Accepting Payment by Credit Card, Surcharging the Customer ... · The Credit and Financial Management Review 5

The Credit and Financial Management Review

5

Accepting Payment by Credit Card, Surcharging the Customer and the Multibillion Dollar

Litigation Settlement With the Card Companies: Is it Time to Rollout a Card Payment Program

for Your B2B Sales? By: Scott Blakeley, Esq. &

Brad Boe

Abstract The credit team offers customers a variety of payment channels, including ACH, EDI, wire, check, check by fax, payment cards, and cash. Yet more customers are choosing credit cards to pay vendors’ invoices in the B2B setting, and those customers using cards are increasing the frequency with which they use their cards. According to the National Small Business Association’s 2012 Year-End Economic Report, 31% of small businesses use credit cards to finance their capital needs. A number of factors account for a customer’s increased use of credit cards, including: (1) more time to ultimately pay for the vendor’s goods or services, thereby improving cash flow (think terms pushback with a smile); (2) customer convenience (think Gen X and shorthand approach); (3) from the cardholder’s view, points and miles earned with every invoice payment (cardholder thinks vacation in the Caribbean for using his or her personal card to pay vendors’ invoices); and (4) bank and credit card marketing programs encouraging customers to increase card usage. Unfortunately for vendors, credit cards are the most expensive payment alternative. While the accommodative credit team may appreciate the growing customer preference to use his or her card to pay invoices (and the potentially positive impact on the vendor’s DSO), the finance team commonly complains that cards eat into the profitability of the sale as the vendor pays the interchange fee (2% - 4%). Credit card companies have prohibited vendors from surcharging customers, thereby burdening the vendor with the fee. This year, however, Visa and MasterCard changed the surcharge rules. This article considers legal compliance, card company rule compliance and a vendor’s best practice with adopting a credit card payment program and surcharge rollout.


6

Credit Card Litigation and the Impact on the Vendor’s Payment Channel Alternatives Visa and MasterCard are defendants in an eight-year class action lawsuit concerning alleged artificially-high interchange fees in violation of the Sherman Antitrust Act. The class action lawsuit comprises multiple lawsuits against the card companies, brought by retailers such as Kroger, PayLess, Safeway and several trade associations. American Express and Discover are not named as defendants. The suits were consolidated in the U.S. District Court in Brooklyn. On November 27, 2012, the District Court granted preliminary approval of the class action settlement. The retailers and Visa and MasterCard agreed to settle under the following terms: (1) cash distribution of $6.05 billion to retailers and vendors that were overcharged during the eight year period (January 2004 through November 2012); (2) reduction of the interchange fee by ten basis points for eight months, which is valued at $1.2 billion; and (3) rule changes. The most significant settlement term for vendors in the B2B setting is the rule change that now permits surcharging the interchange fees to customers. The irony of Visa and MasterCard’s surcharge concession is that the national retailers suing Visa and MasterCard contend that the surcharge concession has no value under the settlement as they will not surcharge their customer base, the consumer. While the irony of the surcharge concession is not lost on the national retailer/consumer environment, those same surcharge concessions have opened up a world of opportunity in the B2B world. On September 12, 2013, the District Court considered final approval of the class action settlement. A ruling is expected within the month. Despite the pending court approval, Visa and MasterCard adopted the rule changes, which became effective January 27, 2013. Since the effective date of the rule change, vendors may now rollout a surcharge program to cardholders using Visa and MasterCard to pay invoices. A Vendor’s Evaluation of a Credit Card Payment Program Surcharge Rollout


7

The Vendor’s Perspective A credit card payment program benefits the credit and sales teams in ways that traditional payment methods do not. The finance team may have a contrary view. The Credit Team’s View The credit team’s mission is to find a way to sell the customer, and have that customer pay for the sales as agreed. Credit cards achieve this, especially for those customers scored as high risk, as the card company takes the risk of loss. The general benefits may include:

Reduced credit risk Minimized bankruptcy risk Minimum documentation More accurate and timely financial reporting Lower administrative expense, depending on how the vendor handles the interchange

fee (discussed below) Faster collections Increased productivity Improved customer service

By making reduced terms of sale prerequisite for the customer’s credit card use, the vendor may reap further benefits, such as:

Immediate payment Increased cash flow, earlier funds availability and positive impact on treasury

operations Reduced accounts receivable Improved DSO Fewer credit approvals and collection activities

The Sales Team’s View The sales team’s mission is to sell, both existing and new customers. Credit cards achieve this. The benefits may include:

Opening new sales channel Attracting new customers who otherwise do not qualify for terms More sales opportunities Enhanced competitive position

The Finance Team’s View The finance team’s mission is to manage cash flow and working capital. Credit cards may improve revenue, but at what cost?

Profit margin erosion Most expensive payment form


8

Credit cards are the most expensive payment channel and interchange fees continue to increase. Given this, the vendor should determine whether a surcharge program balances out these costs and results in cards being competitive with other forms of payment. When evaluating a surcharge rollout, a vendor may consider:

Impact on Profit Margin: To what extent do interchange fees erode margins? Should the vendor run individual customer profitability models? If margins are large, the vendor may be willing to absorb the interchange fee and offer cards for the customer’s convenience. If margins are thin, the vendor may consider a surcharge as the only choice if adopting a card payment program. The vendor should also consider the implementation costs (i.e. IT equipment, training, etc.) associated with managing a surcharge program. Implementation costs will vary significantly depending on the way(s) in which the vendor processes customer credit cards: (1) card-not-present transactions, (2) swiped transactions, and/or (3) EIPP model transactions.

Impact on Sales: Do the vendor’s competitors surcharge customers’ cards? Will a

surcharge alienate customers so they may threaten to move their business to a competitor or will opening the entire customer base to credit cards as an alternative payment channel enhance your competitive position?

The Customer’s Perspective For the customer, the benefits of using a credit card to pay invoices are:

Improves Cash Flow: From the day the card is used to pay the invoice, the cardholder has up to 30 days to pay the card statement that includes the payment of the vendor’s invoice. The cardholder submits the card statement to the customer for reimbursement. This additional time improves the customer’s working capital and acts as a friendly form of terms pushback strategy, as it is the card company, and not the vendor, that is giving the customer additional time to pay.

Convenience: Electronic transactions and little paperwork make cards a convenient

payment alternative for customers.

Cost: Customer eliminates the cost of processing accounts payable checks. The Cardholder’s Perspective In the B2B transaction where the customer is a small, closely held business organization, the cardholder paying the vendor’s invoice is typically the principal of the company. Card companies offer rewards to the individual cardholder for using the card, such as points and airline miles. The individual cardholder will have their company reimburse them for using their card to pay the vendor’s invoices, but the cardholder retains the benefit of the points and miles. That the principal is using their card to pay the invoices is not an indicator on its own that the customer is in financial difficulty.


10

Surcharge Rollout Considerations State Anti-Surcharge Legislation and the Impact on the B2B Sale To date, only 11 states have passed legislation addressing the ability of vendors to surcharge customers.1 With regards to the 39 states that have not passed any legislation, there is no legal bar to surcharge customers. The major question for vendors is whether B2B surcharging is allowed in states with anti-surcharge legislation that does not expressly provide for B2B surcharging. There is a distinction between consumer and commercial credit card transactions that may exempt B2B transactions from the purview of some state’s anti-surcharge statutes. Consider California’s anti-surcharge statute, Civil Code §1748.1, which reads: “No retailer in any sales, service, or lease transaction with a consumer may impose a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check, or similar means.”2 The legislative history behind the California statute confirms the intent to protect consumer transactions, rather than commercial transactions. Similarly, the Texas anti-surcharge law defines a credit card transaction as “a transaction for personal, family, or household use…”3 While statutes in other states are vaguer in their distinction of consumer and commercial transactions, statements from lawmakers in those states suggest a similar focus on consumer transactions. Pennsylvania State Representative, Adam Ravenstahl, referred to the proposed law in Pennsylvania as a “consumer protection piece of legislation.” The consumer-commercial distinction notwithstanding, a New York District Court’s recent injunction against an anti-surcharge statute may soon render the point moot. Until October 2013, the state of New York prohibited retailers from surcharging customer credit card purchases.4 In Expressions Hair Design v. Schneiderman, however, the U.S. District Court declared the statute unconstitutional, on the grounds that it violates the 1st Amendment’s Freedom of Speech. The Court held that the statute’s distinction between the prohibited “surcharges” and the permitted “discounts” is based on “words and labels, rather than economic realities” and therefore “the statute clearly regulates speech, not conduct”5 The preliminary injunction was stipulated on November 5, 2013. Armed with the ruling, the plaintiffs’ attorneys announced their intention to challenge the remaining states’ anti-surcharge laws. On December 2, 2013, the defendants appealed the ruling. Their appeal will be heard before the 2nd Circuit Court of Appeals. Even before the District Court’s ruling, there appeared to be limited support for anti-surcharge bills in the state legislatures. During the 2013 state legislative sessions, anti-surcharge bills were introduced in twenty-three states. Utah and Mississippi are the only two of the twenty-three to pass anti-surcharge bills.6 Sixteen chose not to pass the legislation: Arkansas, Hawaii, Indiana, Iowa, Kentucky, Maryland, Missouri, Nevada, New Hampshire, New Mexico, Rhode Island,

1 Exhibit A contains a review of these states’ anti-surcharge laws. 2 California Civil Code §1748.1(a) 3 Tex. Finance Code § 301.002 (2) 4 New York General Business Law §518 5 Expressions Hair Design, et al. v. Eric T. Schneiderman in the U.S. District Court for the Southern District of New York. Preliminary Injunction, Opinion, and Order at pg. 21-22 (Doc. No. 63) 6 Mississippi’s anti-surcharge bill only applies to state-issued credit cards. It is not relevant to this discussion.


11

South Carolina, Tennessee, Vermont, Washington and West Virginia. The five remaining states are Illinois, Michigan, New Jersey, Pennsylvania, and Wisconsin. The District Court injunction and promise of further litigation may deter passage of the remaining anti-surcharge bills. Visa and MasterCard Rule Changes The Visa and MasterCard rule change that permits surcharging also contains points for the vendor to consider with a surcharge rollout: Notice and Disclosure Requirements: A surcharge rollout program requires that the vendor give Visa and MasterCard notice of their intention to surcharge 30 days in advance of the rollout. Cardholder’s are to be given notice of a surcharge program in advance of using the card. The cardholder is also entitled to notice of the surcharge amount.

In a card-not-present transaction, the vendor discloses a surcharge prior to the sale (i.e. notice on the web portal used to process the transaction), and the surcharge amount may be a line item on the invoice if the customer is using the card at the time the order is placed (no terms). If the customer is qualified for terms and the customer uses the card, then an invoice does not work, as the customer has already been invoiced. A debit memo may qualify. In addition to pre-sale notice, the vendor must disclose the exact surcharge amount for every surcharged transaction.

In a card present sale, the vendor discloses the surcharge amount to the customer. The

surcharge should be reflected on the receipt. Cap on Surcharge: The credit team is to operate as a profit center. However, Visa and MasterCard limits the amount a vendor may surcharge a customer. The surcharge should equal the cost of processing the credit card transaction (the cost typically is 1.5% to 3%), but cannot exceed 4% of the purchase. If the vendor plans to surcharge both Visa and MasterCard at the universal, maximum rate, the surcharge must not exceed the lower of the two blended rates. Otherwise, the vendor may establish a dual surcharge rate, with one covering Visa surcharges and another covering MasterCard surcharges (more on the dual surcharge below). Prior to the class action settlement, a vendor could only charge a customer a convenience fee that was intended to offset the vendor’s overhead cost in accepting payment by card. Brand and Product Level Surcharge: Vendors can charge either at the “brand level” or the “product level,” but not both.

Brand Level: Applies an equal surcharge to all credit card transactions for a particular brand (Visa or MasterCard), regardless of the card’s issuer or product type. In this setting, all Visa transactions receive the same surcharge, while all MasterCard transactions receive an equal surcharge.

Product Level: Applies the same surcharge to all credit card transactions made with a

particular type of Visa or MasterCard. For example, all transactions with the Visa Signature card are surcharged at the same rate.


13

Credit card processing costs vary. Vendors should calculate their average processing costs before determining their surcharge level. Vendors who have not yet accepted credit cards may consider Visa and MasterCard’s product-level costs of acceptance, broken down by merchant category. These figures indicate that, on average, brand level transactions have a higher cost than do product level. This means the vendor, on average, can pass on a higher surcharge with a brand level surcharge rollout. Product level surcharges, however, offer more pricing flexibility. While these gauge potential surcharge rates, the vendor’s actual surcharge rate is based on its merchant discount rate.

Consistency of Surcharge and Stratification of Customer Base: A vendor’s finance and sales teams commonly class certain customers as favored based on their volume and product mix. The preferred customers get most favored pricing, terms and promotional allowances. The sales team treats this customer class as protected and will resist surcharging this class. In another setting, it may be the customer that dictates that the vendor cannot surcharge, such as a state or the federal government. May the vendor protect its favored customers by absorbing some, or all, of the fee for these customers? Can it bend to the demands of a customer refusing to accept a surcharge in order to preserve the trade relationship? Put another way, do Visa and MasterCard’s new rules allow the vendor to stratify its customers, waiving the surcharge with one class, absorbing a


14

portion of the interchange fee with another class, and surcharging the entire interchange fee with the remaining customers? The operative clause in the Visa-MasterCard rule changes is: “A merchant adds the same surcharge to all Visa [or MasterCard] Credit Card Transactions, regardless of the card’s issuer or product type.” At first blush, this might suggest stratification is prohibited, but stratification is not discussed. This qualifying language instead concerns the brand level-product level distinction. Stratification is never prohibited in the settlement agreement nor in the corresponding materials (i.e. the FAQs on Visa’s and MasterCard’s websites). Had Visa and MasterCard intended to forbid differential treatment for favored customers, they would have included such a provision. But they did not, because disallowing stratification would not be consistent with the purpose of the settlement, which is to increase competition. Also, the inability to stratify surcharges would likely lead many vendors to opt for cash payments, leading to a loss of business for Visa and MasterCard. American Express and Discover Cards: American Express and Discover are neither defendants to the class action nor parties to the settlement. The vendor may surcharge American Express credit card transactions if the vendor only accepts American Express, and so long as the vendor equally surcharges all electronic transactions (including debit card transactions). If the vendor accepts American Express cards in addition to Visa and MasterCard, and still wishes to apply a surcharge on credit card transactions, that vendor will have to negotiate an exception from American Express rules regarding debit cards (which would violate the Visa and MasterCard rule changes). Discover Financial Services permits surcharging, so long as the vendor imposes equal surcharges on other rival credit card transactions. Debit Cards: Debit card transactions may not be surcharged. The vendor may have, on its internet payment portal, a prompt requesting the customer disclose whether the card is a debit card. However, for the B2B sale, debit card payments should be an insignificant percentage of a customer’s form of payment. Credit cards are preferred given the additional time for payment and the cardholder’s rewards. Location: The Visa and MasterCard rule changes apply only to payments made by customers in the U.S. and U.S. territories. It’s a Negotiation: Vendors should negotiate with credit card companies for exceptions and concessions. The larger a vendor’s credit card sales volume, the greater leverage that vendor will have in negotiations. Lowering the Interchange Fee (For the Vendor and the Customer) To reduce risk of fraudulent card use (especially in card-not-present transactions), payment networks encourage vendors to obtain security information with the transaction. There are three different levels of security information, and depending on amount of information passed along with a given credit card transaction, the vendor may qualify for a lower interchange rate. The levels are:


15

a) Level I data includes the cardholder’s billing address, the vendor’s name, the transaction amount, and date of transaction.

b) Level II data includes Level I information, the customer’s tax ID number, sales tax

amount, and the customer code. Only business, corporate and purchasing cards qualify for Level II data.

c) Level III data includes Level II information and line item detail (i.e. product code,

product cost and item description). Visa only allows Level III data on corporate and purchasing cards, while MasterCard’s commercial cards qualify for Level III data.

While this information can help the vendor lower the interchange rates the customer pays, collecting Level II and III data may increase the processing time for card transactions. Also, collecting this high-level information increases the vendor’s informational security burden (discussed below). Before attempting to lower its interchange rates with additional security information, the vendor should ensure that its credit card sales volume justifies capturing such data. Vendors looking to stratify their surcharge program may collect Level II and Level III data from a preferred customer class in order to reduce the interchange rate for those customers. Best Practices for a Card Payment Program Rollout Internal Credit Card Policy A vendor may consider adopting an internal credit card policy as a best practice to ensure the credit and finance teams are trained with the card company rules and anti-surcharge statutes. The card policy addresses the in-house procedures for accepting cards, compliance with card company rules, including brand and product selection and surcharge disclosure, storing cardholder information and mitigating chargeback risks. Vendor’s Card Agreement with Customer, Including Terms and Conditions Like a new account set-up, where the vendor conditions open credit on a completed credit application, including terms and conditions to keep the customer within terms, the vendor may condition a customer’s card use on the customer agreeing to the vendor’s card agreement form. In the credit card agreement, the “Applicant” should be defined as “the customer buying from [vendor] or any person, natural or legal, who uses their credit card to make payments on behalf of the customer.” In this way, the card payment agreement is applicable to both corporate and personal cards, and avoids problems that may arise where a customer pays with multiple cards. The card agreement form provides the vendor with a customer’s personal guarantee and protections from a cardholder’s unauthorized use dispute and extended chargeback risk. The vendor may also include a venue provision, or forum selection clause, in the card agreement to address anti-surcharge issues. With regards to the choice-of-law clause, the vendor must be sure that either (1) the chosen state has a substantial relationship to the parties or their transaction, or (2) there is any other reasonable basis for the parties’ choice of law.


17

Chargeback Risk If a cardholder disputes a card payment, the card issuing bank may investigate and chargeback the disputed balance to the vendor. The timeframe for the cardholder to chargeback the transaction varies depending on the bank, but may extend to 150 days after issuance of the statement containing the charge. For the vendor, chargeback exposure up to five months after the transaction is simply too long of a window to carry that risk, especially given the reporting responsibilities of the credit team to finance. The vendor’s focus of shortening the cardholder’s chargeback window is consistent with a policy of promptly dealing with deductions and disputed invoices. For the cardholder to have chargeback rights up to five months from the transaction is inconsistent with a customer’s good faith in a trade relationship. The vendor may shorten the chargeback window (say 30 days from use of the card to pay the invoice) through a vendor’s card payment agreement form (sample at Exhibit B). Fraudulent Card Risk Card-not-present transactions, such as those via telephone, fax, or Internet, make it more difficult for the vendor to verify the identity of the customer, as the credit team does not meet the customer nor get an imprint of the card. This creates greater risk of fraudulent card use. Being unaware of fraudulent card use is not a valid defense, and vendors generally assume the risk of loss for accepting fraudulent transactions. By creating credit risk profiles for its card-paying customers (address and card verification, confirmation calls to the customer and a maximum spending limit that can only be surpassed with customer consent), the vendor can mitigate the risk of fraudulent card use. Cardholder’s Privacy Rights All states have enacted privacy laws to protect individual cardholders from identity theft. The vendor’s electronic storage of a cardholder’s information imposes on the vendor a duty to protect the card information from identity thieves. To comply with privacy laws and protect card info stored electronically, vendors may install firewalls, encryption software and anti-virus software. Vendors can also utilize a dedicated server to store cardholder data and limit access to only those employees who require access. A best case scenario has cardholder data stored on a third party server with restricted access and masked information. Cardholder information should not be emailed, nor should it be stored on personal computers or flash drives. Any paper documents containing cardholder information should be secured. When cardholder information is no longer needed, the electronic data should be permanently deleted and the paper documents should be shredded. Firms can be retained to audit the vendor’s compliance with privacy laws. Privacy laws may also require the vendor to notify cardholders of a data breach. The notice allows the cardholder to cancel the card and avoid being a victim of identity theft. PCI Compliance The Payment Card Industry Security Standards Council (PCI SSC) was created by Visa, MasterCard, American Express, Discover, and JCB in 2006 to provide compliance standards for protecting cardholder data. PCI sets out standards for vendors:

Building and maintaining a secure network;


18

Implementing safeguards to protect cardholder data; Maintaining a vulnerability management program; Applying strong access control measures; Regularly monitoring and testing network security; and Enforcing an information security policy.

Failing to comply with the PCI SSC standards can lead to fines from the card companies and, depending on the level of security negligence, federal fines and criminal prosecution. Conclusion Customers continue to increase the use of cards to pay invoices, and banks continue their marketing efforts aimed at the relatively new B2B revenue stream. To meet the customer’s preference, vendors that do not accept cards have to evaluate a card payment program, including whether to surcharge. Those vendors who accept cards may evaluate a surcharge to offset the costs. The decision to adopt a card payment program is a collaborative one, involving input from the credit, finance, and sales teams. It will likely be premised on market segments, competitive landscape and political considerations, and should address the opportunities and risks discussed in this paper. Scott Blakeley is a principal with Blakeley & Blakeley LLP, where he practices creditors’ rights and bankruptcy. His email is [email protected] Brad Boe is the Director of Credit for Performance Food Group, and the Chairman of the Board of Trustees for the Credit Research Foundation. His email is [email protected].


19

EXHIBIT “A” State Anti-Surcharge Legislation State Statute Language of Statute Legislative Intent/History

(if any) Year Enacted

California Civil Code §1748.1

(a) No retailer in any sales, service, or lease transaction with a consumer may impose a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check, or similar means. A retailer may, however, offer discounts for the purpose of inducing payment by cash, check, or other means not involving the use of a credit card, provided that the discount is offered to all prospective buyers. §1747.02: (d) "Cardholder" means a natural person

“It is the intent of the Legislature to promote the effective operation of the free market and protect consumers from deceptive price increases for goods and services by prohibiting credit card surcharges and encouraging the availability of discounts by those retailers who wish to offer a lower price for goods and services purchased by some form of payment other than credit card.”

2012

Colorado Consumer Credit Code §5-2-212

Surcharges on credit transactions – prohibition: Except as otherwise provided in sections 24-19.5-103(3) and 29-11.5-103(3), C.R.S., no seller or lessor in any sales or lease transaction or any company issuing credit or charge cards may impose a surcharge on a holder who elects to use a credit or charge card in lieu of payment by cash,

Purpose of the Code: (d) “To protect consumer buyers, lessees, and borrowers against unfair practices…” (f) “To conform the regulation of consumer credit transactions to the policies of the federal “Truth in Lending Act” and federal “Consumer Leasing Act” Memorandum from Office of the Attorney General for

2010


20

check, or similar means. A surcharge is any additional amount imposed at the time of the sales or lease transaction by the merchant, seller, or lessor that increases the charge to the buyer or lessee for the privilege of using a credit or charge card. For purposes of this section, charge card includes those cards pursuant to which unpaid balances are payable on demand.

