In recent weeks, dealers have been excited by the news headlines that businesses can begin surcharging their customers for credit card purchases. Credit card issuer rules have always been a thorn in the side for dealers in vehicle sales. “Can we add a surcharge?” “Can we limit the amount charged?” No federal law has prevented these practices (but state law may, as we will discuss below), but the credit card rules have. So dealers have been asking, “Can we add a surcharge?” And the answer is “Yes, but only under the appropriate circumstances.” Here are some questions dealers may have and some answers on the new developments.
What happened that caused the publicity?
A class action lawsuit against Visa and MasterCard concerning interchange fees was settled last fall, and the settlement was approved on November 27, 2012 by the United States District Court for the Eastern District of New York. The lawsuit alleged that Visa and MasterCard violated the law because they set interchange fees and they imposed and enforced rules that limited merchants from steering customers to use other forms of payment. The suit charged that this insulated Visa and MasterCard from lowering the interchange fees because they did not feel competitive pressure to do so.
What are interchange fees?
When a cardholder makes a purchase with a credit or debit card, there is fee paid by the merchant that is a percentage of the purchase price. Interchange fees represent the bulk of the earnings of Visa and MasterCard from merchants.
What does the settlement provide about the right to surcharge?
As of January 27, 2013, merchants in the United States were permitted to pass along to customers the interchange fees for Visa and MasterCard credit cards (but not debit cards) at either (but not both) the “Brand level” or the “Product Level.”
- “Brand Level” Surcharge. This surcharge allows dealers to charge a fee to all customers who pay with Visa or MasterCard branded credit cards so long as the surcharge is:
- the same for all Visa credit cards or all MasterCard credit cards;
- not more than the dealer’s average Visa or MasterCard merchant discount rate (calculated historically or based on the previous month); and
- not more than the maximum surcharge cap, which will be posted on Visa’s and MasterCard’s websites (if a cap is set).
- “Product Level” Surcharge. For this surcharge, a dealer may impose a surcharge on a particular Visa or MasterCard credit card product, such as Visa Signature.
- The amount of the surcharge must not be more than the dealer’s cost to accept the particular Visa or MasterCard credit card product; and
- The surcharge must be the same for all transactions on the particular Visa or MasterCard credit card product, regardless of the card’s issuer.
So as a dealer can I just start surcharging on credit card purchases?
Not exactly. The settlement only involves Visa and MasterCard credit cards, and a merchant’s ability to surcharge is limited if a dealer may not surcharge or is limited in surcharging by other competing issuers of credit cards companies such as American Express, Discover, or PayPal that the merchant accepts.
- If the dealer accepts a competing brand of credit card that prohibits the dealer from surcharging in a particular channel of commerce, the dealer may not surcharge Visa or MasterCard cards.
- If the competing brand card permits a surcharge, but its fee is less than the fee for Visa and MasterCard, then the merchant may only surcharge the percentage fee of the competing brand card.
- If a merchant accepts a competing brand credit card that is more expensive than Visa or MasterCard, the surcharge is limited to the Visa and MasterCard fee.
Dealers that accept credit cards from companies that were not part of the settlement, like American Express and Discover, may find it difficult to impose surcharges as long as those companies do not permit them. Moreover, dealers may not impose surcharges where prohibited by state law — California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas all prohibit surcharges.
Can dealers offer incentives or discounts to customers who do not pay with Visa or MasterCard cards?
Yes. Dealers may offer discounts or other financial incentives at the point of sale to customers who do not pay with Visa or MasterCard cards.
What does the dealer have to do to begin surcharges on customer credit card use?
A dealer that wishes to and that can, because of the absence of other limitations, apply either a “Brand Level” or “Product Level” surcharge must
- Provide Visa and MasterCard with at least thirty (30) days’ advance written notice that the dealer intends to impose surcharges at either the “Brand Level” or “Product Level”;
- Provide a clear disclosure to its customers at the point of dealership entry or in an online environment on the first page that references credit card brands that the dealer imposes a surcharge that is not greater than the applicable merchant discount rate for Visa or MasterCard Credit Card Transactions;
- Make clear disclosures to its customers of the dealer’s surcharging practices, at the point of sale with the customer, in a manner that does not criticize the brand, network, issuing bank, or the payment card product being used. (That does not prevent a dealer from advising a customer that the dealer prefers or requests that a cardholder pay with a Credit Card or Debit Card that has a lower cost of acceptance to the dealer than the one the customer wishes to use.) The information on the dealer’s surcharging practices at the point of sale must include
- the amount of any surcharge that the dealer imposes,
- a statement that the surcharge is being imposed by the dealer, and
- a statement that the surcharge that the dealer imposes is not greater than the applicable merchant discount rate for Visa or MasterCard credit card transactions.; and
- Make clear disclosure of the dollar amount of the surcharge on the transaction receipt provided by the dealer to its customers.