By Dan Papineau
It is undeniable that the way retailers process credit and debit cards have undergone major changes. All these changes result in greater costs to business owners. The charges levied on retailers to process plastic seem exorbitant. From swipe fees to newly required technology and now chargebacks the customer payment landscape across the country has changed dramatically. It is actually quite ridiculous when you think about the history of debit and credit card use and why they came about in the first place. Electronic payment methods were developed to save financial institutions money. As an alternative to frequent visits to a branch to withdraw cash or the high cost of processing paper checks, electronic payment methods streamlined the banking industry. It is hard to believe now but, at one time, retailers were given incentives to install electronic payment hardware at their locations. It was heavily debated at that time whether swipe fees should even exist since this new technology saved the banking industry so much overhead.
Today we are faced with high swipe fees and a threat in Washington to see things get even worse. MIRA board member Jerry Crete will tell you that swipe fees have become his highest business expense after labor. Jerry points out that the number of customers paying with plastic has gone from about 15% 10 years ago to probably 60% today and he only sees the trend continuing. Younger generations simply do not carry cash anymore. Jerry’s store will see 60 different interchange fees throughout a month. Keeping track of what it costs to process certain cards is impossible. The worst, according to Jerry, are the credit cards that are linked to reward programs. Retailers pay higher fees on these cards and the extra money made by the credit card companies are used to cover the costs of the rewards offered to the cardholder.
MIRA Director of Petroleum, Ed Weglarz, sees swipe fee costs surging as well at his own gas station. According to Ed “while most gasoline retailers have upgraded the cash register/pump controller inside their businesses, the EMV challenge is far from over! The payment system process travels through so many entities that the weakest link contributes to an “unqualified” or “non-compliant” system. The result is: The gasoline retailer is being held responsible for any and all chargebacks, unless he can prove otherwise. This issue, a significant problem today, will be multiplied in October of 2017 when Pay-at-the-Pump machines must be EMV compliant!”
Given the realities of exceedingly never ending costs to process plastic there has been a lot of questions from members on how to curb these costs through surcharges. First, it is important to know that surcharges on debit card transactions are not allowed. That is a very important point to keep in mind throughout this article. As will be explained earlier, cash discounts are allowed to incentivize debit card customers to use cash however putting a surcharge on a purchase made with a debit card is not allowed. Surcharges on credit card transactions are allowed but very complicated.
DEBIT CARDS First, with respect to debit cards, while a surcharge cannot be added to a payment using a debit card a retailer can allow a cash discount. Even if a customer pays with a debit card but chooses “credit” a surcharge cannot be added. Ed summarizes cash discounts on petroleum products as follows:
“You can offer a “Discount for Cash” on gasoline and diesel purchases, but it must be offered to all customers. Both Cash and Credit prices must be posted on the roadside price sign. If you only post one price, the highest price must be posted. The price being paid by the motorist must appear on the pump at the time fuel is being dispensed.”
Cash discounts at grocery stores and convenience stores are a little different since multiple products are being purchased at once but it is allowed. An easier way to deal with debit card fees is to establish a threshold that must be met in order to be able to use a debit card. Telling a customer that they must spend at least $5.00 to use a debit card is allowable. Make sure these thresholds are not higher than $10.00 or else you may face penalties from Visa and/or Mastercard.
CREDIT CARDS With credit card sales a retailer has another option to offset the cost to process the sale other than offering discounts for using cash. Unlike with debit cards, retailers can impose a surcharge on sales paid with credit cards. As a result of a legal settlement to resolve claims brought by a group of U.S. merchants, merchants in the U.S. and U.S. territories may add a surcharge to certain credit card transactions. While this may sound like a good option, the feasibility of actually being able to add a surcharge to purchases made at your store is rather difficult.
While some states have passed state laws prohibiting retailers from adding surcharges to credit card sales, Michigan, Ohio, and Illinois have not giving retailers in these states the ability to add a surcharge to credit card purchases. There are some restrictions though on a national level that retailers will need to abide by if they choose to utilize credit card surcharges.
First, you must notify the card brands you accept of your intent to surcharge. Each brand requires 30 days’ notice before you may begin charging checkout fees. Also, inform your acquiring bank of your intent to surcharge as well. Consider whether you want to charge for only specific types of cards (such as rewards cards, which tend to carry higher costs for businesses) or for all cards issued under a brand. You must choose one or the other. You cannot charge a fee for all cards and an additional fee for card products which have higher processing costs. Contact your merchant services provider for help or guidance if you need to.
Second, once you begin to add a surcharge to sales using credit cards you must post a notice at the store’s entrance advising that a surcharge applies on purchases made with identified credit cards. At the point of sale, the exact percentage must be disclosed. In addition to these signage requirements receipts must itemize the exact amount of the surcharge.
Third, the surcharge cannot be higher than the actual costs of processing the credit card transaction, or 4 percent of the purchase price, whichever is less. This makes things complicated as you will need to know the actual cost to process the cards you accept. It is nearly impossible; and certainly impractical, to calculate the fee on an individual payment card since the percentage plus flat fee charges are different for each and every card. Even cards issued under the brand will have unique fees depending on the “perks” offered by the issuing bank.
As you can see, while retailers have the ability to add surcharges to credit card sales it becomes very complicated and almost impractical. Similar to debit cards however, retailers do have the choice of adopting a policy for not accepting credit card purchases below a certain level not to exceed $10.
CONCLUSION When choosing a mechanism to offset electronic payment costs it is always important to remember what your competitors are doing and how these mechanisms will go over with your customers.
Hopefully this clarifies the discussion surrounding the ability and restrictions on debit and credit card surcharges. The MIRA, alongside out national partners, will continue to fight for comprehensive electronic payment reform. Additionally, it is important to inform members that the only inkling of debit swipe fee reform adopted on a national level is being threatened right now in Congress. What is known as the Durbin amendment to the Dodd-Frank Act is under the target for some members of the US House of Representatives. The Durbin amendment added transparency and increased competition in the debit card swipe fee marketplace and resulted in $6 billion per year in consumer savings. The MIRA is working to preserve the Durbin amendment and will keep members updated as things develop.
As always, if you have further questions on this topic or any other for that matter please feel free to contact the MIRA office.