State of Colorado (From: UCCC, To: Retail Sales Businesses, Re: “Annual Notification Fee” that credit sellers and retail merchants that extend consumer credit as a “creditor” must annually file and pay UCCC notification – dated January 17, 2013): “A consumer credit sale contract is entered into by a creditor and an individual person, rather than an organization; is primarily for personal, family, or household purpose.”

Connecticut Connecticut General Statutes > Title 42 > Chapter 739 > §42-133ff

“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, in any sales transaction.”

None found 2008

Florida Fla. Stat. Ann. §501.0117(1) Chapter 501 is titled “Consumer Protection”

“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…”

Title of Chapter which statute falls under is “Consumer Protection” Focus on term “buyer.” No use of the term “cardholder,” which is later defined under §501.0118, as including a person or organization. But did not use “cardholder” here in this statute so likely intended to make a distinction.

2010


21

Kansas Kan. Stat.

Ann. §16a-2-403 Chapter 16a: “Consumer Credit Code”

“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.”

Title of Chapter which statute falls under is “Consumer Credit Code” Scope of Statute: [Part 4] applies to consumer loans; consumer credit transactions

1999

Maine Maine Rev. Stat. Ann. tit. 9-A, §8-509 Title: 9-A: “Maine Consumer Credit Code”

“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.”

Name of Title which statute falls under is “Consumer Credit Code” § 8-501 states that “Maine Consumer Credit Code” is referred to as “Truth in Lending.” Also states that any term not defined under state statute will use definition from federal TILA. But note that TILA exempts credit transactions involving business purposes. Focus is on the CONSUMER, which under TILA is defined as a “natural person” Regulation Z of TILA (12 C.F.R. § 226.1) defines cardholder as a “natural person”

2011


22

Massachusetts Consumer

Credit Cost Disclosure (Chapter 140D), §28A

(a)(1): “With respect to a credit card which may be used for extensions of credit in sales transactions in which the seller is a person other than the card issuer, the card issuer may not, by contract or otherwise, prohibit any such seller from offering a discount to a cardholder to induce the cardholder to pay cash, check or similar means rather than use a credit card. (2) No seller in any sales transaction may impose a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check or similar means.”

Uses SAME exact wording to define terms as Federal Truth in Lending Act. But note the scope of TILA and that it is not applicable to credit transactions involving business purposes. Focus is on the CONSUMER, which under TILA is defined as a “natural person” Regulation Z of TILA (12 C.F.R. § 226.1) defines cardholder as a “natural person”

Oklahoma Consumer Credit Code, Title 14A - §2-417

“No seller in any sales transaction may impose a surcharge on a cardholder who elects an open-end credit card or debit card account instead of paying by cash, check or similar means.”

Exactly same purposes of Code as mentioned in CO Consumer Credit Code EXCEPT (f) does not reference “Truth in Lending Act”

2012

New York General Business Law §518

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

2010


23

Texas Tex. Fin. Code Ann. §339.001(a)

“In a sale of goods or services, 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.”

Brochure by Attorney General re “Questions about Credit Cards,” stating “In Texas, a business cannot penalize consumers who pay for a good or service by using a credit card… However, businesses in Texas can discount the regular retail price of an item for consumers who pay cash instead of using a credit card. Consumers who are charged extra for using a credit card should report…” Last amended in 2005, adding subsection (c): “The Finance Commission of Texas shall have exclusive jurisdiction to enforce and adopt rules relating to this section. Rules adopted pursuant to this section shall be consistent with federal laws and regulations governing credit card transactions described by this section. This section does not create a cause of action against an individual for violation of this section.” Same arguments as above with regard to applicability of TILA in this situation, focus of TILA on consumer, and Regulation Z

2005


24

Utah Utah Code 13-38a-301; Part 3 “Financial Transaction Card Surcharges”

“(1) A seller may not impose a surcharge on a transaction for $10,000 or less that is paid for by using a financial transaction card. (2) A seller may offer a discount on a transaction that is paid for by means other than a financial transaction card.” The ban is set to expire as of June 30, 2014

Bill that was signed into law on April 4, 2013 by Governor Herbet is S.B. 67 and is titled “Consumer Protection Revisions” Under 13-38a-203 entitled “private action,” the law relies on private citizens seeking redress in courts for enforcement. Under the terms of the new law, a person who has been charged a surcharge can take the retailer to court to recover the surcharge, court costs and attorney fees and may seek to enjoin conduct in violation of this chapter.

2013

NOTE regarding TILA (that applies to various states above): B2B transaction would involve a credit transaction primarily for business and thus, exempted from the TILA. So, all the states that refer to the TILA must also follow this exemption: § 104. Exempted transactions This title does not apply to the following: (1) Credit transactions involving extensions of credit primarily for business, commercial, or agricultural purposes, or to government or governmental agencies or instrumentalities, or to organizations. NOTE regarding purpose of TILA: focus is on the consumer and protecting consumer. It is the purpose of this title to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices. NOTE regarding definition of consumer in TILA: consumer defined as a “natural person.” § 103. Definitions and rules of construction The adjective "consumer", used with reference to a credit transaction, characterizes the transaction as one in which the party to whom credit is offered or extended is a natural person, and the money, property or services which are the subject of the transaction are primarily for personal, family or household purposes.


26

EXHIBIT “B” [VENDOR] COMMERCIAL CREDIT CARD PAYMENT PROGRAM [Applicant] agrees to the following terms and conditions regarding payment by credit card. AGREEMENT TO PAY [Applicant] agrees to honor all credit card charges for product purchased from [Vendor]. Should the credit card be declined, [Vendor] may demand payment prior to any further shipments. PAYMENT OF OBLIGATIONS [Applicant] agrees to pay to [Vendor] at such place designated by [Vendor], obligations evidencing credit extended by [Vendor] in accordance with the applicable payment, finance and service charge schedule in effect from time to time. CHARGEBACKS [Applicant] agrees that any disputed charge, request for chargeback or adjustment will first be reported to [Vendor]. [Vendor] will have ten business days to resolve the dispute with [Applicant]. [Applicant] has [#] days from the date of payment to dispute or request a chargeback relating to any credit card charge. [Applicant’s] failure to dispute the charge or request a chargeback within [#] days of payment to [Vendor] constitutes a waiver of any right to dispute the charge or request a chargeback. Payment to [Vendor] will be deemed to have occurred for the purposes of this paragraph on the date [Vendor’s] bank records show that payment has been received from [Applicant]. Card Number: _______________________________________ Card Member: _______________________________________ Expiration Date: _______________________________________ Card Member’s Address: ________________________________ Account Name: _______________________________________ Account Number: _______________________________________


27

AUTHORIZATION FOR PAYMENT [Applicant] hereby authorizes [Vendor] to charge its credit card for any and all purchases. The following representatives of the [Applicant] are authorized to use the [Applicant’s] credit card. ____________________________________ _________________________ Representative [Title] ____________________________________ _________________________ Representative [Title] ____________________________________ _________________________ Representative [Title] [Applicant] agrees to inform [Vendor] within 10 days of any changes to those authorized to use its credit card. WARRANTIES AND REPRESENTATIONS [Applicant] warrants and represents that the signature on the claim slip will be genuine and authorized by cardholder and not forged or unauthorized. TRANSACTIONS COSTS [Applicant] agrees to bear the cost of each credit card transaction, including any and all fees charged to [Vendor] as a result of accepting the particular credit card brand used by [Applicant]. [Applicant] is not entitled to a cash discount for payments by credit card. TRANSFERABILITY This agreement is not transferable by [Applicant] without [Vendor]’s prior written consent. Any attempt by [Applicant] to assign the Agreement in violation of this paragraph shall be void. FAILURE OF CUSTOMER TO FULFILL OBLIGATIONS Should [Applicant] fail to fulfill any of the obligations under this agreement, [Vendor] may declare the entire outstanding balance, whether or not already past due, immediately due and payable, and may proceed to enforce the full payment of such balance, including finance and service charges at the rate of eighteen percent per annum. In the event of suit to collect such


28

payment balance, [Applicant] and those individuals in privity with [Applicant] shall pay all of [Vendor’s] collection costs and fees, including but not limited to reasonable attorneys’ fees, expert witness fees, forensic accountant fees, and court costs. GOVERNING LAW All credit card commerce between [Applicant] and [Vendor] shall be governed by and interpreted in accordance with the laws of the State of [State ] without regard to conflict of law provisions thereof, and all actions, disputes, and proceedings arising from, relating to or in connection with credit card commerce between [Applicant] and [Vendor] shall be subject to the exclusive jurisdiction of the federal district courts for [State] or, in the event the district court lacks subject matter jurisdiction, the [State] state courts located in [County]. For the avoidance of doubt, the foregoing is intended to be a mandatory forum selection clause divesting all other courts of jurisdiction to hear any actions, disputes, and proceedings arising from, relating to or in connection with credit card commerce between [Applicant] and [Vendor]. WAIVER OF STATUE OF LIMITATIONS [Applicant] expressly waives the defense of the statute of limitations for the period permitted by law. AGREEMENT OF CUSTOMER [Applicant] expressly agrees to the provisions contained in this agreement and manifests this agreement by his or her signature. RECEIPT OF COPY OF AGREEMENT [Applicant] acknowledges receipt of a copy of this agreement. Date:____________________, By:________________________ [Applicant] Date:____________________, By:________________________ [Vendor]

The Vendors Credit Card Payment Program Rollout, the Target Stores Data Breach and the Cardholders’ Privacy Rights: What it Means to the Vendor in the B2B Setting

By: Scott E. Blakeley, Esq.

The Credit Research Foundation

A CRF Occasional Paper – Examining Current Issues Related to Acceptance of Credit Cards in B2B Transactions.

Given the headlines regarding Target Stores and the data breach (read payment fraud) which could affect 110 million of its customers, vendors rolling out a card payment program are reminded to consider a cardholder’s privacy rights when they store the cardholder’s card information electronically.

With the arrival of the electronic credit department and the credit team storing a cardholder’s card information, there is a greater risk of identity thieves or rogue employees stealing the information.

46 states, the District of Columbia, Guam, Puerto Rico and the Virgin Islands have enacted legislation that creates a duty for companies to protect electronic personal information from being disclosed, and requires companies to notify customers when their unencrypted electronic information has possibly been misused.

1

After eight years of litigation, the US District gave final approval of the Visa/MasterCard class action settlement with retailers. Visa and MasterCard are alleged to have conspired to inflate interchange fees, in violation of the Sherman Act federal antitrust law. As part of the settlement, Visa and MasterCard changed their rules to allow vendors to surcharge the interchange fee. American Express has settled their class action lawsuit; vendors may surcharge AmEx cardholders, subject to court settlement. Given the interchange fee-shifting rule change, vendors are evaluating the cost savings of a credit card payment program rollout with a surcharge component, especially since more customers are using credit cards to pay invoices in the B2B setting. The details of a card payment program rollout are discussed in “ACCEPTING PAYMENT BY CREDIT CARD, SURCHARGING THE CUSTOMER AND THE MULTIBILLION DOLLAR LITIGATION SETTLEMETN WITH THE CARD COMPANIES: IS IT TIME TO ROLLOUT A CARD PAYENT PROGRAM FOR YOUR B2B SALES?” 1

But given the headlines regarding Target Stores and the data breach (read payment fraud) which could affect 110 million of its customers, vendors rolling out a card payment program are reminded to consider a cardholder’s privacy rights when they store the cardholder’s card information electronically. The Wall Street Journal reports that companies have gone on a hiring spree for compliance officers, given fines and penalties for regulatory infractions. 2

Forty-six states, the District of Columbia, Guam, Puerto Rico and the Virgin Islands have enacted legislation that creates a duty for companies to protect electronic personal information from being disclosed, and require companies to notify customers when their unencrypted electronic information has possibly been misused (the Privacy Laws). The Privacy Laws identify a cardholder’s personal information to include their credit card number. In light of the customer’s increasing preference to use credit cards, vendors’ efforts to offset interchange fees through a card payment program, the credit team’s electronic storage of card information and the Target data breach, what do the Privacy Laws mean to the credit team and what is a best practice to comply with these laws?

The Target Stores Data Breach Data thieves stole credit and debit card information, as well as personal information, from 110 million Target customers who used their credit cards between November 27 and December 15, 2013. The Target data theft is the nation’s largest data theft, and potential identify theft victims represent 45% of the US adult population. The stolen information spans Target’s credit cards to major credit branches such as Visa and MasterCard. Card issuers are concerned that data thieves could use the Target information to get further account information.

Target and the United States Secret Service are investigating the data thieves’ method for accessing the card data. The stolen information contains the customer’s name, credit card

1 Scott Blakeley and Brad Boe. The Credit and Financial Management Review. The Credit Research Foundation, December 2013.2 The Business of Risk is Booming, January 15, 2014. Wall Street Journal.

2

number, the card’s expiration date and the CVV security code. This data is used, along with the stolen personal information (email address, mailing address and phone number), by data thieves to create counterfeit cards or sell the card information on the internet. Target is complying with states’ Privacy Laws and notifying customers of the data breach.

Plaintiffs’ lawyers are filing lawsuits against Target, seeking class action status, claiming Target was negligent in handling the credit card data. Attorneys General from 30 states are investigating the breach. A card issuing bank is suing Target contending it was forced to issue security alerts and new cards. The card companies may seek to fine Target or raise the interchange fees.

Michaels Stores and Neiman Marcus are also investigating possible data breaches of customer credit card information.

A Cardholder’s Privacy Rights under State Law With the arrival of the electronic credit department and the credit team storing a cardholder’s card information, there is a greater risk of identity thieves or rogue employees stealing the information. Ten years ago, California adopted the first privacy law; since then, forty-five states have created similar privacy laws. The Privacy Laws require safeguards be put in place to protect a cardholder’s information. They are intended to protect cardholders from the risk of identity theft by requiring vendors to notify them when a security breach may have occurred, allowing cardholders to cancel the card. The laws do not define what constitutes a security breach, and requires notification even when the vendor only suspects there has been a breach.

The Privacy Laws are silent as to the mechanics for detecting and responding to a security breach; however, a vendor that encrypts the card data may be exempt. Credit teams should consider how a cardholder’s credit card information is stored; the cardholder’s name should be stored separate from their card number, and the data should be encrypted.

Credit teams should adopt a policy of notifying customers in the event of a security breach, storing card information, and sharing card information with others in the company (such as the sales force) and with third parties. To reduce the risk of a security breach, employee access to cardholder information should be restricted. Vendors should include all of their procedures in a company policy manual when establishing procedures to process credit card information.

Credit Cards and Payment of Invoices in the B2B Setting: The Identity of the Cardholder In a B2B sale, the customer (whether corporation, LLC, partnership or sole proprietorshipbusiness organization form) may pay by ACH, wire or check. With these payment forms, the identity of the payer is virtually always the business organization listed on the credit application and invoice. By contrast, with a credit card payment, the identity of the payer commonly moves from the business organization to the principal of the company, who uses his or her personal card to pay the invoice. Credit card companies generally do not offer rewards (points and miles) to a company, but do so with personal cards.

3

Under the Privacy Laws, an individual cardholder is entitled to the protections of the Privacy Laws, even when the individual uses a personal credit card to pay a B2B invoice. The individual’s personal data then falls within the Privacy Laws’ definition of “personal information.” The goal of the Privacy Laws is to protect the personal information of individuals.

The fact that a customer uses a personal credit card to pay a B2B invoice does not exclude the individual from the protections of the Privacy Laws. Although the customer is documented as the party to the B2B transaction, that is not determinative of who is entitled to protection under the Privacy Laws. The element that triggers the privacy statute is the breach of an individual’s “personal information,” as defined in the statute, rather than the identity of the parties to a transaction.

Since a cardholder’s personal information is still transferred and stored in such a B2B transaction, the breach notification statute would be triggered in the event of a security breach.

Credit Cards and Card Not Present Transactions Covered by Privacy Laws The Privacy Laws also apply where the cardholder uses a credit card remotely to pay an invoice, such as the vendor’s internet portal, email or fax (the credit card is not physically present and a card imprint is not made). As previously stated, as long as personal card information is transferred and stored by the vendor, then the Privacy Laws apply. The Privacy Laws are triggered by the type of personal data provided and how the vendor stores it, not how the credit card was physically processed.

PCI Compliance The Payment Card Industry Security Standards Council (PCI SSC) was created by Visa, MasterCard, American Express, Discover and JCB in 2006 to provide compliance standards for protecting cardholder data. PCI sets out standards for vendors to: build and maintain a secure network; implement safeguards to protect cardholder data; maintain a vulnerability management program; regularly monitor and test network security; and enforce an information security policy.

Failing to comply with the PCI SSC standards can lead to fines from the card companies. In light of compliance issues with both the privacy laws and PCI, what is the credit team’s best practice?

The Credit Department’s Best Practice with a Credit Card Program Rollout and Card Data Security: A Privacy Policy A cardholder’s privacy rights are at the forefront of legislation and regulation, and these rights impact the credit team when managing card information. For the credit team that stores card information electronically, they must be mindful of a cardholder’s privacy rights and how the card information is protected. Given this, the credit team should consider implementing a privacy policy as to the storing of a cardholder’s credit card information.

4

Compliance Best Practices Privacy Policy and Notices

The credit team should consider how card information is stored. A cardholder’s name should be stored separate from their credit card number. The credit team should adopt a policy of notifying cardholders in the event of a security breach, storing private information and sharing private information with third parties. To reduce the risk of a security breach, employee access to card data should be restricted.

Security

In addition to privacy notices, the Privacy Laws require that a customer’s information be kept secure. Card information should be protected by reasonable security safeguards against such risks as loss or unintended disclosure of a cardholder’s information.

Written Manual

The credit team should include all privacy law compliance procedures in a company policy manual when establishing procedures to process credit card information.

Training

Train credit and sales on the privacy policy. The Privacy Laws apply to agents of the company cloaked with authority to deal with card information. An example of risk for a company is the theft of a company laptop storing card information. Some companies have employed a Chief Privacy Officer or an information manager to comply with privacy policy.

Privacy Audit

Accounting and consulting firms have launched specialized units that sell privacy audits to comply with the Privacy Laws. Consultants review a company’s computer databases to determine how personal identifiable information is maintained.

Encryption of Data

Perhaps the best way for vendors to ensure compliance with the Privacy Laws is to store an individual’s personal information in an encrypted format. The Privacy Laws apply in the event there is a security breach and unauthorized access to unencrypted card data.

Third Parties

Vendors should also consider the use of third parties, who have sufficient security measures in place, to store personal information. As the Privacy Laws apply to any business that owns or licenses electronic data that includes personal information, vendors should confirm that the third parties have established procedures for responding to a security breach.

5

Conclusion Credit cards are a preferred payment method for customers in the B2B setting. Storing card information electronically is the preferred form for the credit team as it is the easiest to access for payment. In light of the Target Stores data breach, vendors must implement a system to store personal information and respond to a security breach. A cardholder’s privacy rights will continue to be a hot topic, and vendors must consider compliance issues as part of their credit card payment program rollout.

The Credit Research Foundation wishes to express its sincere appreciation to Scott Blakely for developing this article for the benefit of the credit community and those who are engaged in the practice of accepting credit cards in B2B transactions.

Scott Blakeley is a principal at Blakeley & Blakeley LLP, where he practices creditors’ rights and bankruptcy. His email is [email protected]

23

Customers in the B2B space are increasingly using credit cards to pay vendor invoices. According to the National Small Business Association, the number of companies using credit cards for financing jumped from 31% in July 2013 to 33% in December 2013.1 The upside for the cardholder and paying customer is the 30 extra days to pay the cardholder statement that includes the vendor’s invoice. Cards also reduce paperwork and allow the customer to eliminate the time and cost of processing A/P checks. The upside for vendors is that payment by credit card means near immediate remittance, reduced credit approval and collection activities, reduced credit and bankruptcy risk, and new sales channels (attracting customers who otherwise may not qualify for terms). Further, by accepting cards only when the order is placed (cards not accepted from Terms customers), the vendor also enjoys increased cash flow, improved DSO and reduced A/R.

However, vendors accepting payment by credit card must pay interchange fees ranging from 2% - 4%, which eats into profit margins. To offset these fees, vendors are evaluating a surcharge rollout.

I. Surcharging and Stratification

Pursuant to a class action settlement between Visa and MasterCard and retailers, the card companies adopted rule changes that allow vendors to surcharge the interchange fee to their card-paying customers.2 Surcharging makes credit cards a more competitive payment channel for vendors. However, for many vendors, a surcharge rollout covering their entire customer base may not be practical. For example:

A customer is classed by the vendor as “favored,” • based on their large volume purchases. This favored status may give the customer lower pricing, extended terms or promotional allowances. The sales manager contends that this favored customer should be protected from the credit team’s surcharge rollout, or risk losing the business.

A customer (say a state or federal government entity) • mandates payment by credit card, but refuses to pay a surcharge.

In both examples, the vendor is willing to absorb the interchange fee for fear of losing the account, but also recognizes that they cannot afford to absorb interchange fees across its entire card-paying customer base. The 1 The National Small Business Association. “2013 Year-End Economic Report.” NBSA.biz.2 For a more thorough review of the settlement and a vendor’s best practices for accepting and surcharging credit cards, see Scott and Brad Boe’s article “Accepting Payment by Credit Card, Surcharging the Cus-tomer and the Multibillion Dollar Litigation Settlement with the Card Com-panies: Is it Time to Rollout a Card Payment Program for Your B2B Sales?,” published in CRF’s The Credit and Financial Management Review (2013).

solution to these issues is stratification, whereby the vendor assesses different surcharges, or none at all, to different classes of its customer base. In this way, the vendor limits margin erosion without alienating certain customers or classes of customers. What are the card companies’ rules regarding stratification? What of federal antitrust law and discriminatory pricing tied to stratification?

