Payment Processing Guidance Edition

(1)

P

AYMAXX

P

RO, LLC

Payment Processing Guidance

2013 Edition

This document provides thought leadership on payment processing to new or existing merchants who accept credit/debit card or ACH payments. This information highlights certain areas of compliance that merchants need to consider in order to process payments securely, and how to best protect their businesses and consumers from legal, compliance and security risks. We gathered the information contained in this paper through industry research and discussions with industry experts as well as representatives of regulatory bodies. This paper covers surcharges and convenience fees and relevant rules and laws a merchant should explore when considering a pricing model that incorporates either fee type.

It is important to know that the analysis contained in this paper is based on the current laws and Visa and MasterCard Rules, and are subject to change. The market landscape and application of this information is subject to change as these laws and rules are updated.

The professionals at Paymaxx Pro are constantly developing further guidance that will provide greater detail on not only the issues addressed in this paper, but also other related issues that will be made available during the course of 2014.

Surcharges and Convenience Fees

A surcharge is a fee assessed to the customer because of the customer’s use of a credit card. A convenience fee is an amount assessed because of the customer’s ability to make a card payment via the internet or telephone. Failure to strictly adhere to surcharge and convenience fee standards can result in government or card payment brand imposed fines, investigation by a state attorney general, and even cancellation of a merchant account.

Effective January 27, 2013, Visa and MasterCard revised their Rules to permit merchants to surcharge credit card payments under certain conditions. Surcharges remain prohibited on debit card or prepaid card payments. In addition, the laws of 11 anti-surcharge states prohibit surcharges: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New

(2)

II

York, Oklahoma, Texas, and Utah. Also, merchants in seventeen other states must be cautious of entertaining thoughts of imposing such surcharges because anti-surcharge legislation has been contemplated or introduced in: Arkansas, Hawaii, Illinois, Indiana, Kentucky, Missouri, Maryland, Michigan, Nevada, New Jersey, New Mexico, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont, and West Virginia (See Exhibit 1).

The new surcharge rules do not affect Visa and MasterCard Rules regarding convenience fees, which are still permitted under certain circumstances, and which may be an option for merchants. However, like surcharges, Visa’s Rules specify that Convenience Fees may only be charged by the merchant that actually provides the goods or services to the cardholder, and not by any third party, this includes the payment processor. We suggest caution on charging a credit card convenience fee in one of the eleven anti-surcharge states since these states’ statutes are unclear as to whether a convenience fee is a surcharge.

If state law allows credit card surcharges, then a merchant must jump through a few hoops in order to comply with Visa and MasterCard rules. The merchant must, among other things: (1) inform Visa/MasterCard at least 30 days prior to implementing a surcharge program; (2) provide surcharge notices at all points of entry and points of sale; (3) itemize the surcharge separately on the receipt; and (4) include the surcharge amount in the final transaction amount. A merchant may only surcharge its customer the amount it costs the merchant for accepting the credit card. So, if it costs the merchant 2.5% of the underlying transaction amount to accept the card, then the surcharge amount is limited to 2.5%. However, in no event may surcharges exceed 4% of the underlying transaction amount, even if it costs the merchant more than 4% to accept the card.

The settlement agreement also imposes a surcharge equality rule that requires surcharge amounts to be equal across all payment card brands’ credit cards. This means that if a merchant charges 3% for a MasterCard credit card, then it must also charge the same for a Visa credit card. The process is quite technical so it is in a merchant’s best interest to initiate it with the help of their payment processing company.

Whether a merchant can charge a convenience fee or not requires an inquiry separate from whether a merchant may impose a surcharge on credit card transactions – such an inquiry requires several steps.

(3)

III

The merchant should look at the payment card brand rules for all the credit card types it accepts. The basic rules for the four major payment card brands are: (1) AMEX does not allow a merchant to charge a convenience fee; (2) Discover does not have an explicit convenience fee policy, but requires its card to be treated like any other card; (3) MasterCard allows a merchant to charge a convenience fee if such a fee is imposed “on all like transaction regardless of the form of payment used”; and (4) Visa allows a merchant to charge a fixed convenience fee (i.e. $5.00 per transaction) if, among other things, the fee is charged for payments made via the internet or telephone – Visa prohibits convenience fees for face-to-face transactions.

