How To Cut Credit Card Processing Expenses

When I renewed my license plates online the other day, I was miffed that the Secretary of State’s office charged me an additional $5 for the privilege. On the other hand, when I look at what MFM budgets for credit card fees, I wonder if we should consider passing them along to the people who use the cards. A growing number of media businesses are accepting credit cards as payment for advertising or premium content. I’ve got to believe that their credit card fees, which are in the neighborhood of 2% or more of the transaction price, are significant.

For decades, most credit card merchant agreements prevented businesses from adding a surcharge to bills paid by credit card. In addition, a number of states passed laws that prevented vendors, other than state and local governments, from adding a surcharge to a credit card transaction. That’s all changed or is changing, beginning with the outcomes from several antitrust lawsuits involving the major credit card providers and, more recently, court cases that have overturned state statutes that prevented the surcharges.

These developments were addressed in a presentation at Media Financial Management’s Media Finance Focus 2017 conference in May. Attorneys Wanda Borges and Bruce Nathan, whose work also includes helping media companies recover funds from creditors that have filed for bankruptcy protection, outlined the impact of these decisions in a session focused on recent Supreme Court decisions. Since the information may be useful in budget planning, I wanted to share the highlights.

Court Settlements

Beginning in 2005, antitrust lawsuits complained MasterCard, Visa and many of the providing banks were conspiring against merchants and restraining their trades by prohibiting the pass-through of the surcharges merchants were required to pay to banks as part of accepting credit card payments. The litigation was granted class-action status and culminated in settlements totaling more than $7 billion in 2013.

A similar complaint was filed against American Express, however approval of its 2014 settlement order was denied following disclosure that the company’s attorneys had received confidential documents from lawyers familiar with the MasterCard settlement. As a result, the American Express surcharge litigation is ongoing. Borges, the principal member of the Borges & Associates law firm, warns that this could unravel the MasterCard and Visa settlements.

In the meantime, unless otherwise prohibited, merchants are now free to surcharge credit card transactions. However, there are a series of steps need to be followed. As Borges explained, the first requirement is that merchants provide a minimum 30 days’ written notice that the surcharge will be imposed. In addition, the disclosure must indicate that the surcharge will not be greater than its cost and the notification must be at the point of entry, not the point of sale. If the notification is provided online, it should be on the first page of the website, specifying that a surcharge will be passed through for credit card payment.

Some States Prohibit Pass-Throughs

State laws may provide an additional complication. Currently 10 states (California, Colorado, Connecticut, Florida, Kansas, Massachusetts, Maine, New York, Oklahoma, Texas) and Puerto Rico have statutes that prohibit merchants from adding a surcharge to a transaction for a cardholder who elects to use a credit card instead of another method of payment.

While prohibiting surcharging, eight of these states (excluding New York and Texas) and Puerto Rico permit offering a discount to induce non-credit card payment, providing it is offered to all prospective buyers and, as Borges said during the presentation, “disclosed clearly and conspicuously in accordance with regulations.” A number of branded gas stations seem to have taken advantage of this provision.

In addition, Borges pointed out that the language in several of the statutes “is unclear on the question of whether they are intended for business-to-business transactions or only for business-to-consumer transactions.” However, lawsuits questioning the constitutionality of the statutes themselves could make this a moot issue.

A First Amendment Issue

Several of the lawsuits challenging the state statutes argue the laws represent a free speech violation. The presentation by Borges and Nathan summarized cases in New York, California, Florida and Texas that all have the potential to throw out the prohibitions.

The case that has received the most attention is a complaint questioning the constitutionality of the New York surcharge statute, which made it all the way to the U.S. Supreme Court. Federal Judge Rakoff of the U.S. District Court of New York initially ruled surcharges and discounts are “merely different labels for the same thing – a price difference between cash and credit.” The court went on to say this “virtually incomprehensible distinction between what a vendor can and cannot tell its customers offends the First Amendment and renders [the New York statute] unconstitutional.”

Or Maybe Not

The Second Court of Appeals disagreed with Judge Rakoff, saying the NY law is “neither unconstitutional nor does it violate a merchant’s freedom of speech.” However, as Bruce Nathan, a partner at Lowenstein Sandler LLP, went on to explain, in reviewing the case, the Supreme Court concluded that the New York law “does regulate speech and remanded the case back to the Court of Appeals to determine whether that regulation is unconstitutional.”

In Florida, where the appeals court ruled the surcharge statute was unconstitutional, businesses can surcharge credit card users. However, as Borges warned attendees, “The merchant’s battles against the anti-surcharge laws in Texas, California and New York are far from over. [The Supreme Court] did nothing to give credit grantors and merchants a clear directive as to how they can differentiate in price between cash and credit transactions.”

Navigating Through The Quagmire

Despite what remains unresolved in the courts, there are currently 41 states where passing through the surcharges is currently legal, and 48 states where it is permissible to offer discounts to customers paying by cash or check. To assist merchants in taking advantage of these opportunities, there are companies developing technologies that allow merchants to add surcharges at the time of purchase.

Organizations considering a surcharge will also want to spend some time on a communications plan. When doing background research for this article, I found a couple of blog posts and an editorial. As all three pointed out, merchants receive some benefits in exchange for the fees they pay. These include faster payments, a reduction in the number of bad checks, fewer trips to the bank, a decrease in time spent on payment processing, and so on. Media businesses may also find that a surcharge on credit card payments increases the friction in the sales process.

Of course, card users also are also taking advantage of the card’s benefits, such as the ability to defer full payment until a later period, expense accounting tools, and cash or travel rewards. For this reason, some businesses are considering offering both a cash discount along with implementing the surcharge to address the divergent points of view and customer needs.

More Information

The pass-through issue also affects a company’s accounts payable operation. With more merchants exploring the surcharge option, and many companies preferring employees use business credit cards for travel, entertainment, and other expenses, it will be important to keep an eye on developments. It is quite possible that any increase resulting from adding a fee for the use of a credit card will be more than offset by the payment of credit card surcharges to other merchants.

Copies of the Borges and Nathan slide presentation for Media Finance Focus 2017 and related literature are posted on our website. Presentations from other conference sessions (indicated by the word “Presentation” in red) are also available there.

Bruce Nathan’s firm, Lowenstein Sandler LLP, is the location for our upcoming Media Outlook 2018, which will be held in Manhattan on Sept. 12. That seminar features a look at the trends expected to affect media organizations in the coming year. We hope you will join us for the half-day (noon-6 p.m.) event. As the situation involving credit card surcharges reminds us, there seem to be twists and turns in the path to budgets for 2018 and beyond.

Being equipped with the latest knowledge and contacts remains the best way to navigate that treacherous course as swiftly and smoothly as possible.

Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary, the media industry’s credit association. She can be reached at[email protected] and via the association’s LinkedIn, Twitter, or Facebook sites.