II. Credit Card Company Card Rules

a. Visa and MasterCard

The operative clause in the Visa and MasterCard class action settlement agreement is: “A merchant adds the same surcharge to all Visa [or MasterCard] Credit Card Transactions, regardless of the card’s issuer or product type.” At first blush, stratification appears to be prohibited. However, the qualification language refers to the brand level/product level distinction. Stratification is not prohibited in the class action settlement agreement between Visa and MasterCard and retailers, nor in the corresponding materials (FAQ’s on Visa and MasterCard’s websites). Had Visa and MasterCard intended to forbid stratification, one would have expected they include such a provision.

b. American Express

Like Visa and MasterCard, American Express allows vendors to surcharge the interchange fee to their customers. And, like the Visa and MasterCard settlements, there is no express prohibition of stratification in the American Express settlement agreement.

c. Why Card Companies May Allow Stratification

There are several likely reasons why card companies declined to expressly prohibit stratification. First, disallowing stratification would not be consistent with the purpose of the class action settlement, which is to increase competition among card companies. More importantly, however, is that card companies may lose business by prohibiting vendors from stratifying. Where a vendor absorbs the interchange fee for certain customers or classes of customers, it encourages the customer(s) to increase their credit card usage (which means more interchange fee proceeds for the card companies and the acquirers). Neither the card companies nor the acquirers should be concerned with who pays the surcharge, provided it is paid. Alternatively, the vendor may be forced to absorb the interchange fee as the customer refuses to pay a surcharge. Without stratification, the vendor cannot accommodate the customer’s payment channel.

Making Credit Cards a Competitive Payment Channel via Surcharge, Yet

Preserving the Trade Relationship with Key Customers: Stratifying the

Customer Base and Complying with the Robinson-Patman Act

Scott E. Blakeley, Esq.

24

d. Where a Vendor Accepts All Three Cards

MasterCard, Visa and American Express are competing with one another for cardholders. To that end, the Visa-MasterCard and the American Express settlements devote a significant portion of their language and rules to ensuring that vendors cannot discriminate between the card brands (i.e. promoting the use of one card brand over another). Visa may appreciate a vendor’s stratified surcharge program (which promotes increased Visa card usage amongst the vendor’s favored customers), but American Express may interpret the program as discriminatory. The key to circumventing this discrimination issue may lie in the Robinson-Patman Act.

III. The Robinson-Patman Act and Discriminatory Pricing

Credit card company rules aside, how does the Robinson-Patman Act (the “RPA”) affect the vendor’s right to stratify the surcharge?

a. Overview

The RPA prohibits vendors from offering more favorable pricing to one customer without extending comparable pricing to all similarly-classed customers. Pricing under the RPA is not limited to the price charged for a particular product. Instead, pricing also includes:

Credit terms;• Discounts;• Rebates;• Promotional allowances; and• Shipping terms. •

Surcharge waivers are a form of discount and should be considered as part of the RPA classification.

b. Classifying Your Customer Base

As a vendor, the first step to complying with the RPA is to class your customer base according to the following:

Customer’s functional level (wholesaler? retailer?);• The type of product the customer purchases (i.e. grade • and quality); andThe geographic region in which the customer does • business (the respective customer’s sales territories overlap).

Absent exceptions discussed below, customers that align on these factors are like-classed and should be offered comparable terms and pricing.

c. RPA Exceptions

Even where customers are like-classed, the vendor may be excused from RPA compliance if it meets an exception:

Meet the Competition. If the vendor is acting to meet • the extended terms offered to its customer by a competitor, then the vendor will not violate the RPA by

agreeing to extended terms, even if those terms are more favorable than like-classed customers.

Functional Discount. The RPA may permit pricing and • terms differences if those differences are the result of differentials in the cost of manufacture, sale or delivery.3

d. Stratification Allowed under the RPA?

Provided that the surcharges, or surcharge waivers, are treated equally amongst like-classed customers, or there is an RPA exception, the vendor and its stratified surcharge rollout should be compliant with the RPA.

IV. Implementing a Stratified Surcharge Rollout

a. Complying with the Rules and the Laws

The vendor’s best practice is to class its customer base, in compliance with the RPA, and then stratify its surcharge accordingly. So long as all customers in a given class are surcharged the same, the vendor should not violate the RPA and should avoid any suggestion of discriminating against a particular credit card brand.

Alternatively, the vendor may choose to stratify its surcharge based on the terms it extends to customers, waiving the surcharge for POS customers and assessing the surcharge for Terms customers. The vendor is willing to waive the surcharge for POS customers because it does not have to carry the cost of the receivable. Where Terms customers pay with credit cards, however, the vendor carries the cost of the receivable and pays the interchange fee. Assessing a surcharge on Terms customers allows the vendor to reduce the added cost and mitigate the credit risk. Again, the key is consistency. The vendor must apply the same surcharge rate to all Terms customers, regardless of the card used.

b. It’s a Negotiation

Vendors should always negotiate for further exceptions and concessions from the credit card companies. The larger a vendor’s credit card sales volume, the more leverage that vendor wields in the negotiations.

3 There are additional RPA exceptions, but they are not applicable to the surcharge waiver issue.

Attorney Scott Blakeley

About the Author ...Scott Blakeley is a principal with Blakeley & Blakeley LLP, where he practices creditors’ rights and bankruptcy. His e-mail is: [email protected].

22

In the wake of the recent settlements between retailers and credit card companies, credit cards are becoming an

increasingly popular payment channel in the B2B setting. Though traditional credit cards (think: plastic, commercial or personal cards) still dominate the credit card payment channel, Virtual Credit Cards (also known as single-use accounts) appear to be gaining a foothold. Businesses planning to receive payments via Virtual Credit Cards should understand what they are, their benefits and downsides, and what a customer’s virtual credit card program means for the vendor’s bottom line. The following attempts to provide answers to these essential questions.

Credit Cards in the B2B SettingAs a B2B payment channel, credit cards offer a variety of benefits to vendors, customers and cardholders. For vendors, payment by credit card reduces credit risk at the time the order is placed, improves DSO, minimizes documentation and improves collections, as there is no accounts receivable. Conversely, payment by credit card provides the customer with convenience and more time to pay the vendor’s invoices (up to 30 days to pay the statement on which the invoice appears). The cardholder, who is commonly a principal of the customer, receives the personal benefit of points and miles.

MC/Visa and American Express Settlements and the Vendor’s Surcharge Rollout Despite their convenience and flexibility, many vendors refuse to accept credit cards because, prior to the class action settlements, vendors were prohibited from passing the interchange fee to their card-paying customer. These interchange fees typically range from 2% - 4% of the transaction and erode a vendor’s profit margins. However, as part of two class action federal court settlements between retailers and Visa/MasterCard/American Express, card companies now allow vendors to surcharge customers for the interchange fee.

In light of the rule change allowing vendors to surcharge, it will be interesting to find out whether customers embrace the surcharge or instead, go on the offensive by rolling out their own virtual card payment program, under which the vendor continues to absorb the interchange fee.

Customer’s Virtual Credit Card/Single-Use Account Payment Program: All the Convenience without the Surcharge?

What is a Virtual Credit Card/Single-Use Account?Virtual Credit Cards, or single-use accounts, are customer-driven card payment programs that require vendor adoption to handle card-not-present transactions. These programs are offered by a number of banks, including JPMorgan Chase, Citi and BBVA, and accepted by Visa, MasterCard and American Express. The general process of single-use accounts is:

Once a vendor is enrolled in the customer’s single-use • account program, the system automatically generates and assigns a unique account number (a “virtual credit card”) to each of that vendor’s invoices;The credit cards are governed by a set of pre-transaction • approvals, which specify: the card’s spending cap/credit limit; the card’s expiration date; the number of allowed transactions on the card;If all approvals are met, the transaction is authorized and • the vendor receives immediate electronic remittance; and The customer has up to 30 days from the issuance of the • first statement reflecting the invoice in which to pay the credit card company.

In this way, single-use accounts combine the control of a check with the flexibility and expediency of a credit card. Further, virtual credit cards can be set up on automated, recurring payment cycles, like an ACH payment.

Benefits and Downsides for the VendorFor vendors, the benefits and downsides of virtual credit cards are similar to traditional credit cards, with a few key differences. The vendor enjoys immediate electronic remittance, increased cash flow, reduced accounts receivable, improved DSO and minimized bankruptcy risk. Further, the automated system eases account reconciliation and financial reporting. While customers may still dispute virtual credit card payments, the system’s pre-transaction authorizations limit a customer’s acceptable reasons for dispute. Disputed payments are less likely under a virtual credit card program than they are with a traditional card.

However, to accept virtual credit card payments, vendors must (1) be enrolled in the customer’s single-use account program and (2) pay credit card processing fees. As is the case with traditional card use prior to the class action settlement, the processing fees associated with virtual card programs eat into profit margins and can make this payment channel cost-prohibitive for some vendors. Unlike traditional credit cards, virtual credit card surcharges are not addressed in the recent class action settlements. In other words,

CUSTOMER’S VIRTUAL CREDIT CARD -

A Way to Trump the Vendors’ Surcharge?

By Scott Blakeley, Esq.

23

vendors have not received express consent to surcharge virtual credit card sales. Therefore, the vendor will need to negotiate the virtual credit card surcharge with the card companies.

Benefits and Downsides for the CustomerVirtual credit card programs provide the customer with a variety of benefits. The customer enjoys de facto extended terms (up to 30 days to pay the statement on which the invoice first appears), improved DPO, increased working capital and decreased administrative costs. Unlike traditional credit cards, virtual credit cards’ unique account numbers and transaction-level controls reduce the odds of fraudulent use or theft. Also, virtual credit cards support electronic data capture and automatically match transactions with the vendor’s purchase documents (P.O. or invoice), thereby simplifying the reconciliation process. And, instead of the cardholder earning points and miles, the customer earns cash rebates for its virtual credit card purchases. For the customer, this means that the company—not just the cardholder—enjoys the incentives.

Vendor/Customer — The Battle Lines May Be Forming

Given a vendor’s recent right to surcharge traditional credit card sales under the class action settlements, expect more customers to roll out virtual credit card programs in order to avoid paying vendors’ credit card surcharge fees.

For the vendor, the clock may be ticking to control the costs of this payment channel. To preempt the virtual card rollout,

the vendor may condition the customer’s credit card use on a credit card payment agreement. In addition to mitigating the risks of chargeback and unauthorized use, establishing governing law (i.e. venue provision), and rolling out the surcharge, this credit card agreement can lock the customer into paying with its traditional credit card, thereby precluding the customer from rolling out a virtual program for the duration of the agreement.

Whether or not a tug of war results between vendors and customers over the establishment of virtual credit card programs remains to be seen. Vendors, however, may be torn between the financial incentive to levy charges on traditional credit card purchases and the desire to accommodate the purchasing preferences of customers demanding the use of virtual credit cards.



New

Online Course

Available

Now!

CRF 103: Diagnostic Cash Flow

This course delivers intermediate and advanced methods of clash flow and financial ratio analysis in a variety of industry settings.

CRF 103: Diagnostic Cash Flow

For details and registration information please CLICK HERE. Instructed by Dr. Steven Isberg

CRF Sr. Research Fellow

http://classes.crfonline.org/Public/Course%20103.aspx?PageView=Shared

8 9©2014 Credit Research Foundation ©2014 Credit Research Foundation

Apple has made a media splash with its announcement of Apple Pay, the latest foray of a tech company entering the mobile card payment space. While the B2B space has been slow to embrace electronic payment channel alternatives, especially those designed for smart phones and tablets, these alternatives are thriving in the B2C space. In our article “Payment Channel Alternative (Traditional and Emerging) For The Customer (And The Credit Team’s Preferences),”1 Lyle Wallis (VP Research, CRF) and I considered the topic of mobile payments. Apple Pay advances this payment form. But does Apple Pay provide insight for the credit team in the B2B space of what the payment channel may look like in the near future?

The Mobile Wallet: A B2B Payment Channel in the Near Term? Electronic payments, especially in mobile form, are showing to be a most efficient and cost effective payment channel. Banks have invested in mobile options, which allow consumers to deposit checks, view balances and make transfers between accounts, all from their smart phone or tablet. Javelin Strategy and Research estimates that the average cost for a mobile banking transaction (deposit or transfer) is 50% cheaper than a desktop computer transaction and 90% cheaper than an ATM transaction. It costs J.P. Morgan Chase $0.03 to process a customer’s mobile check deposit, versus $0.65 where the customer physically deposits a paper check.

The mobile wallet has arrived. A mobile wallet can be peer-to-peer, consumer-to-business, or both. To use a mobile wallet, the consumer registers a new account with a provider and then connects that mobile wallet

1 The Credit and Financial Management Review, May, 2014.

to their existing debit card and bank account. Once money is loaded onto the digital wallet, it can be sent to other peers and/or businesses also on the mobile wallet network. Then, should they desire, the consumer may “cash out” all or a certain percentage of their mobile wallet, and the funds are automatically routed back to the original bank account.

Consumers may choose a variety of mobile wallets: Google, Amazon, PayPal, Square, Venmo, and now Apple. Apple announced that its new iPhone 6 and digital watch give users the ability to pay for products and services just by tapping the device to payment terminals using Apple Pay. The service is a take-off of the Google Wallet, which has been available on Android phones since 2011. The mobile payment system uses a technology known as Near Filed Communication (NFC), which transmits a radio signal between the device (smartphone in this instance) and a receiver, when the two are fractions of an inch apart or touching.

Apple Pay, Data Breach and Card Security: Applications to the B2B Space?The headlines regarding the Home Depot, Target Stores and Neiman Marcus data breaches have affected hundreds of millions of their customers. Vendors rolling out card payment programs in the B2B space are reminded to consider a cardholder’s privacy rights when they store the cardholder’s card information electronically. Apple recognizes the significance of cardholder privacy and intends to distinguish itself through greater card security. Major payment

networks and banks have all been working on a system that allows customers to make a payment without handing over any personal details, using a kind of digital token that can be used only once. Apple Pay is the first program to use the

Apple Pay And Its Implications As A Payment Channel For Customers To Pay Vendors’ Invoices In The B2B Space

By Scott Blakeley, Esq.Blakeley & Blakeley, LLP

tokenization system on a widespread basis. With each Apple Pay transaction, a user’s credit card number won’t pass through the system, just a scrambled, one-time code that can’t be used in any future transaction.

If a retailer’s systems are hacked, Apple Pay customers’ personal information is not compromised. The service also requires a thumbprint scan for each transaction, meaning that only the phone’s owner can use it to make purchases--a stolen smartphone cannot be used for fraudulent purchases. The devices’ operating software iOS 8 will also encrypt more of the user’s personal data (photos, messages, email, contacts, call history, iTunes content), where previous versions of iOS only encrypted a device’s email. These added security features are important and one of the reasons that Apple Pay has won over credit card companies and retailers. The iPhone 6 and the Apple Watch will use Apple Pay at merchant locations that have purchased the hardware that can read the wireless signal from Apple’s devices. Because merchants are already under pressure to upgrade their POS systems to accept EMV, a new card technology to reduce fraud, there is thus greater opportunity to add-on the NFC technology at the same time. Upgrades to POS systems have been mandated by the credit card companies and must be in place by late 2015 else the merchant will be liable for fraudulent credit card use. Both Visa and MasterCard are on board with Apple Pay, and Apple is not charging them for allowing their products on Apple phones. Banks have agreed to accept lower fees from Apple than what they usually accept on credit card transactions, with their hope that cardholders will opt to use the technology in place of cash and other payment methods, thereby driving up the total number of transactions. Safer

credit card transactions will lower the instance of fraud and thereby reduce card fees for everyone.

Apple Pay and B2B ImplicationsCan mobile solutions accommodate transactions in the B2B space? Mobile payment technologies have focused on the consumer sector. However, given the push for electronic payment alternatives in the B2B space, developers are pursuing B2B mobile payment technologies. Will businesses move to this payment channel, given the transactional efficiency and low processing costs of mobile payments? According to the AFP, only 11% of US companies surveyed are using mobile payment technologies.

Apple Pay is presently geared toward brick and mortar stores. Online application for card-not-present transactions is a key for the B2B space. The single use nature of Apple Pay technology (digital token) rules out use for multiple transactions (the credit team storing a card on file). Applications will be developed that provide for Apple Pay technology to be used to pay vendor invoices in the near term.



CRF Webinar on Credit Card Payment Program

Draws Over 800 Attendees!

On July 30, 2014 CRF offered its members a 90-minute webinar exploring the important aspects of establishing a credit card payment program.

The webinar was entitled: “Rolling Out a Credit Card Payment Program and Surcharging the Customer,” presented from the offices of Blakeley & Blakeley LLP, by Attorneys Scott Blakely and Ronald Clifford of Blakeley & Blakely LLP and Brad Boe, CRF Past Chairman and Director of Credit, Perfomance Food Group.

Attorney Blakeley emailed written responses to those attendees whose questions were not answered during the webcast as time ran out.

32©2014 Credit Research Foundation

The number of customers using credit cards to pay B2B invoices continues to increase, and for good reason, as it is the only payment channel where the principal

%3' 6of additional time to ultimately pay the vendor’s invoices through reimbursement of the cardholder’s card statement. Unfortunately for vendors, credit cards are the most expensive payment channel because the interchange fees

Historically, credit card companies have prohibited vendors from surcharging customers the interchange fee. In 2004, several national retailers and trade associations (including Kroger, PayLess, Safeway, and several trade associations) 78' &9interchange fees in violation of the Sherman Antitrust Act. * the U.S. District Court. After eight years of litigation, a federal # :;!7<8class action settlement. Under the class action rules, class claimants (primarily retailers) were given the option to either opt in or opt out of the class and the corresponding settlement with the card companies.

For those opting into the class, the claimants and Visa and MasterCard agreed to settle under the following terms: (1) cash distribution of 7.25 billion to retailers and vendors that were overcharged during the eight year period (2004 through 2012); (2) reduction of the interchange fee by ten basis points for 8 months, which is valued at $1.2 billion; and (3) the right *term for vendors in the B2B setting is the rule change that now permits surcharging the interchange fees to customers. The rule changes became effective on January 27, 2013.

Thousands of retailers, including some of the largest in the United States, such as Wal-Mart Stores Inc., opted out of settlement, complaining it was not adequate. In particular, the retailers noted they would not surcharge their customers (consumers) as they would lose business. In early 2014, nearly 30 big national retailers who opted out of the earlier settlement agreement (including Target Corp., Hewlett-Packard Co., Wal-Mart Stores Inc., CVS Pharmacy Inc., Toys R Us Inc., Bed Bath & Beyond Inc., and Forever 21 Retail 3 78:;!federal court, asserting similar, if not the same, accusations as the previous suit.

8'78these cases, arguing that the retailers’ claims should be

barred by legal releases in an earlier settlement in 2003. They also argued the claims should be thrown out because the retailers don’t directly pay fees to banks that issue Visa and MasterCard branded cards. Wal-Mart Stores Inc., CVS Pharmacy Inc., and scores of other merchants who opted out, joined in opposition against dismissal, arguing that the QJuly 18, 2014, the judge rejected Visa and MasterCard’s motion for dismissal and ruled that the opt-out plaintiffs could proceed with litigating their claims.

What Does this Mean for Vendors’ Ability to Surcharge? A vendor’s ability to surcharge remains unaffected by the 9 $'out a surcharge program is not without its restrictions. First, it is supposed to equal the actual cost of processing the credit card transaction (typically between 1.5 and 3 percent), but may not exceed 4 percent of the purchase. The surcharge may also vary based on the type of card; vendors still cannot add surcharges to debit card transactions. Also, U.S. vendors may only surcharge Visa and MasterCard credit cards if the vendor is able to add a surcharge fee on other non-Visa/MasterCard credit cards that it accepts in a channel of commerce or adds such a surcharge at an amount equal or lesser to the competing network’s cost to the vendor – in other words, vendors surcharging customers must do so consistently without discrimination. In order to begin surcharging, vendors must also notify Visa and MasterCard, as well as their acquirer, at least thirty days in advance. Furthermore, the vendor must also notify customers at the point of entry, the point of sale, and on the invoice. For further details regarding a surcharge rollout, consider the article authored by Brad Boe and I entitled “Accepting Payment by Credit Card, Surcharging the Customer and the Multibillion Dollar Litigation Settlement With the Card Companies: Is it Time to Rollout a Card Payment Program for Your B2B Sales?” (Published in Credit Research Foundation’s The Credit and Financial Management Review, Volume 19, Number 4).



What the Recent Opt-Out Litigation Against Visa

and MasterCard Means for Vendors’

Ability to Surcharge Card Customers

By Scott Blakeley, Esq

Blakeley & Blakeley LLP

A Glossary of Key Terms for the Vendor to Surcharge to Make Card Payments a Price

Competitive Payment Channel By: Scott Blakeley, Esq. &

Brad Boe

Abstract Customers have payment channel choices, whether traditional (paper check) to modern (ACH, echeck, wire, cards). Customers in the B2B space are increasingly using credit cards to pay vendor invoices. The Wall Street Journal reports the share of U.S. companies that pay vendors by credit card has doubled in the past four years, comprising 10% of the payments in the B2B space.1 Credit Card as a Payment Channel Credit cards in the B2B space are a unique payment channel. When contrasted with other payment channels, the vendor often finds the payer of the invoice moves from the corporation or LLC that the vendor credit scored and invoiced, to the principal of the company, even though the

principal has not personally guaranteed the B2B invoice. The reason that the payer moves to the principal is that the card companies reward the individual card holder through points and miles for using the personal card to pay the invoice. Through the individual’s reimbursement of his or her card’s statement by the company, the customer not only receives the potential terms of sale from its vendor it also gets the float conferred to the cardholder of up to 30 days from the card company. With the card payment channel, both the principal and the company are rewarded for using the card, which is unique to this payment channel. Cards also reduce paperwork and allow the customer to eliminate the time and cost of processing A/P checks. The upside for vendors is that payment by credit card can mean immediate remittance (COD), reduced credit approval

1 Noelle Knox, B2B Credit Card Payments Jump, Wall Street Journal (October 28, 2014)

and collection activities, reduced credit and bankruptcy risk, and new sales channels (attracting customers who otherwise may not qualify for terms). Further, by accepting cards only when the order is placed (cards not accepted from terms’ customers), the vendor also enjoys increased cash flow, improved DSO and reduced A/R. For vendors, however, credit cards are the most expensive payment channel. Vendors incur an average of $2.2 million in credit card processing fees per 100 million of revenue.2 Electronic payments by contrast, cost a company less than $1 per transaction, on average.3 The following spreadsheet highlights the cost to vendor not surcharging.