The merchant should also determine whether convenience fees are allowed under state law. While this inquiry may sound simple enough, many states do not have a “convenience fee” law, and therefore the relevant inquiry is whether charging a convenience fee violates a state’s anti-surcharge law. The Colorado Attorney General’s Office and Massachusetts’ Office of Commission of Banks have issued written opinions stating that convenience fees violate the anti-surcharge law. And, while not in writing, the Texas Office of Consumer Credit Commissioner has stated that state law prohibits convenience fees. This unfortunately means that those merchants charging convenience fees in the other anti-surcharge states are operating in the gray. If a merchant charges a convenience fee, under Visa Rules it must be: (a) charged for a bona fide convenience in the form of an alternative payment channel outside the merchant’s customary payment channels; (b) disclosed as a charge for the alternative payment channel convenience; (c) added only to a non-face-to-face transaction (if a mail order or electronic commerce merchant’s payment channels are exclusively non-face-to-face, such merchant may not impose a convenience fee); (d) a fixed amount, regardless of the value of the payment due; (e) applicable to all forms of payment accepted in the alternative payment channel; (f) disclosed before the completion of the transaction and the cardholder is given the opportunity to cancel; and (g) included as part of the total amount of the transaction.

Convenience fees may only be charged by the merchant that actually provides goods or services to the Cardholder, and not by a third party, such as the payment processor. Further, convenience fees may not be added to recurring transactions.

As far as convenience fees for ACH Payments, they are not addressed by the NACHA Rules. However, based on our interactions with experts at NACHA, the merchant should make sure that the customer is authorizing the fee and that the amount that the consumer authorizes is

(4)

IV

the same amount he/she will be debited. (So, they can’t authorize a $10 payment and have a $12.50 debit show up because of the convenience fee.) If it is for an additional amount other than what the consumer is authorizing, the merchant would have to do the authorization and the debit for the fee as a separate transaction and follow all of the NACHA Rules for that transaction including proper authorization. Our research, with respect to state law, suggests that the merchant should be cautious of the state laws in Connecticut, Colorado, and Massachusetts.

Merchants must be keenly aware of payment processing laws and regulations as improper practices may, in extreme cases, result in the loss of a merchant’s account and the correlated revenue. Therefore, best practice requires a merchant to consult with their payment processing company and a knowledgeable payments attorney before instituting any type of surcharge or convenience fee. At Paymaxx Pro, we offer processing models to support a merchant’s ability to charge a convenience fee and we will work with you to determine how do to so while maintaining compliance with state laws and card standards.

The opinions put forth in this document are based on standard industry practices for payment processing. The accuracy of all statements contained in this analysis is limited to the correctness of the data that was provided. We have taken steps to verify that the data and information furnished is true and correct.

PayMaxx Pro, LLC 3700 South Tamiami Trail Sarasota, FL 34239

(5)

V

Exhibit 1 - SUMMARY OF “NO SURCHARGE” STATES California

"No retailer...may impose a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check or similar means..."

Statute: Cal. Civ. Code § 1748.1(a) (West)

Colorado

"[N]o seller...may impose a surcharge on a holder who elects to use a credit or charge card in lieu of payment by cash check or similar means..."

Statute: Colo. Rev. Stat. Ann. § 5-2-212(1) (West)

Connecticut

"No seller may impose a surcharge on a buyer who elects to use any method of payment, including, but not limited to, cash, check, credit card or electronic means..."

Statute: Conn. Gen. Stat. Ann. § 42-133ff(a) (West)

Florida

"A seller...may not impose a surcharge on the buyer...for electing to use a credit card in lieu of payment by cash, check, or similar means, if the seller...accepts payment by credit card..." Statute: Fla. Stat. Ann. § 501.0117(1) (West)

Kansas

"No seller...or any credit card issuer may impose a surcharge on a card holder who elects to use a credit card in lieu of payment by cash, check or similar means."

Statute: Kan. Stat. Ann. § 16a-2-403

Maine

"No seller...may impose a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check or similar means."

Statute: Maine Rev. Stat. Ann. tit. 9-A, § 8-303(2) (See also id. § 8-103 (definitions and rules of construction))

(6)

VI

Massachusetts

Statute: Mass. Gen. Laws Ann. ch. 140D, § 28A(a)(2) (West)

New York

"No seller...may impose a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check or similar means..."

Statute: N.Y. Gen. Bus. Law § 518 (McKinney)

Oklahoma

Statute: Okla. Stat. Ann. tit. 14A, §§ 2-211, -417 (West)

Texas

"[A] seller may not impose a surcharge on a buyer who uses a credit card for an extension of credit instead of cash, a check or a similar means of payment."

Statute: Tex. Fin. Code Ann. § 339.001(a) (Vernon)

Utah

“A seller may not impose a surcharge on a transaction for $10,000 or less that is paid for by using a credit card.”