 80 percent of the market.  Due to this dominance, merchants don’t have other card issuing companies to choose from, and may be stuck accepting the surcharged credit card transactions.

In the meantime, these three questions remain.

  • Is it practical or is it good business to pass along surcharges to consumers or employees?
  • Should passing these surcharges become industry practice or is it taking a risk?
  • Will passing the surcharges result in angering employees as well as consumers?

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