Supplier accepting credit card payment for $200,000 customer purchase:

COD Customer SUPPLIER

Payment in full within 48 hours $ 200,000

Interchange Fee 2.5% $ (5,000)

Reinvestment/Redeployment of Funds at 3% $ 455

Net to Supplier $ 195,455

% of Purchase Price 97.7% Terms Customer

Payment in full after 30 Days $ 200,000


10% Weighted Cost of Capital $ (1,644)


% of Purchase Price 96.7%





% of Purchase Price 95.9% Surcharge Terms Customer


Customer Pays 2.5% Interchange Fee $ -



% of Purchase Price 99.2%

2 REL Consulting, Companies Can Dramatically Reduce the Burden of Credit Card Fees By Evaluating and Changing Payment Policies, (October 31, 2014), www.credittoday.net 3 Noelle Knox, B2B Credit-Card Payments Jump, Wall Street Journal (October 24, 2014)

Cash Discount for Non-Card Use

Payment (with Discount) in 10 Days $ 200,000

2% Discount $ (4,000)


% of Purchase Price 98.0% According to REL Consulting, approximately 60 to 85 percent of credit card fees can be avoided by making changes to a credit card acceptance policy keyed to the company’s business model, customer base, customer risk, and competitive landscape.4 A vendor may consider adopting an internal credit card policy as a best practice to ensure the credit and finance teams are trained with the card company rules and anti-surcharge statutes. The decision to adopt a card payment program is collaborative one, and requires input from the credit, finance and sales teams. The card policy addresses the in-house procedures for accepting cards, compliance with card company rules, including brand and product selection and surcharge disclosure, and mitigating chargeback risks. For the credit team that stores card information electronically, they must also be mindful of a cardholder’s privacy rights and compliance with PCI SSC standards. The credit team should consider implementing a privacy policy as to the storing of a cardholder’s credit card information. To help vendors understand the card companies’ rules, the state anti-surcharge laws and privacy laws to implement a surcharge program, the glossary of credit card terms may be of guidance. Acquirer: The financial institution accepting payments from a credit cardholder (customer). The Acquirer has a contract (vendor account) directly with the vendor or indirectly through an independent Processor providing the vendor with a line of credit. Assessment: A licensing fee, like a royalty, which pays a percentage to the respective association (card brand) on every transaction. Anti-Surcharge Law - Laws enacted in California, Colorado, Connecticut, Florida, Kansas, Main, Massachusetts, New York, Oklahoma and Texas that limit a vendor’s surcharging a customer that pays for goods or services with a credit card to recover the interchange fee from the cardholder. However, it is unclear whether these Anti-Surcharge Laws include the B2B transaction. As it stands, only Connecticut and New York seem to have statutory language broad enough to cover both the B2C and B2B transaction. Brand and Product Level - Visa and MasterCard provide for two forms of surcharging; Brand Level and Product Level. A vendor must select one, but not both, of the forms of surcharge to institute.

The Brand Level form of surcharge allows the vendor to apply the same surcharge to all credit card transactions for a particular brand, regardless of the card’s issuer or product

4 REL Consulting, Companies Can Dramatically Reduce the Burden of Credit Card Fees By Evaluating and Changing Payment Policies, (October 31, 2014), www.credittoday.net

type. In this form of surcharge, the merchant is applying a surcharge equally to all Visa and/or MasterCard transactions.

The Product Level form of surcharge allows the vendor to apply the same surcharge to all credit card transactions made with a particular type of card.

Card Company and Cardholder Disclosures - A vendor must also disclose their surcharging practices to their customers at the point of sale and on the customer’s invoice (or receipt with card present transactions) as follows:

• In a card-not-present transaction, a merchant discloses a surcharge prior to the sale (for example, notice on the web portal used to process the transaction), and the surcharge amount may be a line item on the invoice is using the card at the time the order is placed (COD). If the customer is qualified for terms and the customer uses the card, then the invoice may contain a line item setting out the surcharge should the terms-customer use a card. A debit memo may also work.

• In a card present sale, the surcharge amount is itemized on the receipt. Card Company Class Action Settlement - On December 13, 2013, the U.S. District Court for the Eastern District of New York approved a class settlement brought by retailers against Visa and MasterCard alleging that the card companies conspired to artificially inflate the interchange fee in violation of the federal antitrust law, the Sherman Act. The settlement is comprised of a cash portion and rule change portion. The rule change portion, among other things, allows vendors to shift to their customers the interchange fee imposed by their card companies. Cardholder/ Customer Payment Agreement Form - A vendor may condition a customer’s card use on the customer agreeing to the vendor’s card agreement form. The card agreement form provides protections from a cardholder’s unauthorized dispute and shortens chargeback period. The vendor may also include a venue provision, or forum selection clause, in the card agreement to address anti-surcharge issues. The vendor may also include a personal guaranty, should the card be declined. Card-Not-Present Transaction - A payment card transaction made where the cardholder does not physically present the card to the vendor for payment of the invoice. Payment may be through the phone, fax or a vendor’s payment portal. Cardholder Chargeback - The reversal of the card charge, in whole or in part, by the card issuer to the acquirer, and usually, by the merchant bank to the vendor. Chargebacks arise for many reasons, primary among which are customer disputes, fraud, processing errors, authorization issues, and non-fulfillment of copy requests. Card Company Chargeback - The card companies reserve the right to charge back to the vendor certain transactions where the card holder fails to pay the card company. For example, if the vendor accepts payment on a charged off debt and the cardholder does not pay the card company, the card company may charge back the transaction to the vendor.

Convenience Fee – A fee charged by the vendor for a bona fide convenience to the Cardholder, in the form of an alternative payment channel outside the vendor’s customary payment channel. This is separate from a surcharge. Vendors elect if they wish to assess a convenience fee or a surcharge, as they cannot do both. Data Levels of Information- Visa and MasterCard categorize credit card transactions into three categories: Level 1, Level 2 and Level 3 processing. A vendor may lower its interchange fee by meeting the Level 2 and Level 3 requirements (Level 1 processing refers to the business to consumer transaction). Level 2 data includes the cardholder’s billing address, the customer’s name, the transaction amount, the date of the transaction, the customer’s TIN, the sales tax amount and the customer’s state code. Level 3 data includes all of the Level 2 data, plus the product code, the product cost, and the item description and applies only to commercial business and purchase cards. With a surcharge rollout, the vendor seeks a lower interchange fee for the benefit of customers, except where the vendor stratifies its customer base and may absorb a portion of the surcharge. Debit Cards and Surcharging - A vendor may not surcharge a debit card. Even though the card may be run as a credit card, it may not be surcharged. Discount Rate: The amount a processor charges a vendor to give credit for depositing and handling vendor’s daily credit card transactions. The cost to process a card transaction always includes three fees: (1) processor’s discount rate and per item fee, (2) interchange rate, and (3) assessment. Some processors include these fees by combining them in a single fee, such as tier billing. Discount rates depend on factors like the vendor’s industry type (retail, ecommerce, mail/telephone order, hotel, petrol, grocery, etc.) Certain types of businesses qualify for special lower pricing, yet many processors do not pass these savings to their vendors. The Discount Rule – Vendors may offer discounts or other financial incentives at the point of sale to customers who choose non-card forms of payment. Vendors who adopt a surcharge program that equals their cost of acceptance may still offer a discount to their customers. EMV- Europay-MasterCard-Visa (“EMV”) cards store payment information in a secure chip rather than a magnetic stripe. Unlike a magnetic stripe card, it is impossible to create a counterfeit EMV card that can be used to conduct an EMV payment transaction. Interchange Fee - The sum paid by vendors to the credit card processor as a fee for accepting a credit card. Internal Card Policy- A vendor may consider adopting an internal credit card policy as a best practice to ensure the credit, finance and sales teams are trained with the card company rules and anti-surcharge statutes. The card policy addresses the in-house procedures for accepting cards, compliance with card company rules, including brand and product selection and surcharge disclosure, storing cardholder information and mitigating chargeback risks. Issuing Bank: Cardmember’s bank, or the bank which has issued a MasterCard or Visa card to a cardholder.

Level Playing Field Limitation: If the vendor accepts a competing payment network brand that is as, or more expensive, than Visa, MasterCard or American Express, and that competing payment network limits the vendor’s ability to surcharge credit cards, the vendor may surcharge Visa, MasterCard and American Express cards only in the same way as the vendor would be allowed to surcharge the competing payment network’s credit card (or on the terms on which the vendor actually surcharges the competing payment network’s credit cards). Notification of Intent to Surcharge – Before surcharging, the vendor must provide credit card companies with 30-day notice of their intent to surcharge. VISA, MasterCard, and Discover provide an online portal and form (American Express will implement a similar online portal upon final approval of their surcharge settlement).The notification form advises the card companies of how the vendor intends to surcharge (i.e. brand or product level) and the channels (i.e. telephone, mail order, or online). Once a vendor notification is sent to the card company, the vendor receives an automatic reply indicating receipt of their notification. The vendor then waits 30 days after receiving the automated response, at which point they are able to surcharge their card-paying customers. PCI Compliance - The Payment Card Industry Security Standards Council (PCI SSC) was created by Visa, MasterCard, American Express, Discover and JCB in 2006 to provide compliance standards for protecting cardholder data. Vendors failing to comply with the PCI SSC standards can lead to fines from card companies. An internal PCI Compliance Policy should accompany any internal credit card policy covering audience, scope, and enforcement and exceptions. PCI SSC: The PCI Security Standards Council is a global forum, launched in 2006, that is responsible for the development, management, education and awareness of the PCI Security Standards, including the Data Security Standards (PCI DSS). Privacy Laws – Forty seven states, the District of Columbia, Guam, Puerto Rico, and the Virgin Island have enacted Privacy Laws to protect card information from identity thieves. The Privacy Laws require safeguards to be put in place to protect a cardholder’s information. The Privacy Laws also apply where the cardholder uses a credit card remotely to pay an invoice, such as the merchant’s internet portal, email or fax (the card is not physically present and a card imprint is not made). Processor: A bridge between a vendor’s customer’s bank (that issued the credit card) and the vendor’s bank account. The Processor must either be or also have an Acquiring Bank if it is a non-Bank Processor. Processors assume risk because they guarantee the Issuing Bank that the charge was secure, legitimate (no fraud involved) and assume additional risk because they cover network fees, gateway fees, and Interchange Fees while waiting to recoup expenses for these fees at the end of the statement period. Product Type: Refers to the type of the card within a particular brand—consumer credit, business, check card, rewards, etc.

Stratification- Where a vendor assesses different surcharges, or none at all, to different classes of its customer base. The operative clause in the Visa and MasterCard Rules and Regulations is that a vendor “adds the same surcharge to all Visa [or MasterCard] credit card transactions.” Thus, on looking at the plain language of the rule, the vendor may assess the same surcharge on all its transactions and a vendor cannot choose to surcharge one Visa [or MasterCard] transaction but not another. However, a vendor may negotiate with card companies for exceptions and concessions, such as surcharging terms-customers, but not COD. Waving a surcharge on high volume customers, or creating floor dollar amounts or ceilings with card acceptance. Surcharge – Where the vendor passes some, or all, of the interchange fee onto the cardholder. The surcharge amount cannot exceed the vendor’s cost of acceptance or 4% of the invoice being paid, whichever is lesser. Surcharge Cap - The surcharge may not exceed 4%. Surcharge Disclosure to Cardholder – Vendors are required to give notice to customers of their intent to surcharge. In a card-not-present transaction, the vendor discloses a surcharge prior to the sale (for example notice on the web portal used to process the transaction), and the surcharge amount may be a line item on the invoice if the customer is using the card at the time the order is placed. In addition to a pre-sale notice, the vendor must disclose the surcharge amount for every transaction. In a card-present sale, the vendor discloses the surcharge amount to the customer and the surcharge should be reflected on the receipt. Virtual Credit Card - Virtual Credit Cards or Single-Use Accounts is an electronic card-based payment system designed to provide greater efficiency in the buyer/supplier process. Each Virtual Credit Card account number is only valid for one payment and expires after each use. Virtual Credit Cards or Single-Use Accounts are customer-driven card payment programs that require vendor adoption to handle card-not-present transactions. These programs are offered by a number of banks and accepted by Visa, MasterCard and American Express. Scott Blakeley is a principal at Blakeley & Blakeley LLP, where he practices creditors’ rights and bankruptcy. His email is [email protected]

Brad Boe is the Director of Credit for Performance Food Group, and the prior Chairman of the Board of Trustees for the Credit Research Foundation.

1/12/2015 Plastic Preference: Are Added Credit Card Rewards Increasing Card use in the B2B Space?

http://www.credittoday.net/public/6031print.cfm 1/2

Scott Blakeley,Esq.

http://www.credittoday.net | Home

Plastic Preference: Are Added Credit Card Rewards Increasing Carduse in the B2B Space?By Scott Blakeley, Esq.1

The credit team offers customers a variety of payment channels, frompaper and echecks, to ACH and EDI to wire to payment cards.However, more customers are choosing credit cards to pay vendors'invoices, in some cases over the objection of the credit team in the B2Bsetting, and those customers using cards are increasing the frequencywith which they use cards.

Card Issuers Offer Further Incentives to Cardholders

According to the Wall Street Journal, the share of customers that pay vendors by creditcard has doubled in the past two years. The WSJ attributes the initial increase to the creditcrisis, which caused many customers to move their payments to cards to capture the cardcompanies 30day float, as well as the perks that card companies' offer cardholders,including travel points, miles and cash back.2 Indeed, the WSJ further reports that cardissuers are offering cardholders even more cash back, up to 6% in some settings, deeper discounts and greatertravel rewards. And card issuers do not cap the rewards.3 The weekly newsmagazine, Barron's, likewise notesthe flood of rewards cards, citing annual fees of some rewards cards are nearly $500. But even with such ahigh annual fee, the added perks still bring substantial value to cardholders.4

Uniqueness of Card Payment Channel

Credit cards in the B2B space are a unique payment channel. In contrast with other payment channels,suppliers often find that owners of small to mediumsized business customers pay their invoices personally,rather than through the company, in order to earn points.

However, on the other end of the equation, the credit cards are the most expensive payment channel forvendors. While the accommodative credit team may appreciate the growing customer preference to use his orher card to pay invoices (and the potentially positive impact on the vendor's DSO with COD sales), the financeteam commonly complains that cards cut into the profitability of the sale as the vendor pays the interchangefee (2%4%) and other costs associated with processing a credit card.

The WSJ notes the expense of this payment channel with the example that a vendor accepting a credit card fora COD sale on a $200,000 P.O. would pay a $5,000 interchange fee to the card issuer, based on a 2.5%interchange fee. If the vendor has extended 30 day terms, the additional cost of carrying that balance for theterm of the invoice, increases the vendor's cost with this payment channel to 3.3%.5

Future Use of Cards in the B2B Space

Vendors have the option to rollout a surcharge program to cover the cost of the interchange fee and with whatseems to be greater incentives for cardholders to use credit cards, a surcharge program may be the vendor'sbest option to recover a majority of the costs with this payment channel. With credit card companies providinggreater rewards to cardholders, credit card usage in the B2B space will continue to increase.

Footnotes:

1. Scott is a principal at Blakeley & Blakeley LLP, where he practices bankruptcy and creditors' rights. His email:

[email protected]

2. Noelle Knox, B2B CreditCard Payments Jump, The Wall Street Journal (October 29, 2014).ret

3. Annamaria Andriotis, Credit Card Rewards: The Deals Get Sweeter, The Wall Street Journal (November 24, 2014). ret

4. Emily Bary, Extra Credit, Analyzing Reward Cards, Barron's (January 5, 2015). ret

1/12/2015 Plastic Preference: Are Added Credit Card Rewards Increasing Card use in the B2B Space?

http://www.credittoday.net/public/6031print.cfm 2/2

5. B2B Credit Card Payments Jump, WSJ, Id. ret

© 2015 Credit TodayAll Rights Reserved. Reproduction without permission prohibited.

SPECIAL Scott Blathe recenUNCONSPress Rerights an We are galerting PAYMENANTI-SUScott Bla Credit caStreet JoPaymentperks off Until JanAmericanclass litigantitrust With the have enaCalifornia In 1985, to encousurchargHarris, fiv (1) violatstatute repurchase(2) violatvaguene

L REPORT

akeley of Blant court rulinSTITUTIONAelease of Mad bankruptc

grateful to Mus to this to

NT CHANNEURCHARGE akeley, Esq.

ards are the ournal, custots are movinfered to card

uary 2013, tn Express angation alleginlaw, the She

card rules nacted anti-sua.

California enrage custome law was cve California

es the First egulates howes; es the Due Pss.

akeley and Bg, "CALIFOAL". Mr. Blaarch 31st. Sy. His emai

Mr. Blakeleyopical issue

EL UPDATELAW UNCO

fastest growomers payingg to this cha

dholders, inc

the card issund Discover ng they conserman Act.

now allowingurcharge law

nacted its anmers to pay bhallenged re

a businesses

Amendmentw parties can

Process Cla

Blakeley LLPORNIA PAYMakeley's inte

Scott is a prinl: seb@blak

y for his supe.

: CREDIT CONSTITUTIO

wing paymeng suppliers bannel to captcluding trave

uers did not have amen

spired to infla

g surchargingws as part of

nti-surchargeby cash formecently in a fs alleged tha

t as an unlawn describe th

ause of the F

P in Irvine, CAMENT CARDrpretation ofncipal at Blakeleyllp.com

pport of CR

ARDS. FEDONAL

nt channel inby credit cardture the cardl points, mile

permit surchded their rulate the inter

g, the credit their surcha

e law prohibms, such as Afederal distriat the law:

wful restrictiohe price diffe

Fourteenth A

A has offereD SURCHARf the ruling iskeley LLP, w

m

RF members

DERAL COU

n the B2B sprd has doubled companieses and cash

harging. Butles to allow srchange fee

team must carge rollout.

biting surchaACH, EDI orict court. In

on on commerence betw

Amendment

ed his immedRGE BAN s below, followhere he pra

ship and the

URT RULES

pace. Accorded in the pas’ 30-day flo back.**

t, Visa, Mastsurcharging in violation o

consider theOne of thos

rging, but alr check. CalItalian Colo

mercial speecween cash an

because the

diate reactio

owed by theactices cred

e communi

S CALIFORN

ding to the Wst two yearsat, and also

terCard, after years

of the federa

e ten states tse states is

llowing discoifornia’s antirs Restaura

ch because nd credit

e law is void

on to

e itors’

ity in

NIA’S

Wall s. the

of al

that

ounts i-nt v

the

for

In his decision of March 26, 2015, the District Court declared California’s anti-surcharge law unconstitutional and enjoined its enforcement. The Court stated that the central question was whether the restriction on surcharges imposes an impermissible burden on commercial speech in violation of the First Amendment. The Court found that the statute regulates speech that conveys price information, which is protected by the First Amendment as “Plaintiffs cannot frame their price how they would like”. The California Attorney General’s office has stated it is reviewing the ruling. It has until May 25, 2015 to file an appeal. The reasoning in Italian Colors is substantially similar to a federal district court decision in the Southern District of New York in Expressions Hair Design v Schneiderman in 2013. In that case, the Court found that the equivalent New York statute “plainly regulates speech” and the “manner in which price information is conveyed to buyers is quintessentially expressive and therefore protected by the First Amendment”. The Court enjoined the Attorney General from enforcing the impugned section. The ruling is on appeal. **Noelle Knox, B2B Credit-Card Payments Jump, The Wall Street Journal (October 29, 2014). CALIFORNIA PAYMENT CARD SURCHARGE BAN UNCONSTITUTIONAL Judge finds that law is unclear, and restricts merchants’ freedom of speech. March 31, 2015 SACRAMENTO, Calif. – Late last week, a federal judge ruled that California’s new law that bans payment card surcharges was unconstitutional. As reported by PYMNTS.com, the case stems from California businesses that sued the state in 2014, stating that their First Amendment rights were being violated because the law restricted commercial speech by dictating how retailers can advertise the difference of prices on cash versus card purchases when it came to adding a surcharge on credit card purchases. According to a news release on the ruling, U.S. District Court Judge Morrison England found that the law “is an unconstitutional restriction on plaintiffs’ freedom of speech and is void for vagueness.” The federal judge pointed to one example to show the reasoning behind the ruling. The judge explained that retailers could charge more for a product and then place a discount on that product, but that same retailer could not charge one amount and then add on a surcharge to make up for the credit card fees that the retailer would incur (even if the price in both those scenarios were the same). Judge England said the California law restricted how the retailer presented their price to the consumer, regardless of why they were charging or reducing specific prices. “These fees are typically passed on to all consumers in the form of higher prices for goods and services. Both state and federal law, however, permit merchants to pass swipe fees on to only those consumers who pay with credit cards. Merchants may do so by charging two different prices depending on how the consumer pays: a higher price for using a credit card, and a lower price for using other payment methods (cash, a personal check, or a debit card),” the retailers’ complaint states. “But, in California, merchants may engage in dual pricing only if they communicate the difference between the cash price and the credit price using the right language.” The judge ruled the law unconstitutional, restricting the retailers’ rights, but also said the language of the bill was so vague that a retailer could be unaware of when it might be violating the law. “Plaintiffs cannot frame their price how they would like, even though they are allowed to speak with their customers generally about the credit card industry and the merchant fees that the industry charges,” the judge concluded. “The fact that retailers – even large national retailers

with teams of in-house attorneys – do not use a dual-pricing system under the current law due to fear of enforcement is proof that the law is not clear.”

Scott Blakeley,Esq.

If you elect to bury thesurcharge through a priceincrease, akin to the airlinesand the fuel surcharge, thecard issuers allow cardholdersto chargeback the undisclosedsurcharge

http://www.credittoday.net | Home

Disclosing Your Credit Card Surcharge Program to Customers: Can YouBury the Interchange Fee Through a Price Increase?By Scott Blakeley, Esq.

In the just released Credit Today survey of credit card use in the B2Bspace (see 2014 Credit Card Survey: More Mainstream Than Ever, a keyfinding of the survey is that more customers than ever are choosingcredit cards to pay vendors' invoices, in some cases over the objection ofthe credit team in the B2B setting, and those customers using cards areincreasing the frequency with which they use cards.

The cardholder/customer is motivated to move their payments to this channel to capture thecard issuers 30day float and perks such as travel points, miles and cash back. Another of thesurvey's finding is that the expense of this payment channel is a key driver of credit teamsattempting to limit use of cards, notwithstanding customer preference.

Given that credit card issuers have amended their rules to allow surcharging, the practice ofpassing the interchange fee of the transaction along to the customer, do you risk losingbusiness as a result of the surcharge (a primary concern of the sales team)? Can you simply offset the expense ofthe surcharge by a price increase, and perhaps avoid a customer's complaining (as well as the sales team)?

Airlines Fuel Surcharging as a Guide for Surcharging Credit Cards?Can you take a page from the airline industry and recharacterize a surcharge for credit card interchange fees assomething other than that? The Wall Street Journal (see "Did the Airlines Actually Eliminate Fuel Surcharges?")reports that airlines have stopped adding fuel surcharges; now they call them "carrierimposed charges." Airlineshave costs they are trying to cover. Likewise, suppliers accepting credit cards for payment have costs unique tothis payment channel they are trying to cover. The wording change avoids regulations required to disclose howsurcharges are calculated. The WSJ notes that the surcharge is now included in the cost of a ticket and notitemized in the price.

