For many small business owners, credit cards can be a blessing and a curse. By accepting credit cards, you’re making your goods and services more accessible to potential customers by increasing the number of ways in which they can pay. However, accepting credit cards also means accepting financing charges or interchange fees – commonly known as “swipe fees.” These swipe fees are usually between 1% and 4% of the underlying purchase (for example, between one and four dollars per one hundred dollars charged). Fees for debit card transactions are set according to a formula arising out of the Dodd-Frank Consumer Protection and Wall Street Reform Act. These fees are typically between $0.20 and $0.30 per transaction, down from nearly $0.44 per transaction before the Act was passed.
For some small businesses, these swipe fees not only reduce profit margins but can be the difference between turning a profit or a loss. Naturally, many small business owners seek to pass these costs along to their customers – but sometimes the law gets in the way. The two key sources of law to be aware of are contracts between you and the card issuers (Visa, MasterCard, American Express, etc.) and state statutes.
Prohibitions Under State Law
Eleven states have laws on the books that prohibit businesses from charging surcharges to customers who pay with credit cards. Those states are: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas. Meanwhile, some states explicitly authorize merchants to offer cash discounts to encourage customers to pay by methods other than credit cards (E.g., CA; CO; CT; MD; MA; NV; OK; WA; WI and WY). Other states are silent on the question of whether cash discounts are permissible; while this may mean that cash discounts are allowed, its prudent to check applicable regulatory standards in your state.
Restrictions Under Credit Card Agreements
Historically all of the major credit card companies have included terms in their service agreements prohibiting merchants from imposing fees on customers paying by card. For the time-being those restrictions remain in place; however, merchants may take interest in a current lawsuit pending against Visa and MasterCard. As part of that litigation Visa and MasterCard initially agreed to revise their rules on credit card surcharges—a change that would allow surcharges in many states. But recently the Federal Court of Appeals for the Second Circuit rejected that settlement agreement, which means that the preexisting rules remain in place for the time-being. And in any event, the Visa-MasterCard litigation is not binding on American Express. So regardless of the outcome of that lawsuit, merchants will be bound by any agreement they may have with American Express.
As a side note, merchants are generally required to treat all credit cards alike. In other words, merchants are not allowed to steer customers away from or toward any given card. Moreover, even if Visa and MasterCard permanently agree to change their rules to allow for credit card surcharge fees, merchants accepting American Express would still be foreclosed from imposing surcharge fees. And because merchants must treat all cards equally, that means merchants accepting American Express would likewise be foreclosed from imposing fees on any other card they might accept.
What’s Next in the Visa-MasterCard Litigation?
NIFB opposed the aforementioned Visa-MasterCard settlement on behalf of our members, because the settlement offered too little compensation and was under-protective of small businesses. While some merchants may have appreciated the flexibility of being allowed to impose surcharge fees, we thought that the settlement was fundamentally unfair in its treatment of the smallest merchants. Accordingly, we were relieved to see that the Second Circuit has rejected that settlement, which allows an opportunity for a better deal for small business at the end of the day—including the possibility of refunds for excessive fees for many merchants.
At the end of the day we may either see a better settlement agreement, or this case may proceed to trial. Either way, we will make a point to update our followers. For the time-being, it’s probably prudent to continue to abide by the terms of your service contracts with credit card companies. Relatedly, if you are concerned about processing fees, you may want to check-out our guide to choosing a credit card processor.