So what do the card issuer rules say about whether you must disclose the surcharge to the cardholder? Can youfollow the airlines and their disclosure or perhaps lack of disclosure of fuel surcharges for credit cardsurcharges?

Supplier's Right to SurchargeUntil January 2013, the card issuers did not permit surcharging. But now Visa, MasterCard, American Express andDiscover have all amended their rules to allow surcharging after years of class litigation alleging they conspired toinflate the interchange fee in violation of the federal antitrust law, specifically the Sherman Act.

Card Issuer Surcharge Disclosure Requirements InitialSurcharge DisclosureVisa, MasterCard, and American Express rules provide requiretransparency and disclosure for suppliers rolling out a surcharge.

First, you must initially disclose to the card issuer your intention tosurcharge, giving them 30 days notice prior to surcharging (see tablebelow for details on how to do this).

In addition, you must also give initial notice of your surcharge to thecardholder/customer in advance of initially surcharging. Given that cardpayments in the B2B space are "card not present," the initial noticemay be through your payment portal, via email, fax, mail or over thephone.

Surcharge Disclosure with InvoiceThe card issuers also require that the interchange fee be disclosed as part of each transaction, not buried in aprice increase. Your invoice may contain a line item disclosing the interchange fee in the invoice. Should you allowa terms customer to pay with a card, you may separately invoice the customer for the surcharge.

http://www.credittoday.net/members/2014-Credit-Card-Survey-More-Mainstream-Than-Ever.cfm

http://www.bandblaw.com/attorneys.php?attorney=ScottBlakeley

http://www.credittoday.net/

http://www.wsj.com/articles/did-the-airlines-actually-eliminate-fuel-surcharges-1425488470

Failure to Disclose SurchargeIf you elect to bury the surcharge through a price increase, akin to the airlines and the fuel surcharge, the cardissuers allow cardholders to chargeback the undisclosed surcharge. Visa and Mastercard also reserve the right tofine you for failing to comply with the disclosure provisions of the surcharge rules.

Card Use in the B2B Space Continues to IncreaseAs noted in the Credit Today survey, card use continues to increase in the B2B space and is now a customerpreference. You have the option to rollout a surcharge program to cover the cost of the interchange fee, providedthat the surcharge is disclosed to the cardholder, as opposed to burying it through a price increase.

Relevant LinksTo provide notice to the credit card issuers, use the following links:

Visa: A vendor needs to complete the online notification found at:https://usa.visa.com/merchantsurchargenotification/inquiry.doMasterCard: A vendor needs to complete the online notification found at:http://www.mastercard.us/merchants/support/surchargedisclosure.htmlDiscover: A vendor needs to complete the online notification found at:https://www.discoversurcharge.com

Scott Blakeley, Esq., is a founder of Blakeley & Blakeley LLP, where he advises companies around the UnitedStates and Canada regarding creditors' rights, commercial law, ecommerce and bankruptcy law. He can bereached at [email protected].



http://www.mastercard.us/merchants/support/surcharge-disclosure.html

https://www.discoversurcharge.com/

https://usa.visa.com/merchantsurchargenotification/inquiry.do


The Wall Street Journal reports that credit card use in the B2B space continues to increase as a preferred payment

channel for customers. Suppliers accepting cards in the B2B space commonly receive payment through card not present forms, whether through payment portal, email, fax or over the phone. For those suppliers that accept cards in the cardholder’s presence, card issuers are changing card acceptance rules to give cardholders greater protections from identity theft.

“Chip and pin” or “smart cards” are credit or debit cards that store data on integrated circuits rather than on traditional magnetic stripes. The transition to “chip and pin” or “smart card” technology is now largely underway in the United States. The transition is being assisted by the shift in liability for card-present fraud that will be implemented on October 1, 2015.

Currently, if an in-store transaction is conducted using a card obtained fraudulently, cardholder losses from that transaction lie with the payment processor or issuing bank. From October onwards, that liability will shift to the supplier that has not changed its system to accept chip technology. If a customer uses a chip card, the failure to update the card reader may permit a counterfeit card to be successfully used. In that scenario, the supplier will bear the cost of the fraud. Again, the supplier will only be responsible for the cost of the fraud if the fraudulent transaction is a card-present transaction.

The major benefit of using a “chip and pin” payment card, and what compelled the US to migrate its cardholders to the new generation of cards, is improved security and fraud reduction. Whereas magnetic stripe card transactions rely on the holder’s signature and visual inspection of the card, the use of a PIN and cryptographic algorithms provide authentication of the card to the processing terminal and the card issuer’s host system.

The identity of the cardholder is confirmed by requiring the entry of a personal identification number (PIN) rather than signing a paper receipt. Unlike magnetic-stripe cards, every time a smart card is used for payment, the card chip creates a unique transaction code that cannot be used again. This eliminates the possibility of card duplication fraud as the transaction code becomes obsolete and cannot be used in further transactions.

While much of the rest of the world has already been using “chip and pin” cards for several years, the US is now committing to migrate its credit card use to this more secure format. There is a historical viewpoint regarding the reason

for this delay by the US in updating its credit card technology standards. In the past, fraud was much more prominent in markets outside of the US. What has happened, especially over the course of the past few years, is that since other markets have migrated to “chip and pin” cards and become more secure, fraudsters have moved their focus to the US market. Essentially, they came to the US market because they were looking for less secure networks from which to steal fraudulent credit card information.

For suppliers in card-present transactions, the switch to this technology means adding new in-store technology and internal processing systems, and complying with new liability rules. For cardholders, it means activating new cards and learning new payment processes. And for the supplier and cardholder, it means a more secure form of payment by credit card, and fewer opportunities for fraud to occur. As the credit team is responsible for managing risk, including risk of fraud with payment channels, the credit team must prioritize compliance with this new technology within the organization for card-present transactions.

Suppliers Accepting Credit Card-Present Payments Take Heed

To Adopt New Technology By October 1, 2015 Or Bear

Risk Of Fraud LossBy Scott Blakeley, Blakeley LLP



mailto:seb%40blakeleyllp.com?subject=

The result of this decision isclear: a supplier may now askcustomers to use an alternativecredit card brand.

http://www.credittoday.net/public/6341print.cfm

Home | Outside the Box | Suppliers Accepting Multiple Credit Card Bran . . . Search

Suppliers Accepting Multiple Credit Card Brands May Now Steer CardPaying Customers to Cheaper Brands in Light of American ExpressFederal Court RulingAugust 28, 2015, By Scott Blakeley, Esq.

Credit card payments to suppliers continue to increase, both from existing and newcustomers. Credit cards are the most expensive payment channel. Suppliers acceptingmultiple card brands (Visa, MasterCard, American Express and Discover) find that theremay be a meaningful difference with card brands' interchange fees, as shown in thechart:

Average Credit Card Processing FeesMastercard 1.55% 2.6%

Visa 1.43% 2.4%

Discover 1.56% 2.3%

American Express 2.5% 3.5%

Source: Value Penguin, Credit Card Processing Fees and Costs

For suppliers absorbing the interchange fee, the credit team has a selfinterest in steering the customer to theleast expensive card brand. For suppliers surcharging the customer the interchange fee, the customer has a selfinterest to consider an alternative brand.

American Express ('Amex") Card Rules barred 3.4 million merchants,including suppliers accepting cards on their invoices in the B2B space, whoaccept Amex cards from encouraging customers to use alternative,cheaper, credit card brands such as Visa, MasterCard and Discover. Amexrequired merchants, including suppliers, to accept all card brands equally.Amex insisted that the rule was required to protect the Amex brand fromcompetition. In 2010, the United States and the attorney generals fromseventeen states brought an antitrust enforcement action against Visa, Mastercard and Amex, challenging theirrules preventing suppliers from steering customers to cheaper cards, alleging that the rule constituted ananticompetitive restraint that violates the Sherman Act antitrust legislation. Visa and Mastercard settled, agreeingto remove the restriction. After a sevenweek trial featuring over thirty witnesses and four expert witnesses, theDistrict Court found that Amex had breached the Sherman Act. Amex has appealed.

The Court found that through this rule, Amex harmed competition. Amex merchant (supplier) restraints "severthe essential link between the price and sales of network services by denying merchants (supplier) theopportunity to influence their customers' payment decisions and thereby shift spending to less expensive cards."The rules prevent any meaningful means of controlling a merchant's use of network services in response, short ofdropping acceptance of Amex cards altogether.

The result of this decision is clear: a supplier may now ask customers to use an alternative credit card brand. Thechief beneficiaries of this decision naturally will be Amex' principal competitors: Visa and MasterCard, the supplierthat does not surcharge, and the customer where the supplier surcharges. The result is likely to see an increasein transactions conducted with competitors' cards unless, and until, Amex reduces the costs of accepting its cards.

http://www.credittoday.net/public/main.cfm

http://www.credittoday.net/bannergate/BannerGateRotator.cfm?CatIndex=1&LinkIndex=37

http://www.credittoday.net/public/department98.cfm

http://www.credittoday.net/public/programs/search.cfm

Scott Blakeley,Esq.

Scott Blakeley, Esq., is a founder of Blakeley & Blakeley LLP, where he advises companiesaround the United States and Canada regarding creditors' rights, commercial law, ecommerceand bankruptcy law. He can be reached at [email protected].

Share your thoughts on this: comment

Related Articles

· Cindy Christy, President and COO of Asurion Corporation, Joins Dun & Bradstreet Board of Directors





http://www.credittoday.net/public/Cindy-Christy-President-and-COO-of-Asurion-Corporation-Joins-Dun-Bradstreet-Board-of-Directors.cfm


The Wall Street Journal reports that credit card use in the B2B space continues to increase as a preferred payment

channel for customers. Suppliers accepting cards in the B2B space commonly receive payment through card not present forms, whether through payment portal, email, fax or over the phone. For those suppliers that accept cards in the cardholder’s presence, card issuers are changing card acceptance rules to give cardholders greater protections from identity theft.

“Chip and pin” or “smart cards” are credit or debit cards that store data on integrated circuits rather than on traditional magnetic stripes. The transition to “chip and pin” or “smart card” technology is now largely underway in the United States. The transition is being assisted by the shift in liability for card-present fraud that will be implemented on October 1, 2015.

Currently, if an in-store transaction is conducted using a card obtained fraudulently, cardholder losses from that transaction lie with the payment processor or issuing bank. From October onwards, that liability will shift to the supplier that has not changed its system to accept chip technology. If a customer uses a chip card, the failure to update the card reader may permit a counterfeit card to be successfully used. In that scenario, the supplier will bear the cost of the fraud. Again, the supplier will only be responsible for the cost of the fraud if the fraudulent transaction is a card-present transaction.

The major benefit of using a “chip and pin” payment card, and what compelled the US to migrate its cardholders to the new generation of cards, is improved security and fraud reduction. Whereas magnetic stripe card transactions rely on the holder’s signature and visual inspection of the card, the use of a PIN and cryptographic algorithms provide authentication of the card to the processing terminal and the card issuer’s host system.

The identity of the cardholder is confirmed by requiring the entry of a personal identification number (PIN) rather than signing a paper receipt. Unlike magnetic-stripe cards, every time a smart card is used for payment, the card chip creates a unique transaction code that cannot be used again. This eliminates the possibility of card duplication fraud as the transaction code becomes obsolete and cannot be used in further transactions.

While much of the rest of the world has already been using “chip and pin” cards for several years, the US is now committing to migrate its credit card use to this more secure format. There is a historical viewpoint regarding the reason

for this delay by the US in updating its credit card technology standards. In the past, fraud was much more prominent in markets outside of the US. What has happened, especially over the course of the past few years, is that since other markets have migrated to “chip and pin” cards and become more secure, fraudsters have moved their focus to the US market. Essentially, they came to the US market because they were looking for less secure networks from which to steal fraudulent credit card information.

For suppliers in card-present transactions, the switch to this technology means adding new in-store technology and internal processing systems, and complying with new liability rules. For cardholders, it means activating new cards and learning new payment processes. And for the supplier and cardholder, it means a more secure form of payment by credit card, and fewer opportunities for fraud to occur. As the credit team is responsible for managing risk, including risk of fraud with payment channels, the credit team must prioritize compliance with this new technology within the organization for card-present transactions.

Suppliers Accepting Credit Card-Present Payments Take Heed

To Adopt New Technology By October 1, 2015 Or Bear

Risk Of Fraud LossBy Scott Blakeley, Blakeley LLP



mailto:seb%40blakeleyllp.com?subject=


New York Appellate Court Finds Ban On Credit Card

Surcharging Constitutional: What It Means To The Credit

Team And A Nationwide Surcharge Rollout

By Scott Blakeley, Esq. and Ruth Fagan, Esq. Of Blakeley LLP

On September 29, 2015, the U.S. Court of Appeals for the Second Circuit vacated the earlier decision of the U.S. District Court for the Southern District of New York (SDNY), that had declared New York’s anti-surcharge law (General Business Law § 518) a violation of the First Amendment and unconstitutionally vague. As a result of the Second Circuit’s decision, the ban on surcharging credit cards, once more, will be enforceable in New York. What does the Appeals Court’s ruling mean to suppliers’ right to surcharge, as recently provided by the card networks under their rule changes, to New York businesses in the B2B space?

BackgroundEnacted in 1984, New York’s anti-surcharge law prohibits sellers from imposing a surcharge on customers who use credit cards in lieu of paying by check, cash or other payment forms. In 2013, five New York businesses and their owners sued New York challenging the anti-surcharge statute, claiming that it violates the First Amendment’s Free Speech Clause and is void for vagueness under the Fourteenth Amendment’s Due Process Clause. In December 2013, the district court agreed with the Plaintiffs on both counts and entered a final judgment declaring New York’s anti-surcharge statute unconstitutional and enjoining New York from enforcing the law against the Plaintiffs.

ContextThe 2013 district court decision marked another victory for merchants, including suppliers, on the heels of a settlement earlier in the year through which Visa and MasterCard agreed to allow vendors to surcharge in the 40 states that had no local ban on the practice in place. In March 2015, a federal district court in California followed the NY district court’s lead in finding that the equivalent California state legislation banning surcharges was also unconstitutional.

RulingThe Second Circuit focuses more on how surcharging is labelled, rather than the implications of the fee or its cost to merchants and consumers. The Plaintiffs made three arguments in their appeal: that the NY statute prevented them from posting a “single price” for goods or services with a notation that credit card transactions are more expensive amounting to a violation of their First Amendment rights;

Expressions Hair Design feared posting two different prices showing a separate price for credit card transactions was a breach of the ban and therefore, a violation of its freedom of speech; finally, the Plaintiffs argued the ban was unconstitutionally vague.

The Second Circuit determined that prices set by retailers are not “speech”, therefore, the First Amendment was not relevant. The Court stated that “all that [anti-surcharge statute] prohibits is a specific relationship between two prices, it does not regulate speech.” In relation to the final two arguments of the Plaintiffs, the Court found that the parties did not cite a single New York authority interpreting the scope of the prohibition. In perhaps an opinion that some may consider shirking its core responsibility to decide the issues before it, the Court declared that the “dearth of authority dooms both of Plaintiffs’ remaining challenges.”

What It Means to the Supplier and a Surcharge RolloutNote that not one of the 40 states that have not enacted anti-surcharge legislation has surcharge legislation pending. Moreover, the New York decision and laws may be interpreted to still allow surcharging in the B2B space. Suppliers should consider adopting a contractual waiver and choice of law provision in their card payment agreement form, whereby customers consent to waive the application of the surcharge prohibition to pay the supplier’s invoice by credit card.

About the Authors ...Scott Blakeley is a principal with Blakeley & Blakeley LLP, where he practices creditors’ rights and bankruptcy. His e-mail is: [email protected].

Ruth Fagan is an associate in the New York office of Blakeley LLP, where she practices bankruptcy and creditors’ rights.

Her email is: [email protected].

The States Credit Card Anti-Surcharge Legislation, Both Enacted and Proposed: Reason for the Supplier to Reconsider a

Nationwide Surcharge Rollout?

The Credit Research Foundation

THE STATES CREDIT CARD ANTI-SURCHARGE LEGISLATION, BOTH ENACTED AND PROPOSED: REASON FOR THE SUPPLIER TO RECONSIDER A

NATIONWIDE SURCHARGE ROLLOUT?

By

Scott Blakeley, Esq. &

Ruth Fagan

Blakeley, LLP 18500 Von Karman Ave, Suite 530

Irvine, California 92612 Telephone | 949-260-0611949-260-0611

Facsimile | 949-260-0613

Los Angeles Office 601 S. Figueroa Street, Suite 4050

Los Angeles, California 90017 Telephone | 213-599-8017213-599-8017

Facsimile | 213-599-8018

New York Office 54 W. 40th Street

New York, NY 10018 Telephone | 917-472-9587917-472-9587

Delaware Office 1000 N. West Street, Suite 1200 Wilmington, Delaware 19801

Copyright© 2015 by Credit Research Foundation Inc. All rights to this material are reserved. No part of the material may be reproduced in any manner whatsoever without written permission from the

Credit Research Foundation 1812 Baltimore Blvd. Suite H

Westminster, MD 21157 443-821-3000

www.crfonline.org

1

Introduction In recent years, a trend that has become highly visible for suppliers in the B2B space is the increase in the numbers of customers using credit cards to pay B2B invoices (both existing and new customers). The reasons for this increase are manifold but include the perks uniquely associated with the use of a credit card: cards offer the only payment channel where the principal of the company receives personal benefits with card use (points and miles); and the corporate customer gets the card issuer float of additional time to pay the supplier’s invoices through reimbursement of the cardholder’s card statement.

Unfortunately for suppliers however, credit cards are the most expensive payment channel, due in large part to the interchange fees imposed by card companies that erode the profitability of the sale.

A Brief History of Card Surcharging Historically, credit card companies’ network rules prohibited suppliers and retailers from imposing the interchange fee on customers through a “surcharge”. This contractual ban on surcharging resulted from a protracted decades-long debate on the topic. As far back as 1974, Congress enacted legislation protecting the right of merchants, including suppliers, to have dual-pricing systems, providing that “a card issuer may not, by contract, or otherwise, prohibit any such seller from offering a discount to a cardholder to induce the cardholder to pay by cash, check, or similar means rather than use a credit card.”

In 1976, after two years of lobbying Congress to impose its preferred speech code, the credit card industry succeeded in having Congress enact a temporary ban on surcharges, despite authorization for discounts. After meeting much opposition in the early 1980’s from lobbying groups, Congress allowed the ban on surcharges to lapse in 1984.

Despite the lapse on the ban at the federal level, the credit card companies were successful in lobbying ten state legislators to enact anti-surcharge laws. In addition, the card companies counteracted the effect of the federal easing of restrictions by including contractual no-surcharge provisions in their merchant agreements.

These private no-surcharge rules came under scrutiny when, in 2004, several national retailers and trade associations (including Kroger, PayLess, Safeway) filed lawsuits against Visa and MasterCard, alleging that the card companies conspired to fix artificially-high interchange fees in violation of the Sherman Antitrust Act. The suits were later consolidated and certified as a class in the U.S. District Court for the Eastern District of New York. After eight years of class action litigation, the court gave final approval of the Visa and MasterCard class action settlement in December 2013.

The class action settlement amends Visa and MasterCard rules to allow merchants, including suppliers, to pass the interchange fee to card-paying customers to recoup this fee. Thus, in the forty states that have not passed anti-surcharge legislation, there now is no legal bar to surcharge credit card-paying customers, whether in the B2B or B2C space.

Although forty states now permit surcharging, the issue remains less resolved in the ten states in which anti-surcharge legislation was enacted. Ostensibly, the settlement does not affect the

2

ban on surcharging in these states; nonetheless, the legislative intent in many of these states was to protect consumers, and not to impact B2B relationships. Therefore, the specific language of each anti-surcharge law warrants closer examination to determine whether B2B surcharging is permissible. Further, in several of these states, contractual provisions are permitted that will allow business customers to waive the ban on surcharging in the transaction at issue.

Finally, the status of the constitutionality of the legislation is far from settled: two federal courts in states that enacted anti-surcharge laws (California and New York) have found the ban on surcharging to be unconstitutional, and this may expand.

In light of these developments, the following is a closer analysis of the surcharge ban in the ten states that adopted such legislation: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas.

State Anti-Surcharge Legislation California

Cal. Civ. Code §1748.1 [2012] Surcharge Ban: No retailer in any sales, service or lease transaction with a consumer may impose a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check or similar means.

Discounts Permissible: A retailer may, however, offer discounts to induce payment by cash, check or other means not involving a credit card, provided the discount is offered to all customers.

Defined Terms: “Retailer:” every person other than a card issuer who furnishes money, goods, services or anything else of value upon presentation of a credit card by a cardholder. “Retailer” shall not mean the state, a county, city and county, or any other public agency.

“Cardholder” means a natural person to whom a credit card is issued for consumer credit purposes, or a natural person who has agreed with the card issuer to pay consumer credit obligations arising from the issuance of a credit card to another natural person.

“Consumer” is not specifically defined in Civil Code Sections 17471748.1.

Legislative Intent/History: “It is the intent of the Legislature to promote the effective operation of the free market and protect consumers from deceptive price increases for goods and services by prohibiting credit card surcharges and encouraging the availability of discounts by those retailers who wish to offer a lower price for goods and services purchased by some form of payment other than credit card.”

Analysis: B2B Transactions? The definition of a “cardholder” - a “natural person” to whom a credit card is issued “for consumer credit purposes,” and excludes businesses.

Are Personal Cardholders Paying B2B Invoices Included? The language for consumer credit purposes indicates that a personal cardholder paying a B2B invoice is outside the scope of the statute.

Does the Law Apply to Convenience Fees? The statute does not define what constitutes a “surcharge,” so it is unclear as to whether it includes any additional fee (as other state statutes provide) added by a supplier in a B2B invoice.

3

Status: On March 26, 2015, 1748.1 a federal district court found the law unconstitutional. That decision is on appeal to the Ninth Circuit and is not expected to be heard until sometime in 2016 at the earliest. Therefore, suppliers in California may assess a surcharge on credit card-paying customers.

Colorado Consumer Credit Code §5-2-212 [2010]

Surcharge Ban: No seller or lessor in any sales or lease transaction or any company issuing credit or charge cards 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.

Discount Permissible: “A discount offered by a seller or lessor for the purpose of inducing payment by cash, check or other means not involving the use of a seller or lender credit card shall not constitute a finance charge if such discount is offered to all prospective buyers and its availability is disclosed to all prospective buyers clearly and conspicuously in accordance with regulations of the administrator.”

Legislative Intent/History: Purpose of the Code:

• “To protect consumer buyers, lessees, and borrowers against unfair practices…”

• “To conform the regulation of consumer credit transaction to the policies of the federal “Truth in Lending Act” and federal “Consumer Leasing Act”

Memorandum from Office of the Attorney General for State of Colorado (dated January 17, 2013): “A consumer credit sale contract is entered into by a creditor and an individual person, rather than an organization; is primarily for personal, family or household purpose.”

Analysis B2B Transactions? Even though the word “holder” is broad and may include both consumers and businesses, the statute’s stated purpose and inclusion in the “Consumer Credit Code” support that B2B transactions are outside the scope of the statute. This interpretation is supported by the Attorney General’s memorandum.

Are Personal Cardholders Paying B2B Invoices Included? “Consumer Credit Sales” as defined within the chapter, exclude those transactions made for a “business, investment, commercial purpose.” Additionally, a stated purpose of the statute is to conform to TILA, which also excludes transactions made for a business purpose.

Does the Law Apply to Convenience Fees? The statute defines “surcharge” as “any additional amount imposed at the time of the sales or lease transaction by the merchant, seller, or lessor that increases the charge to the buyer or lessee for the privilege of using credit or charge card.” The language “any additional amount imposed” encompasses surcharge and convenience fees.

Contractual Waiver: A party benefitting from rights or benefits conferred by statute is “free to voluntarily waive its benefits” unless the statute also serves to protect the interests of the public as a whole. Francam Bldg. Corp. v. Fail, 646 P.2d 345, 348–49 (Colo.1982). Courts must be cautious in finding contract provisions void because to do so would be to infringe on an essential freedom. Id. Therefore, in Colorado, it is likely a supplier can include a waiver in its card payment agreement form in which the business customer agrees to waive the ban on surcharging as a condition to use the card to pay the B2B invoice.

4

Connecticut Conn. Gen. Stat. 42-133ff [2008]

Surcharge Ban: 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, in any sales transaction.

Discount Permissible: “Nothing in this section shall prohibit any seller from offering a discount to a buyer to induce such buyer to pay by cash, debit card, check or similar means rather than by credit card.”

Defined Terms: None.

Legislative Intent/History: None.

Analysis: B2B Transactions? The word “buyer” seems to include consumers and businesses, and without legislative intent to the contrary, it may be argued that B2B transactions may fall within the scope of the Connecticut statute.

Are Personal Cardholders Paying B2B Invoices Included? For the reasons that B2B transactions may be included, it may be argued that a B2B transaction involving a personal cardholder may also be included.

Does the Law Apply to Convenience Fees? Unlike other state anti-surcharge laws, this law does not define what constitutes a surcharge. The plain language of the statute seems to exclude convenience fees.

Contractual Waiver: Where the language of an agreement was clear and definitive, and the intention of the parties unmistakable, parties have been permitted a voluntary and absolute waiver of statutory rights. Pero Bldg. Co. v. Smith 6 Conn. App. 180, 185, 540 A. 2d 524, 527 (1986).

Therefore, in Connecticut a supplier can include a waiver in its card payment agreement form in which the business customer agrees to waive the ban on surcharging as a condition to use the card to pay the B2B invoice.

Florida Fla. Stat. §501.0117; Chapter Title: “Consumer Protection” [2010]

Surcharge Ban: A seller or lessor in a sales or lease transaction may not impose a surcharge on the buyer or lease for electing to use a credit card in lieu of payment by cash, check, or similar means, if the seller or lessor accepts payment by credit card.

Discounts Permissible: “This section does not apply to the offering of a discount for the purpose of inducing payment by cash, check, or other means not involving the use of a credit card, if the discount is offered to all prospective customers.”

Defined Terms: “Surcharge:” any additional amount imposed at the time of a sale or lease transaction by the seller or lessor that increases the charge to the buyer or lease for the privilege of using a credit card to make payment.

“Cardholder” is defined as a “person or organization named on the face of a payment card to whom or for whose benefit the payment card is issued.”

5

Legislative Intent/History: The House Commerce Committee’s Staff Analysis indicates the bill’s passage was based on the support of the Florida Consumers Federation, a consumer lobbying organization. The Federation’s position was that the bill “is the only way to assure basic consumer protection for both the citizens of Florida and the tourists who frequent this state.”

Analysis: B2B Transactions? Even though the term buyer may be interpreted to include a business, the statute is focused on protecting the consumer. The statute is contained in the “Consumer Protection” chapter, and the legislative history of the bill supports this.

Are Personal Cardholders Paying B2B Invoices Included? For the reasons that B2B transactions appear to be excluded from the law, a B2B transaction involving a personal cardholder also appears outside the scope of the law.

Does the Law Apply to Convenience Fees? The statute defines a surcharge as “any additional amount imposed at the time of a sale or lease transaction by the seller or lessor that increases the charge to the buyer or lease for the privilege of using a credit card to make payment.” The language “any additional amount imposed” seems to include a convenience fee.

Status: On September 2, 2014, a federal judge ruled the anti-surcharge law was constitutional. That decision is under appeal.

Contractual Waiver: “It is well-settled that contractual waivers are enforceable under Florida law for any types of rights.” Gessa v. Manor Care of Florida, Inc., 86 So. 3d 484, 499 (Fla. 2011). See also, Bellaire Secs Corp. v. Brown, 124 Fla. 47, 168, So. 625, 639 (1936)(“A party may waive any right to which he is legally entitled, whether secured by contract, conferred by statute, or guaranteed by the Constitution.”)

Therefore, in Florida, a supplier can incorporate a provision in its card payment agreement whereby customers waive the ban on surcharging as a condition to use the card to pay the B2B invoice.

Kansas K.S.A. §16a-2-403; Chapter Title: “Consumer Credit Code” [2010]

Surcharge Ban: No seller or lessor in any sales or lease transaction or any credit or debit card issuer may impose a surcharge on a card holder who elects to use a credit or debit card in lieu of payment by cash, check or similar means.

Discounts Permissible: Although the Kansas statute does not specifically allow for discounts for other methods of payment, such as check or ACH, as do most of the other statutes, a 1986 attorney general opinion provides that such discounts do violate the statute.

Defined Terms: “Surcharge:” any additional amount imposed at the time of the sales or lease transaction by the merchant, seller or lessor that increases the charge to the buyer or lessee for the privilege of using a credit or debit card.

Legislative Intent/History: Scope of Statute: “Parts 3 and 4 apply to consumer loans, including loans made by supervised lenders.”

6

Analysis: B2B Transactions? The use of the word “card holder” seems broad enough to cover consumers and businesses, and is not defined within the statute. However, given that the statute is located within the “Consumer Credit Code” and the statute is intended to apply to “consumer loans,” it appears the statute’s intent relates to cards in the B2C space, not B2B.

Are Personal Cardholders Paying B2B Invoices Included? For the reasons that B2B transactions appear to be excluded from the law, a B2B transaction involving a personal cardholder appears outside the scope of the law.

Does the Law Apply to Convenience Fees? The statute defines a surcharge as “any additional amount imposed at the time of the sales or lease transaction by the merchant, seller or lessor that increases the charge to the buyer or lessee for the privilege of using a credit or debit card.” The language “any additional amount imposed” seems to include a convenience fee.

Maine 9-A M.R.S. §8-509; Chapter Titled “Maine Consumer Credit Code” [2011]

Surcharge Ban: A seller in a sales transaction may not impose a surcharge on a cardholder who elects to use a credit card or debit card in lieu of payment by cash, check or similar means.

Discounts Permissible: “A discount or reduction from the regular price is not a surcharge.”

Defined Terms: “Surcharge:” any means of increasing the regular price to a cardholder that is not imposed on a customer paying by cash, check or similar means.

§8-501 states that any term not defined under state statute will use definition from federal TILA.

TILA §104 (1) Exempted Transactions: Credit transactions involving extensions of credit primarily for business, commercial, or agricultural purposes, or to government or governmental agencies or instrumentalities, or to organizations.

Legislative Intent/History: §8-501 states that “Maine Consumer Credit Code” is referred to as “Truth in Lending.”

Analysis: B2B Transactions? While the term “cardholder” is relatively broad and may include consumers and businesses, the statute’s location in the “Consumer Credit Code” and reference to TILA indicates that it is aimed at consumer protection and not B2B transactions.

Are Personal Cardholders Paying B2B Invoices Included? Because the statute follows TILA, which expressly excludes a transaction made for a business purpose, it appears that a transaction made for a business purpose, whether by personal or corporate card, falls outside the scope of the statute.

Does the Law Apply to Convenience Fees? The statute defines surcharge as “any means of increasing the regular price to a cardholder that is not imposed on a customer paying by cash, check or similar means. The language “any means of increasing the regular price” seems to include a convenience fee.

7

Contractual Waiver: Where a statutory right is involved, the law of this circuit is that “a waiver should be express, and that a mere inference, no matter how strong, should be insufficient.” Perkins Machine Co., supra, 326 F.2d at 489.

The doctrine of waiver when applied to constitutional or statutory rights necessitates in this day more than the mere failure to claim one's rights but rather connotes a free, deliberate and understanding foregoing of one's known rights. Green v. State, 245 A.2d 147, 149 (Me.) supplemented, 247 A.2d 117 (Me. 1968)

Massachusetts ALM GL Ch. 140D, §28A; Chapter Titled “Consumer Credit Cost Disclosure” [Enacted 2013]

Surcharge Ban: No seller in any sales transaction may impose a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check or similar means.

Discounts Permissible: the card issuer may not, by contract or otherwise, prohibit any such seller from offering a discount to a cardholder to induce the cardholder to pay cash, check or similar means rather than use a credit card.

Defined Terms: Statute uses the same wording to define terms as TILA.


Analysis: B2B Transactions? The statute uses the same language to define terms as the federal TILA. TILA explicitly excludes transactions involving “business purposes.” Further, the statute is located in the “Consumer Credit Cost Disclosure” chapter, indicating that the statute’s focus is consumer protection.

Are Personal Cardholders Paying B2B Invoices Included? Because the statute appears to coincide with TILA, it seems a transaction conducted for a business purpose, whether by personal or corporate card, falls outside the scope of the statute.

Does the Law Apply to Convenience Fees? The Massachusetts’s Office of Commission of Banks has issued a written opinion that states convenience fees violate the state’s anti-surcharge law.

Contractual Waiver: A statutory right or remedy may be waived when the waiver would not frustrate the public policies of the statute. For example, in Continental Corp. v. Gowdy, 283 Mass. 204, 186 N.E. 244 1933), we stated that a contractual waiver of statutory rights is permissible when the statute's purpose is the “protection of the property rights of individual parties ... rather than ... the protection of the general public.” Canal Elec. Co. v. Westinghouse Elec. Corp., 406 Mass. 369, 377-78, 548 N.E.2d 182, 187 (1990).

Therefore, in Massachusetts, a contractual waiver of the ban against surcharging may be permissible if it is considered not to frustrate the public policy of the state. In the B2B space, a waiver in the supplier’s card agreement form as a condition to use the card to pay the invoice is unlikely to be considered a violation of Massachusetts public policy.

8

Oklahoma 1. §2-417; §2-211 of Chapter Title “Consumer Credit Code”

Surcharge Ban: No seller in any sales transaction may impose a surcharge on a cardholder who elects an open-end credit card or debit card account instead of paying by cash, check or similar means.

Discount Permissible: 2-211: With respect to all sales transactions, a discount which a seller offers, allows or otherwise makes available for the purpose of inducing payment by cash, check or similar means rather than by use of an open-end credit card account shall not constitute a credit service charge… There is no limit on the discount which may be offered by the seller.


Legislative Intent/History: Sets out same purpose as referenced in Colorado’s Consumer Credit Code, but without reference to TILA.

Analysis B2B Transactions? Given the statute’s inclusion in the “Consumer Credit Code” and purpose, it appears that the statute’s focus is on consumer protection. Indeed, this view is supported by an official opinion of the State of Oklahoma Attorney General, dated June 2, 2010, which found that the “prohibition against seller-imposed surcharges on cardholders who elect to use a credit card as a form of payment in lieu of payment by cash, check or similar means, provided in 14A O.S. 2001 § 2-417 of the UCCC, applies to consumer credit sales only.”

However, the opposing view is that the Attorney General’s opinion violates the basic rule that legislative intent is the cardinal rule of statutory construction as applying it to consumer sales only ignores the very situation that gave rise to the prohibition.

Are Personal Cardholders Paying B2B Invoices Included? Because the statute’s focus is consumer protection, any transaction made for a business purpose, whether by personal or corporate card, seems to fall outside the scope of the statute.

Does the Law Apply to Convenience Fees? The statute does not define what constitutes a surcharge, so it is unclear whether it includes any additional fee [as other statutes provide] added by a vendor to a card transaction.

Contractual Waiver: While we agree that a right may be waived whether conferred by law or contract, when a statute contains provisions that are founded upon public policy, such provisions cannot be waived by a private party if such waiver thwarts the legislative policy which the statute was designed to effectuate. Courts must give effect to legislative acts and may not amend, repeal or circumvent them. Isenhower v. Isenhower, 666 P.2d 238 (Okla.Ct.App.1983).

As the legislative policy is designed to protect consumers, it is likely that in Oklahoma, a contractual waiver of the surcharge ban in a B2B card payment agreement form as a condition to paying the invoice will be enforced.

New York N.Y. General Business Law §518

Surcharge Ban: No seller in any sales transaction may impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check or similar means.

9

Discounts Permissible: “With respect to credit card which may be used for extensions of credit in sales transactions in which the seller is a person other than the card issuer, the card issuer may not, by contract or otherwise, prohibit any such seller from offering a discount to a cardholder to induce the cardholder to pay by cash, check or similar means rather than use a credit card.”



Analysis: B2B Transactions? The plain language of the statute is broad, and provides no definition of “holder” or “sales transaction.” Further, nothing in General Business Law §518 or its legislative history indicates that the Legislature intended to limit the statute’s application to B2C, and therefore B2B may appear to fall within the scope of the statute.

Are Personal Cardholders Paying B2B Invoices Included? For the reasons that B2B transactions appear to fall within the scope of the statute, it would seem that personal cardholder transactions, although made for a business purpose, may fall within the scope of the statute.

Does the Law Apply to Convenience Fees? The statute fails to define what constitutes a “surcharge,” so the plain language of the statute could be interpreted to mean that convenience fees are not within the scope of the statute.

Status: On October 3, 2013, a federal judge in the Southern District of New York ruled that this statute was unconstitutional. That decision is under appeal and arguments have been heard in the Second Circuit. A decision is expected at any point.

In the interim, surcharging is permitted in New York.

Texas Tex. Finance Code § 339.001 [Enacted 2005]

Surcharge Ban: In a sale of goods or services, 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.


Legislative Intent/History: Part (d) of the statute provides: “Rules adopted pursuant to this section shall be consistent with federal laws and regulations governing credit card transactions described by this section.”

Analysis: B2B Transactions? The word “buyer” seems to include consumers and businesses. However, the statute’s statement that “[r]ules adopted pursuant to this section shall be consistent with federal laws” appears to reference TILA, which excludes transactions conducted for a business purpose.

Are Personal Cardholders Paying B2B Invoices Included? For the same reason it is unclear whether B2B transactions are within the scope of the statute, it is also unclear whether transactions made by personal cardholders fall within the statute.

Status: On February 4, 2015, a federal judge held the statute was constitutional. That decision is on appeal.

10

Contractual Waiver: Absent a statute or fundamental public policy precluding waiver, a party may contractually waive even constitutional or statutory rights, whether present or future. Wright v. Sport Supply Grp., Inc., 137 S.W.3d 289, 294 (Tex.App.-Beaumont 2004, no pet.)

Therefore in Texas, a supplier may be able to include a waiver in its card payment agreement form in which the business customer agrees to waive the ban on surcharging as a condition to use the card to pay the B2B invoice.

Current Litigation The first challenge to the constitutionality of the state anti-surcharge laws was brought in New York. On June 4, 2013, five retailers filed a lawsuit in the Southern District of New York challenging the constitutionality of the anti-surcharge statute. (Expressions Hair Design v. Schneiderman). The plaintiffs alleged that the anti-surcharge statute violates their First Amendment right to commercial free speech and is unconstitutionally vague.

In October of that year, Judge Rakoff of the Southern District agreed with the plaintiffs and held that the law was unconstitutional. An appeal of that decision was brought before the Second Circuit and oral arguments were heard in March, 2015. It is possible that a decision may be issued by the Second Circuit by the end of summer 2015. Following the success of the New York challenge, similar challenges were launched in California, Florida and Texas to mixed results. On March 26, 2015, a federal court in California found its legislation to be a content-based restriction on commercial speech in a decision that was markedly similar to the decision of the New York district court. The Attorney General for California has appealed, but arguments are not expected to be heard before the Ninth Circuit for a considerable time. (Italian Colors v. Harris).

On the other hand, almost identical constitutional challenges in Florida and Texas both failed and the equivalent legislation was upheld in both states (respectively, Dana’s Railroad Supply v. Bondi; Rowell et al. v. Pettijohn). Again, both cases are on appeal and a decision from the Eleventh Circuit on the Florida decision may be forthcoming in 2015.

Legislative Proposals In addition to the ten states that previously adopted anti-surcharge legislation, in the wake of the class action settlement agreement, state legislatures rushed to consider whether they should enact anti-surcharge legislation to protect residents from surcharging within their states. Indeed, anti-surcharge legislative proposals of some variety were introduced in over eighteen states. However, it quickly became apparent to the state legislators that such legislation may not be required given that national retailers and convenience stores vowed not to exercise the freshly minted right to surcharge. In January 2013, a spokesman for Walmart noted that the “proposed modification to the no-surcharging rule for Visa and MasterCard provides no benefit to customers or merchants such as Walmart” (email to Bloomberg of January 28, 2013). In the same week, Target and Macy’s both announced they would not be introducing surcharges. The national retailers’ election not to surcharge was economic: they believed consumers would take their business to retailers that did not surcharge. The lack of national retailer support to surcharge the consumer saw the initial push for legislative action recede.

11

The table charts the introduction and status of anti-surcharge legislation.

State Anti-Surcharge Proposals State Date Proposal Introduced Status

Hawaii January 18, 2013 February 2014, Committee on Commerce and Consumer Protection deferred the measure

Illinois January 21, 2013 December 3, 2014, adjourned indefinitely

Kentucky February 6, 2013 House February 19, 2013 Senate

Proposal adjourned indefinitely

Maryland February 8, 2013 Hearing February 22, 2013. “Died in committee” i.e., defeated, February 22, 2013

Michigan February 14, 2013 Referred to Committee on Commerce/Banking and Financial Institutions, February 2013, no further action

Missouri February 7, 2013 Public hearing March 2013, bill not currently on legislature calendar

Nevada March 8, 2013 Sent to Committee on Commerce and Labor; pursuant to Joint Standing Rule, no further action allowed, April 2013

New Hampshire February 20, 2013 October 30, 2014, Interim study report: Not recommended for future legislation

New Jersey February 4, 2013 February 7, 2013, defeated in chamber

New Mexico February 12, 2013

Referred to Judiciary Committee February 28, 2013, adopted by House March 1, 2013. No further action taken. Reported as “died” on NM Legislature 2013

Pennsylvania February 14, 2013 Referred to Consumer Affairs Committee, February 14, 2013. “Died in Committee” i.e., was not referred to and no further action taken

Rhode Island January 31, 2013 February 15, 2013, Committee recommended measure be held for further study. No further action

South Carolina February 5, 2013 February 5, 2013, referred to Committee on Labor, Commerce and Industry. No further action

Tennessee February 5, 2013 Taken off Notice – Insurance and Banking Subcommittee, March 20, 2013

Vermont February 7, 2013 Referred to Committee on Judiciary. No further action

West Virginia March 12, 2013 Last action: Sent to Banking and Insurance March 12, 2013

Wisconsin June 6, 2013 April 8, 2014, Failed to pass Assembly

As is apparent from the foregoing table, the state proposals are not progressing and currently no state is considering a proposal to ban the surcharging of credit cards at state-level.

12

Final Analysis: What Does this Mean for Suppliers’ Ability to Surcharge Nationwide? As has been seen, from the effective date of the antitrust settlement in 2013, a supplier had the right to surcharge its customers. Nonetheless, rolling out a surcharge program is not without its restrictions. First, the surcharge must equal the actual cost of processing the credit card transaction (typically between 1.5 and 3 percent), but may not exceed 4 percent of the purchase. The surcharge may also vary based on the type of card; for example, federal law prevents suppliers from surcharging debit card transactions.

In addition, US suppliers may only surcharge Visa and MasterCard credit cards if the supplier is able to add a surcharge fee on other non-Visa/MasterCard credit cards that it accepts in a channel of commerce or adds such a surcharge at an amount equal or lesser to the competing network’s cost to the supplier. In other words, suppliers surcharging customers must do so consistently without discrimination. In order to begin surcharging, suppliers must also notify Visa and MasterCard as well as their acquirer at least thirty days in advance. Furthermore, the supplier must satisfy procedural requirements and must notify customers at the point of entry, the point of sale, and on the invoice. Despite these restrictions, the 2013 Settlement has permitted suppliers to offset the exorbitant costs of processing credit card transactions by passing this expense to the customer. The customer has the option at that point to elect to accept the surcharge or to pay by another less expensive means, such as ACH. In this light, the developments on surcharging have been a considerable benefit to suppliers processing cards. Scott Blakeley is a principal with Blakeley LLP, where he practices creditors’ rights and bankruptcy. His email is [email protected]. Ruth Fagan is a resident associate in the Blakeley LLP New York office. Her email is [email protected].

R E S O U R C E S

Visit the Credit Research Foundation website for additional resources

http://www.crfonline.org

Copyright 2015 by the Credit Research Foundation. All rights in this publication are reserved.

No part of the publication may be reproduced in any manner whatsoever without written permission.

Printed in the United States of America

Credit Research Foundation 1812 Baltimore Blvd. Suite H

Westminster, MD 21157

443-821-3000

The result of this decision isclear: a supplier may now askcustomers to use an alternativecredit card brand.


Home | Outside the Box | Suppliers Accepting Multiple Credit Card Bran . . . Search

Suppliers Accepting Multiple Credit Card Brands May Now Steer CardPaying Customers to Cheaper Brands in Light of American ExpressFederal Court RulingAugust 28, 2015, By Scott Blakeley, Esq.

Credit card payments to suppliers continue to increase, both from existing and newcustomers. Credit cards are the most expensive payment channel. Suppliers acceptingmultiple card brands (Visa, MasterCard, American Express and Discover) find that theremay be a meaningful difference with card brands' interchange fees, as shown in thechart:

Average Credit Card Processing FeesMastercard 1.55% 2.6%

Visa 1.43% 2.4%

Discover 1.56% 2.3%

American Express 2.5% 3.5%

Source: Value Penguin, Credit Card Processing Fees and Costs

For suppliers absorbing the interchange fee, the credit team has a selfinterest in steering the customer to theleast expensive card brand. For suppliers surcharging the customer the interchange fee, the customer has a selfinterest to consider an alternative brand.

American Express ('Amex") Card Rules barred 3.4 million merchants,including suppliers accepting cards on their invoices in the B2B space, whoaccept Amex cards from encouraging customers to use alternative,cheaper, credit card brands such as Visa, MasterCard and Discover. Amexrequired merchants, including suppliers, to accept all card brands equally.Amex insisted that the rule was required to protect the Amex brand fromcompetition. In 2010, the United States and the attorney generals fromseventeen states brought an antitrust enforcement action against Visa, Mastercard and Amex, challenging theirrules preventing suppliers from steering customers to cheaper cards, alleging that the rule constituted ananticompetitive restraint that violates the Sherman Act antitrust legislation. Visa and Mastercard settled, agreeingto remove the restriction. After a sevenweek trial featuring over thirty witnesses and four expert witnesses, theDistrict Court found that Amex had breached the Sherman Act. Amex has appealed.

The Court found that through this rule, Amex harmed competition. Amex merchant (supplier) restraints "severthe essential link between the price and sales of network services by denying merchants (supplier) theopportunity to influence their customers' payment decisions and thereby shift spending to less expensive cards."The rules prevent any meaningful means of controlling a merchant's use of network services in response, short ofdropping acceptance of Amex cards altogether.

The result of this decision is clear: a supplier may now ask customers to use an alternative credit card brand. Thechief beneficiaries of this decision naturally will be Amex' principal competitors: Visa and MasterCard, the supplierthat does not surcharge, and the customer where the supplier surcharges. The result is likely to see an increasein transactions conducted with competitors' cards unless, and until, Amex reduces the costs of accepting its cards.



http://www.credittoday.net/public/department98.cfm


Scott Blakeley,Esq.

Scott Blakeley, Esq., is a founder of Blakeley & Blakeley LLP, where he advises companiesaround the United States and Canada regarding creditors' rights, commercial law, ecommerceand bankruptcy law. He can be reached at [email protected].

Share your thoughts on this: comment

Related Articles

· Cindy Christy, President and COO of Asurion Corporation, Joins Dun & Bradstreet Board of Directors





http://www.credittoday.net/public/Cindy-Christy-President-and-COO-of-Asurion-Corporation-Joins-Dun-Bradstreet-Board-of-Directors.cfm

Scott Blakeley,Esq.

Ruth Fagan,Esq.


SearchHome | FAQS For Suppliers Considering a Credit Card . . .

FAQS For Suppliers Considering a Credit Card Surcharge RolloutBy Scott Blakeley, Esq. & Ruth Fagan, Esq.

Credit cards are the fastest growing payment channel in the B2B space. According tothe Wall Street Journal, the share of customers that pay suppliers by credit card hasdoubled in the past two years. Payments are moving to this channel to capture thecard companies' 30 day float and perks that card companies offer cardholders,including travel points, miles and cash back. However, cards are the most expensivepayment channel, with card charges often eating much of the profit in narrowmargin industries driven by customer preferences. Given the explosive growth ofcard payments and their high expense, many suppliers find that besides their payrollexpense, credit card fees are their greatest operating expense.

Until January 2013, the card networkers did not permit suppliers to pass onthe interchange fee to their customers through a surcharge. But Visa andMasterCard have amended their rules to allow surcharging after years of classlitigation alleging the card issuers had conspired to artificially inflate theinterchange fee in violation of antitrust laws, principally the Sherman Act.Given that the card networks have authorized credit card surcharging, whatquestions must the credit team consider to begin surcharging?

FAQ'sQuestion: What is surcharging?

Answer: In every credit card transaction, whether B2C or B2B, a fee isimposed on merchants, including suppliers, to process the payment. Surcharging is the process by which theinterchange fee is passed on to the customer who uses a credit card to pay an invoice.

Q: What is the purpose of a surcharge?

The purpose of the surcharge is to cover the interchange fee that the supplier is charged for processing a creditcard. The surcharge is not a profit center for the supplier, and the supplier may not charge more than the averageinterchange fee.

Q: What is the history of the ban on surcharging?

In 1976, the first ban on surcharging was implemented with the introduction of a temporary federal ban providingthat:

"No seller in any sales transaction may impose a surcharge on a cardholder who elects to use a credit card in lieuof payment by cash, check or similar means." Pub. L. No. 94222, 90 Stat. 197.

The federal ban was renewed once in 1981, however, in 1984, legislators opted to allow the ban to expire. At thatpoint, the card companies adopted contractual nosurcharge rules with merchants (suppliers) who agreed toaccept their cards. Finally, ten states, on the premise of consumer protection, introduced bans on surchargingincluding some of the most populous states including New York, California, Texas and Florida.

Q: What circumstances changed to allow surcharging?

In 2004, several national retailers and trade associations (including Kroger, PayLess and Safeway) filed lawsuitsagainst Visa and MasterCard, alleging that the card companies conspired to fix artificiallyhigh interchange fees inviolation of the Sherman Act, a federal antitrust statute. The suits were later consolidated and certified as a classin the U.S. District Court for the Eastern District of New York. After eight years of costly class action litigation, the


http://www.blakeleyllp.com/attorneys.php?attorney=RuthFagan




The surcharge must equal theactual cost of processing thecreditcard transaction (typicallybetween 1.5 and 3 percent).

court gave final approval of the Visa and MasterCard class action settlement in December 2013 through which thetwo card companies agreed to permit surcharging their credit cards.

Q: What does the Visa/MasterCard settlement do?

The class action settlement amends Visa and MasterCard rules to now allow merchants (suppliers) to pass theinterchange fee to credit cardpaying customers to recoup this fee. Thus, in the forty states that have not passedantisurcharge legislation there now exists no bar to surcharge credit cardpaying customers.

Q: How does surcharging work?

Following the class action settlement, the card networks changed their rules to allow merchant suppliers tosurcharge Visa and MasterCard credit card transactions (but not debit or prepaid card transactions) at the "brandlevel" (i.e., depending on whether the cardholder uses a Visa or MasterCard) or the "product level" (i.e, dependingon which type of Visa or MasterCard is used, such as Visa Traditional, Visa Signature Preferred, Gold MasterCard,Platinum MasterCard.

Q: What is the maximum surcharge permitted?

The surcharge must equal the actual cost of processing the creditcardtransaction (typically between 1.5 and 3 percent). However, theinterchange fee may not exceed the maximum surcharge cap as listed at:

Visa: Visa (Editor's note: at presstime, Visa had changed this page andcurrently has nothing we can find on this topic. We'll post as soon as we learn the page for this.)

MasterCard: What merchant surcharge rules mean to you

The maximum surcharge cap for Visa, MasterCard, and American Express is 4%. The amount of the surcharge foreach brand of credit card shall be that card brand's lowest average of all the credit card brands, and shall be madeavailable by the credit card companies for posting on the credit team payment portal, at surcharge.

Q: What about other payment cards?

While the rules and regulations of the credit card networks allow for the application of a surcharge to credit cardtransactions, a supplier may not apply a surcharge to debit cards.

Q: Who must the supplier notify?

The credit card company rules require that notice of the surcharge policy be provided to (1) the credit cardcompanies, acquiring banks, and processors, (2) the customer prior to payment, and (3) the customer as a lineitem in the invoice. Any merchant (supplier) that surcharges Visa and MasterCard transactions must satisfynotification and disclosure requirements relating to Visa and MasterCard, the merchant's banks, and themerchant's customers. Merchants must notify Visa and MasterCard and their acquiring banks/payment processorsof their intention to surcharge at least 30 days before surcharging begins, and must state whether they intend tosurcharge at the brand level or product level.

Visa can be notified online here: https://usa.visa.com/merchantsurchargenotification/inquiry.do

MasterCard can be notified online here: http://www.mastercard.us/merchants/support/surchargedisclosure.html

Q: What must the supplier disclose to customers?

The supplier must disclose the following to its customers:

The exact amount or percentage of the surcharge;A statement that the surcharge is being assessed by the supplier and is only applicable to creditcardtransactions;A statement that the surcharge is not greater than the fee the card companies charge to the supplier.

Q: How does a supplier disclose its surcharge policy?

With card present payments, the supplier will disclose at the point of sale, and provide clear disclosure of the dollaramount of the surcharge on the transaction receipt provided by the supplier to its customers.


http://www.mastercard.us/merchants/support/surcharge-rules.html


http://www.mastercard.us/merchants/support/surcharge-disclosure.html

Suppliers may considerrequiring cardholders to sign acard payment agreement formthat includes a governing lawprovision that designates asurcharge neutral state.

Q: How does a merchant disclose a surcharge in an online payment?

For web portal payment of invoices, the surcharge policy must be disclosed on the first page of the website thatreferences credit card brands, and again at the payment page (in a minimum of 10 point Ariel font). The suppliershould provide a screen to be clicked through for any and all credit card transactions that reads as follows:

Surcharge PolicyWE IMPOSE A SURCHARGE OF [interchange fee] %ON THE TRANSACTION AMOUNT OF ALL CREDITCARD PRODUCTS. THIS SURCHARGE IS NOT

GREATER THAN OUR COST OF ACCEPTANCE. WE DONOT SURCHARGE DEBIT CARDS

Q: How does a supplier disclose a surcharge on phone payments?

For phone payments, the following text should be read to customers prior to taking any credit card information forpayment:

WE IMPOSE A SURCHARGE OF [interchange fee]% ON THE TRANSACTION AMOUNT ON ALL CREDITCARD PRODUCTS, WHICH IS NOT GREATER THAN OUR COST OF ACCEPTANCE. WE DO NOTSURCHARGE DEBIT CARDS

Q: How does a supplier disclose a surcharge on invoices?

On all invoices the supplier may print at the bottom of the invoice:

WE IMPOSE A SURCHARGE OF [interchange fee]% ON THE TRANSACTION AMOUNT ON ALL CREDITCARD PRODUCTS, WHICH IS NOT GREATER THAN OUR COST OF ACCEPTANCE. WE DO NOTSURCHARGE DEBIT CARDS

Q: Is surcharging legal in every state?

The short answer is no. The longer answer is that the issue remains less resolved in the ten states in which antisurcharge legislation was enacted. Ostensibly, the settlement does not affect the ban on surcharging in thesestates; nonetheless, the legislative intent in many of these states was to protect consumers, and not to restrictB2B surcharging.

Q: How can a supplier avoid the surcharge prohibition in the ten statesthat have antisurcharge legislation and impose a surcharge in a B2Btransaction?

In several of these states, contractual provisions are permitted that willallow business customers to waive the ban on surcharging in thetransaction at issue. In addition, suppliers may consider requiringcardholders to sign a card payment agreement form that includes agoverning law provision that designates a surcharge neutral state.

Q: Why would a business customer waive a ban on surcharges and thus effectively allow their supplier to chargemore?

A: They would agree to waive as otherwise the supplier would not accept credit cards at all and this allows thecustomer/cardholder to continue to receiving points for card use as well as the use of the float.

Example of a governing law provision:

All credit card commerce between Customer and Merchant shall be governed by and interpreted inaccordance with the laws of the State of California without regard to conflict of law provisions thereof,and all actions, disputes, and proceedings arising from, relating to or in connection with credit cardcommerce between Merchant and Customer shall be subject to the exclusive jurisdiction of the federaldistrict courts for the Central District of California or the California state courts located in OrangeCounty.

Example of a Contractual Waiver:

To the extent allowed by applicable law, Customer expressly waives the application of [Applicable statelaw provision]. Customer acknowledges that it has knowledge of [applicable state law provision] andunderstands the meaning of this waiver. Specifically, customer agrees that the [applicable state lawprovision] shall have no effect or application in this transaction. In this transaction, Customer agreesthat Merchant may impose a charge for the use of a credit card for the extension of credit instead ofcash, a check or a similar means of payment. Customer acknowledges that state law enforcementagencies have no jurisdiction in relation to this transaction or in relation to the use of credit cards inthis transaction.

Q: What are the ten states that have enacted antisurcharge laws?

The ten states are California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Oklahoma, New York,and Texas.

Q: What is a convenience fee?

Convenience fees are charged for the convenience of an alternative payment channel outside the Merchant'scustomary payment channels. Visa has the most indepth and restrictive convenience fee rules. The Visa Rulesrequire the following in order for a Merchant to impose a Convenience Fee:

There must be an alternative payment channel (e.g., web or phone);Disclosed clearly to the cardholderDisclosed before the completion of the transaction so that cardholder is given the opportunity to cancelAdded only to nonfacetoface transactions (i.e., must be cardabsent transaction);Flat or fixed amount regardless of payment value;Applicable to all forms of payment in the channel;Included in the total amount (i.e., single transaction);Cannot be charged by a third party (except for Government and Higher Education);Must not be added to a recurring transaction

Q: What is the difference between a surcharge and a convenience fee?

The key distinction from a surcharge: a convenience fee is not a charge for using a card, it is a charge incurred forusing a payment method that normally would not be used for such a product or service.

The major distinguishing features between a surcharge and a convenience fee are represented in as follows:

Surcharge PolicySurcharge Convenience Fee

Definition

Extra feecharged tocover thecost of themerchantservicecharge

Fee charged for (i) bonafide convenience to thecardholder, (ii) in the formof an alternativeprocessing channel; (iii)outside the supplier'scustomary processingchannel.

Purpose

Fee imposedsolely forthe cost ofprocessingCard

Fee reimburses thesupplier for theadministrative expensesincurred in offering creditcards as a processingchannel

Amount of Fee

Normallyhigher thanConvenienceFee

Normally lesser thanSurcharge

Imposed on: Credit cardsonly

All forms of processing,including debittransactions

CardPresent/Absent

Imposedeither incard presentor absenttransactions

Imposed on card absenttransactions; Cannot beimposed wheretransactions areexclusively cardabsent.

Type of fee PercentageFlat or fixed amountregardless of theprocessing due

RecurringTransaction

Surchargecan beimposed

Convenience cannot beimposed

Scott Blakeley, Esq., is a founder of BlakeleyLLP, where he advises companies around the United States andCanada regarding creditors' rights, commercial law, ecommerce and bankruptcy law. He can be reached [email protected].

Ruth Fagan, Esq. is an associate in Blakeley LLP's New York office. Ruth received her LLM from Columbia LawSchool with an emphasis in corporate reorganization. Her practice is in bankruptcy and creditors' rights. Prior tojoining Blakeley LLP, Ruth clerked with the High Court of Ireland over a twoyear period. Ruth obtained her lawdegree in University College Dublin (summa cum laude), and also studied in Paris II (PantheonAssas). She can bereached at: [email protected].

More Information:VISA: Surcharging Credit Cards Q&A for Merchants

Related Articles

· Backing Up Checks with OnFile Credit Cards· What methods are you using to manage or reduce credit card expenses?· Turning Down CreditCard Payment Proposals· Suppliers Accepting Multiple Credit Card Brands May Now Steer CardPaying Customers to Cheaper Brands inLight of American Express Federal Court Ruling· What Business to Business Credit Companies Need to Know About the October 1, 2015 EMV Liability Shift· What is your company policy for storing or destroying credit card information?· Disclosing Your Credit Card Surcharge Program to Customers: Can You Bury the Interchange Fee Through aPrice Increase?· For those of you that do business with Canadian customers and accept credit cards, what is your process?· Benchmarking Credit Cards, Part 2: Navigating the Costs· 2014 Credit Card Survey: More Mainstream Than Ever



http://www.blakeleyllp.com/attorneys.php?attorney=RuthFagan

https://usa.visa.com/dam/VCOM/download/merchants/surcharging-faq-by-merchants.pdf

http://www.credittoday.net/members/Backing-Up-Checks-with-OnFile-Credit-Cards.cfm

http://www.credittoday.net/members/What-methods-are-you-using-to-manage-or-reduce-credit-card-expenses.cfm

http://www.credittoday.net/members/Turning-Down-CreditCard-Payment-Proposals.cfm

http://www.credittoday.net/public/Suppliers-Accepting-Multiple-Credit-Card-Brands-May-Now-Steer-CardPaying-Customers-to-Cheaper-Brands-in-Light-of-American-Express-Federal-Court-Ruling.cfm

http://www.credittoday.net/members/What-Business-to-Business-Credit-Companies-Need-to-Know-About-the-October-1-2015-EMV-Liability-Shift.cfm

http://www.credittoday.net/members/Whatisyourcompanypolicyforstoringordestroyingcreditcardinformation.cfm

http://www.credittoday.net/public/Disclosing-Your-Credit-Card-Surcharge-Program-to-Customers-Can-You-Bury-the-Interchange-Fee-Through-a-Price-Increase.cfm

http://www.credittoday.net/members/For-those-of-you-that-do-business-with-Canadian-customers-and-accept-credit-cards-what-is-your-process.cfm

http://www.credittoday.net/members/Benchmarking-Credit-Cards-Part-2-Navigating-the-Costs.cfm

http://www.credittoday.net/members/2014-Credit-Card-Survey-More-Mainstream-Than-Ever.cfm

The Credit & Financial Management Review 21

A History of Credit Card Transaction Costs and the Suppliers Newly Minted Right to Surcharge to Make Credit Cards a More

Competitive Payment Channel By: Scott Blakeley, Esq. & Ruth Fagan, Esq.

AbstractIn every credit card transaction, major credit card companies impose a fee on merchants, including suppliers in the B2B space, to process the payment by cardholders. Tracing the convoluted history of the origins of that fee stretches back more than half a century. That history may provide context for a supplier evaluating whether to surcharge, or pass the interchange fee to customers.

A History of Credit Cards Both Visa and MasterCard arose from regional associations of banks that formed joint ventures to operate regional credit card networks. The first step towards credit card landscape familiar to the modern-day card users occurred in 1958 when Bank of America introduced a general-purpose credit card program known as BankAmericard. Twelve years later, in 1970, Bank of America divested its control over the BankAmericard program to National BankAmericard, Inc., a bank-owned joint venture, renamed “Visa” in 1976. Similarly, in 1969, InterbankCard Association was formed, an association that became Master Charge, finally emerging as the familiar MasterCard.

The early history of charging customers for the use of credit cards relates to the lack of technology available at the time. In the 1960s and early 1970s, payment-card transactions were processed largely without the benefit of computer technology. Sales clerks conducted card authorizations either by telephone, or by checking the consumer’s card number against large books of card numbers that were known to be invalid. Once transactions were authorized, the merchant sent paper “drafts” from the transaction to its acquiring bank, who then sent the drafts to the appropriate network. The drafts were then sorted according to issuing bank, bundled and sent to the appropriate bank to debit the consumer’s account.

From their introduction in the 1950s, through the following initial decades, credit cards represented a miniscule percentage of the total number or dollar volume of transactions. The result was minimal regulation of the industry other than state usury restrictions. Instead, credit


cards were governed by various private agreements involving card networks, issuer banks, merchants and cardholders.

Early Challenge to Surcharges Legislators were keenly alert, however, to the practices of imposing fees for paying by card and moved to allow merchants to encourage consumers to pay by cheaper methods. In 1968, Congress passed the Truth in Lending Act (“TILA”), protecting the right of merchants to have dual-pricing systems. (“Card issuer may not, by contract, or otherwise, prohibit any such seller from offering a discount to a cardholder to induce the cardholder to pay by cash, check or similar means rather than use a credit card.”)

However, the TILA required lenders, including credit card issuers, to disclose the cost of credit. Card networks could not calculate what the annual percentage rate (“APR”) of credit would be in advance for every good or service. In addition, card networks simply did not want to make such disclosures, as TILA regulations required the conversion of surcharges into an APR based on a 30-day extension of credit. An example of the result of this requirement is that a 5% surcharge would increase the APR by an extraordinary 60%, deterring potential customers and violating state usury laws.1 The card networks’ solution was to incorporate no-surcharge rules into the private agreements constituting the credit card networks’ operating rules.

In 1974, the first litigation was instituted by Consumers Union against American Express (“Amex”), claiming that Amex’s contractual ban on differential pricing was an illegal restraint on trade constituting an antitrust violation. Amex settled the lawsuit by agreeing to allow merchants to provide consumers with differential price information. Congress also attempted to shield consumers from the fees imposed by credit card companies.

In 1976, the first ban on “surcharging”, passing the cost for processing credit cards to a cardholder, was implemented with the introduction of a temporary federal ban providing that: “No seller in any sales transaction may impose a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check or similar means.” Pub. L. No. 94-222, 90 Stat. 197. The federal ban was renewed once in 1981, however, in 1984 legislators opted to allow the ban to expire.

At this point, following the lapse on the federal ban on surcharging, merchants appeared to have won the battle in combating rising costs of processing credit card transactions. It soon proved to be a pyrrhic victory: the credit card companies fought the lapse on the federal ban on two fronts. First the card companies retained the contractual no-surcharge rules imposed on any merchant who agreed to accept their cards. Second, credit card companies lobbied state legislators to introduce surcharge bans at state level. Ten states acceded to the pressure of the credit card companies, and, on the premise of consumer protection, state bans were introduced in some of the most populous states including New York, California, Texas and Florida. The combination of

1 The issue of violating state usury laws became obsolete following the decision of the Supreme Court in Marquette National Bank v. First of Omaha Serv. Corp., 439 U.S. 299 (1978), allowing nationally chartered banks to circumvent state usury laws by issuing cards from a different state. The decision enabled banks to issue cards on a national basis for the first time.


contractual prohibitions on surcharging and the ten state bans lead to an absence of protection for the merchant against the exorbitant fees of the credit card networks for almost thirty years.

Today’s Reality In 2005, a pet-relocation company located in Atlanta, Georgia, became the unlikely catalyst to the downfall of surcharge prohibitions. In May 2005, Animal Land, Inc. sued Visa for a declaration that its no-surcharge rule violated antitrust laws by preventing Animal Land and other merchants from assessing a discrete, denominated charge upon customers using credit cards as opposed to cash, checks or debit cards. In the ensuing months, numerous US merchants and trade associations brought claims against the dominant credit-card networks, alleging that they engaged in illegal price-fixing in violation of the federal antitrust laws, the Sherman Act, and impermissibly banned merchants, including suppliers, from encouraging customers to use less expensive payment methods.

After eight years of litigation, Visa and MasterCard entered into a national class action settlement, agreeing to drop their contractual prohibitions against merchants, including suppliers, imposing surcharges on credit-card transactions. In January 2013, for the first time in almost thirty years, merchants became entitled to surcharge. Pursuant to Rule 5.6.1.3 of the Visa Core Rules, in “the US Region or a US Territory, a Merchant may assess a fixed or variable US Credit Card Surcharge on a Visa Credit Transaction, subject to applicable laws or regulation.” The MasterCard Rules of December 11, 2014, contain a similar provision for surcharging in its Rule 5.9.2 permitting any merchant to “require a MasterCard Credit Cardholder to pay a Surcharge.”

The class action litigation settlement applied primarily to the forty states that had no prohibition on surcharging. Nonetheless, the ten states that adopted anti-surcharge statutes also came under pressure from pro-surcharge activists. In October 2013, a federal judge in New York declared the Empire State’s legislative ban on assessing a surcharge to be unconstitutionally vague and an impermissible violation of the right to commercial free speech. A federal court in California followed suit in March 2015, striking down the substantially similar Californian prohibition. Both decisions are under appeal.

Credit card companies essentially have been free to amass major profits from the imposition of swipe fees, arguably at the expense of merchants, for more than half a century. In the last ten years, the cumulative effect of consistent and sustained litigation brought by merchants throughout the country has resulted in the tide turning against the card networks, and it would appear, looks likely to consign any prohibition against surcharging to the annals of history.

In light of the card rule changes to allow surcharging, and the increased use of cards by customers in the B2B space, suppliers are rolling out surcharge programs to offset this most expensive channel, and now a customer’s preferred payment channel.

Scott is a principal at Blakeley LLP, where he practices bankruptcy and creditors’ rights.

Ruth is an associate in the New York office of Blakeley LLP, where she practices bankruptcy and creditors’ rights.

Supplier Payment Channel Dilemma: Discourage Credit Card Use Through Early Pay Discount?

By Scott Blakeley, Esq.

Scott Blakeley, Esq.

Credit cards are the most expensive payment channel for the supplier, and the fastest growing.

Indeed, for some suppliers, customer credit card charges are one of their largest operating expenses. What can the supplier do to manage the card cost as more customers turn to cards to pay supplier invoices?

Cards Continue to Increase for a Number of Reasons

The share of customers that pay suppliers by credit card continues its dramatic increase in the B2B space for the following reasons:

1. card issuers continue to increase the rewards offered to individual cardholders (travel points, miles and cash back), and corporate cardholders (rebates);

2. card awareness is increasing in the B2B space as card networks now cold call customers trying to convince the finance team that cards should be the payment preference for the invoices of their supply chain; and

3. the customer's cash flow and working capital improves by using cards, compared with other payment channels.

The key takeaway for suppliers dealing with shrinking margins is that at time of remittance, the most effective way to handle costs is to surcharge the customer's credit card, if that is the customer's

payment preference, as opposed to offering an early pay discount.

Squeezing Supplier Margins at Time of Remittance

Consider a $200,000 order, as set out in the table below. The supplier's margins in fulfilling the order are shaped by both whether the customer has been extended terms and the customer's payment preference, such as credit cards. The supplier may try and influence the payment choice by offering an early pay discount to non-card payment types, such as ACH.

The key takeaway for suppliers dealing with shrinking margins is that at time of remittance, the most effective way to handle costs is to surcharge the customer's credit card, if that is the customer's

payment preference, as opposed to offering an early pay discount. And allowing the customer to continue to use a credit card may better meet the customer's payment preference--accruing points and miles even if surcharged.


The Credit Team Taking Steps to Address Shrinking Margins While supplier margins are commonly the domain of the finance team and leadership, the chart above

reminds credit execs at suppliers with low margins, the credit team has a voice to improve margins by implementing a surcharge program with credit card payments to offset payment channel costs. Surcharging allows the supplier to offset a majority of card costs. Surcharging may also result in the customer electing to use another payment form, such as ACH. As part of any effort like this, the credit team should meet with finance so that they appreciate that an early pay discount incentive is overall a more expensive option for the supplier.

Scott Blakeley, Esq., is a founder of BlakeleyLLP, where he advises companies around the United States and Canada regarding creditors' rights, commercial law, e-commerce and bankruptcy law. He can be reached at [email protected].


FEDERAL CIRCUIT COURT OF APPEAL FINDS FLORIDA’S CREDIT CARD ANTI-SURCHARGE LAW UNCONSTITUTIONAL (AND

UNENFORCEABLE): WHAT IT MEANS TO THE CREDIT TEAM AND A NATIONWIDE SURCHARGE ROLLOUT

Scott Blakeley, Esq.1

Abstract: Credit cards as a means of B2B commerce have been and continues to be a developing and growing financial tool for businesses. Recent developments in the courts have challenged enforceability of surcharges and this piece brings an update to the subject.

The U.S. Court of Appeals for the 11th Circuit has vacated the decision of the U.S. District Court in Florida, finding that state’s anti-surcharge law, which bars retailers from surcharging credit cards, violates the First Amendment and freedom of speech and, therefore, is unconstitutional. As a result, the ban on surcharging credit card purchases in Florida is no longer enforceable. What does the Court of Appeals ruling mean to a supplier’s right to surcharge, as recently provided by the card networks under their rule changes? State Anti-surcharge Law Overlay

In the 1980’s, the credit card networks lobbied state legislatures to enact no-surcharge legislation to discourage national retailers from surcharging consumers. Those states that enacted no-surcharge legislation: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas.

The first challenge to the constitutionality of the state anti-surcharge laws was brought in New York. In October 2013, the Southern District of New York found that the law was unconstitutional. The appellate court reversed. Similar challenges were launched in California and Texas. In March 2015, a federal court in California found its no-surcharge legislation unconstitutional. On the other hand, in Texas the no-surcharge legislation was upheld, and that decision is on appeal. Not one state has adopted anti-surcharge legislation since Visa and MasterCard settled their class action litigation and amended their rules to allow suppliers to surcharge customers in 2013. Background of Florida Anti-surcharge Challenge

Enacted in 1984, Florida’s anti-surcharge law (Section 501.0117(1)-(2) of the Florida statute) prohibits sellers from imposing a surcharge on customers who use credit cards in lieu of paying by check, cash or

1 Scott is a principal at Blakeley LLP, where he practices creditors’ rights. His email: [email protected].

other payment forms. The origin of the Florida legal challenge started with a retailer in Florida posting a sign that it would charge customers who use cards a fee. The Florida Attorney General issued a cease and desist letter to the retailer to stop surcharging. Four Florida businesses sued, challenging the no-surcharge statute, claiming that it violates the First Amendment’s free speech clause.

Each business admitted that it charged customers a lower price for those paying by cash, and a higher price for those using credit cards. The District Court, however, found that Florida’s no-surcharge law was constitutional. An appeal was taken. The Court of Appeals for the Eleventh Circuit reversed the lower court, finding Florida’s state legislation banning surcharges was unconstitutional. 11th Circuit Court Ruling The 11th Circuit focuses more on how surcharging is labelled, rather than the implications of the fee or its cost to merchants and consumers. The plaintiffs made three arguments in their appeal: (1) that the Florida statute prevented them from posting a “single price” for goods or services with a notation that credit card transactions are more expensive amounting to a violation of their First Amendment rights; (2) businesses feared posting two different prices that shows a separate price for credit card transactions was a breach of the ban and, therefore, a violation of its freedom of speech; and (3) the plaintiffs argued the ban was unconstitutionally vague.

The 11th Circuit determined that prices set by retailers are “speech” because they restrict the way a business describes a remittance and, therefore, the First Amendment was relevant. The Court stated that “Florida’s no-surcharge law directly targets speech to indirectly affect commercial behavior. It does so by discriminating on the basis of the speech’s content, the identity of the speaker, and the message being expressed.” The Court further noted that “surcharges and discounts are nothing more than two sides of the same coin; a surcharge is simply a ‘negative’ discount, and a discount is a ‘negative’ surcharge.” Next Stop - the U.S. Supreme Court? Two federal circuit courts of appeals have reached opposite conclusions as to the constitutionality of no-surcharge laws (New York and Florida). In addition, the constitutionality of California’s (trial court invalidated no-surcharge law) (9th Circuit) and Texas’ (trial court upheld) (5th Circuit) no-surcharge laws are also on appeal. This may lead to the U.S. Supreme Court to rule on how the federal courts have handled the constitutionality of state anti-surcharge laws. What It Means to the Supplier and a Surcharge Rollout The takeaway for the credit team considering a nationwide surcharge is that a conclusive ruling on the constitutionality of the 10 states that enacted no-surcharge laws may have to wait for the U.S. Supreme Court to rule, which may be a couple of years away.

However, suppliers selling in the B2B space, including the 10 states that enacted no-surcharge laws, may adopt a contractual waiver and choice of law provision in their card payment agreement form with customers, whereby customers consent to waive the application of the surcharge prohibition when paying by credit card.

No Surcharge

State Litigation Challenging No Surcharge Laws

California

California federal court rules its anti-surcharge law is unconstitutional as it violates freedom of commercial speech and is unenforceable. On appeal to the Ninth Circuit Court of Appeal.

Florida

Florida federal court rules its anti-surcharge law is constitutional on commercial free speech grounds and may be enforced. 11th Circuit Court of Appeals reverses, finding that Florida’s anti-surcharge law is unconstitutional as it violates freedom of commercial speech and is unenforceable.

New York

New York federal court rules its anti-surcharge law is unconstitutional as it violates freedom of commercial speech and is unenforceable. 2nd Circuit Court of Appeals reverses, finding that New York’s anti-surcharge law is constitutional on commercial free speech grounds and may be enforced.

Texas

Texas federal court rules its anti-surcharge law is constitutional on commercial free speech grounds and may be enforced. On appeal to the Fifth Circuit Court of Appeals.

Colorado No litigation challenging the constitutionality of anti-surcharge law.

Connecticut No litigation challenging the constitutionality of anti-surcharge law.

Kansas No litigation challenging the constitutionality of anti-surcharge law.

Maine No litigation challenging the constitutionality of anti-surcharge law.

Massachusetts No litigation challenging the constitutionality of anti-surcharge law.

Oklahoma No litigation challenging the constitutionality of anti-surcharge law.

Opt-Out Litigation Settlement Against Visa and MasterCard: Clarity for a Supplier’s Right to Surcharge?, by Scott Blakeley, esq. Published on May 5, 2016 by Alan Dicker in Articles, Credit News

0

Customers using credit cards to pay suppliers’ invoices continue to increase, whether driven by principal’s self-

interest in points miles, corporate customer’s interest in improving cash flow through additional float, or card networks

pressuring customers to use cards to pay suppliers.

But credit cards are the most expensive payment channel because the interchange fees imposed by card companies

erode the profitability of the sale.

While the strategy of surcharging is attractive for suppliers to offset the majority of this expense, suppliers are

challenged to adopt the recently minted right-to-surcharge given the uncertainty surrounding all of the credit card

litigation, especially the litigation pursued by national retailers against the card networks. The recent settlement

between CVS and Visa and MasterCard may provide further clarity and comfort that card litigation will not bar

supplier’s rolling out a surcharge.

Historically, the credit card networks (Visa, MasterCard and AmEx) have prohibited suppliers from surcharging

customers. In 2004, several national retailers and trade associations (including the national drug store chain CVS

Pharmacy) filed multiple lawsuits against Visa and MasterCard, accusing the card companies of conspiring to fix

artificially-high interchange fees in violation of the Sherman Antitrust Act. The suits were consolidated and certified as

a class in the U.S. District Court. After eight years of litigation, a federal judge in New York gave final approval of the

Visa/MasterCard class action settlement. Under the class action rules, class claimants, primarily retailers, were given

the option to either opt in or opt out of the class and the corresponding settlement with the card companies.

A number of retailers, including CVS Pharmacy, opted out of settlement, complaining it was not adequate. In

particular, the retailers noted they would not surcharge their customers, consumers, as they would lose business.

In early 2014, CVS, and several other retailers, filed suit against Visa and MasterCard asserting similar accusations

as the previous suit. CVS and Visa and MasterCard have settled their litigation.

What Does the CVS Settlement Mean for Suppliers’ Ability to Surcharge?

For suppliers seeking indicators that their right to surcharge is cemented, given all of the retailer litigation against Visa

and MasterCard challenging their interchange pricing, the CVS settlement provides some certainty and guidance. It is

expected that CVS is the first of many national retailers that will settle with Visa and MasterCard. These settlements

reaffirm that Visa and MasterCard are determined to resolve the interchange pricing litigation which ensures that the

supplier’s newly minted right to surcharge sticks.

Scott Blakeley, Esq., is a founder of BlakeleyLLP, where he advises companies around the United States and

Canada regarding creditors’ rights, commercial law, e-commerce and bankruptcy law. He can be reached at

[email protected].

http://creditmanagementassociation.org/2016/05/05/opt-litigation-settlement-visa-mastercard-clarity-suppliers-right-surcharge-scott-blakeley-esq/



http://creditmanagementassociation.org/author/adickeremailcma-org/

http://creditmanagementassociation.org/category/blog/articles/

http://creditmanagementassociation.org/category/blog/

http://creditmanagementassociation.org/2016/05/05/opt-litigation-settlement-visa-mastercard-clarity-suppliers-right-surcharge-scott-blakeley-esq/#respond


THE SECOND CIRCUIT COURT’S DECISION REJECTING THE CREDIT CARD CLASS ACTION SETTLEMENT: WHAT IT MEANS TO A SUPPLIER’S RIGHT TO SURCHARGE IN THE B2B SPACE?

Scott Blakeley, Esq.

On June 30, 2016, the U.S. Court of Appeals for the 2nd Circuit (Circuit Court) vacated the multibillion dollar credit card class action settlement (Card Settlement) brought in 2006 by retailers against Visa and MasterCard alleging conspiracy in violation of the Sherman Act. In 2013, the U.S. District Court of New York had approved the settlement, which was the largest antitrust class action settlement in history. The Circuit Court found the Card Settlement an “unreasonable and inadequate” solution for merchants (nearly all retailers) accepting cards, coupled with conflicting interests of class counsel. The question is whether the Card Settlement will be renegotiated or the case may go to trial. A key provision of the Card Settlement for suppliers accepting cards in the B2B space was the right to surcharge customers the interchange fee, which led to Visa and MasterCard amending their operating rules setting standards for merchants, including suppliers, to surcharge. In light of the Circuit Court’s ruling, will the card networks further amend their operating rules and void the supplier’s right to surcharge?

Given the increase in the number of customers using credit cards to pay B2B invoices (both existing and new), and that cards are the most expensive payment channel, the topic is central to many supplier’s finance teams attempting to manage profit margins. The short answer is that the card network surcharge rules remain in force, and it is not expected that they will be voided. The supplier’s right to surcharge will remain unaffected. How We Got Here: A Brief Background of the Credit Card Litigation The Retailer Lawsuits and Class Settlement In 2004, 19 national retailers and trade associations (including Kroger, PayLess, Safeway) filed lawsuits against Visa and MasterCard, alleging that the card companies conspired to fix artificially high interchange fees in violation of the Sherman Antitrust Act. The plaintiffs were virtually all retailers accepting cards in the B2C space. The suits were consolidated and certified as a class action in 2006 in the U.S. District Court for the Eastern District of New York.

Millions of retailers and businesses were members of the class. In a class action lawsuit, parties with similar claims are able to sue a defendant, providing smaller claimants to be represented. Class members are bound to the settlement, unless there is an opt‐out provision.

Credit Research Foundation


After four years of negotiation, the District Court approved the settlement. The key terms of the settlement:

For merchants accepting cards from January, 2004 through November, 2012, they would share $7.25 billion. Class members could opt out of the settlement, but those accepting the settlement were barred from suing;

For merchants accepting cards after 2012, they would have the right to surcharge, but would not share in the cash settlement. They are bound by the terms of the settlement.

The Class Settlement was appealed by a number of retailers, contending Visa and MasterCard would have the ability to impose even higher interchange fees. The settlement would also bar retailers from suing over interchange rules and rate settings. The Opt Out Litigants Several of the largest retailers opted out of the Card Settlement and sued Visa and MasterCard. These retailers found the settlement did not change the high interchange fees. Rather than lower the fees, Visa and MasterCard proposed in the settlement that they be passed to customers as a surcharge. However, Walmart noted that the “proposed modification to the no‐surcharging rule for Visa and MasterCard provides no benefit to customers or merchants such as Walmart” (email to Bloomberg of January 28, 2013). In the same week, Target and Macy’s both announced they would not surcharge. The national retailers’ election not to surcharge was economic: they believed consumers would take their business to retailers that did not surcharge.

Retailers would also be prohibited from suing over interchange rules and rate settings. Retailers also complained that the class action lawyers had a conflict of interest in representing both classes of settling merchants. Eight thousand retailers opted out. A Brief History of Surcharging Historically, credit card companies’ network rules prohibited suppliers and retailers from imposing the interchange fee on customers through a surcharge. This contractual ban on surcharging resulted from a decades‐long debate on the topic. It was only with the Class Settlement in 2013, followed by an amendment of the card network rules, that suppliers were given the right to surcharge.

2


The Visa and MasterCard Rule Changes Allowing Surcharging Consistent with the Card Settlement, in 2013 Visa and MasterCard amended its rules to allow suppliers and retailers the right to surcharge. The key provisions of the rule changes:

The surcharge must be disclosed to the card networks and card holders; Surcharge the interchange fee, which may not exceed 4%; The surcharge amount is the average of the preceding six months interchange fee; An election of brand level and product level; Debit card may not be surcharged.

The Second Circuit’s Rejection of the Settlement: a Conflict of Interest, Binding Future Claimants and a Surcharge Right with Little Value to Settling B2C Class Notwithstanding over 400 depositions, 32 days of expert testimony, and 80 million pages of documents which were tied to years of card litigation and negotiating the Class Settlement, the three panel Circuit Court unanimously found it fundamentally flawed. The Settlement Agreement broke the class of plaintiffs into two groups: one which accepted Visa or MasterCard from 2004 to 2012, and another which accepted the cards from 2012 onward. The first class of merchants was to be paid $7.25 billion, but could opt out of the Class Settlement. The second class was offered a temporary interchange rate decrease and the right to surcharge, but was barred from suing the card networks regarding their rate structure. The class action attorneys represented both classes. The Circuit Court found that a rich cash payout for one class, and a cash free, temporary interchange reduction coupled with a surcharge right for the other class created a conflict of interest for the attorneys who were representing both classes. The court noted the lawyers were in a position to negotiate terms that could benefit one class and harm the other. Further, the court noted:

“One class of plaintiffs receives money as compensation for the defendants arguable past violations, and in return gives up the future right of others. The Supreme Court has addressed such circumstances and ruled that an adjudication coming to this result is impermissible.”

On the topic of surcharging, the Circuit Court noted the value to retailers was illusory as most would not surcharge. The court’s comments highlight the fundamental distinction between B2C and B2B surcharging. With B2C surcharging, retailers risk losing business as consumers will buy from a competitor that is not surcharging.

3


By contrast, in the B2B space, the trade relationship between the supplier and customer is multifaceted. A supplier surcharging likely does not risk losing the business from a customer. The customer is given many incentives by the card company that override the surcharge. Even if a customer pushes back on the surcharge, the customer may elect another payment form, such as ACH, to avoid the surcharge.

The Circuit Court decertified the case as a class action. The case returns to the New York federal court. The Supplier’s Right to Surcharge in Light of Circuit Court’s Ruling While the Circuit Court ruling sinks the Card Settlement negotiated after a decade of litigation, the issue for suppliers is whether Visa and MasterCard will void the amendments to the operating rules allowing them to surcharge, given the right to surcharge was a provision of the Settlement Agreement. The short answer for suppliers that are surcharging, continues. The network rules have not been amended to bar surcharging. For those suppliers planning to roll out a surcharge, the evidence indicates that Visa and MasterCard do not intend to void the rules allowing surcharging. The card network’s interest in advancing surcharging was shown in allowing suppliers and merchants to surcharge months before the District Court gave final approval of the Class Settlement. With the card networks amending their operating rules to allow surcharging, suppliers and retailers have relied on these changes to offset card expense.

With the card network’s focus to expand use of credit cards in the B2B space, to then revoke a supplier’s surcharge right would undermine this effort. Likewise, the card networks will likely face further litigation with retailers in the B2C space regarding the interchange fee structure. Visa and MasterCard were battling 12 million retailers at the trial court level. Further, in another antitrust suit regarding branded debit cards brought by retailers, Visa and MasterCard may face damages of nearly $40 billion, which is pending review by the U.S. Supreme Court. Added to this, the European Commission is bringing suit against MasterCard for comparable antitrust violations that the card networks have artificially inflated interchange fees, and are seeking damages of $24 billion. Given this, the card network’s self‐interest is to preserve its standing in the B2B space and continue with surcharging. As a start, the card networks continue to push market share in the B2B space, by contrast, in the B2C space they have saturated the market. Companies in the B2B space constantly hear from card issuing banks to persuade them to use cards to pay their suppliers, and accept cards from their customers. If these suppliers don’t have the option to surcharge, more will push back even accepting cards because of the expense. An end note is that alternative payment

4


channels continue to emerge that are more price competitive than cards, if those cards cannot be surcharged. The issue ultimately is who pays the costs to run the credit card network, which interchange fees total approximately $60 billion annually. In the B2C space, retailers appreciate that surcharging consumers is not an effective strategy for risk of losing business, but yet accept cards as it increases sales. The fight with retailers is trying through litigation to lower the card network fee structure. By contrast in the B2B space, suppliers have more leverage in the trade relationship, including moving the interchange to the customer. By allowing surcharging, the card networks seem less concerned as to who pays the interchange fee, whether the cardholder or business accepting the card, but that the operating costs of the card network are being covered. Scott Blakeley is a principal with Blakeley LLP, where he practices creditors’ rights and bankruptcy. His email is [email protected].

Credit Research Foundation

5

Published by the Credit Research Foundation, October 2016 1

The US Supreme Court to Rule on Whether States May Bar Credit Card Surcharging: What it Means to a Supplier’s

Right to Surcharge in the B2B Space?

Scott Blakeley, Esq. Abstract: Credit cards are the fastest growing payment form. But the payment form is the most expensive for suppliers, leading many to rollout surcharge programs to offset the majority of the card costs. The Supreme Court’s recent decision will settle the constitutionality of state no‐surcharge laws.

For many suppliers, credit cards have not only become the preferred payment form for customers, but one of the most significant operating costs for suppliers. A mandate from the finance team is to make cards cost competitive with other payment forms. The way to offset rising costs is through a surcharge, passing the interchange fee (approximately 85% of the card charge) to the customer.

As part of a class action settlement with retailers in 2013, Visa and Mastercard amended the network rules to allow merchants, including suppliers, to surcharge. With the card networks allowing surcharging, suppliers considered as part of their nationwide surcharge rollout, whether 10 states that enacted no‐surcharge laws limit the suppliers’ surcharge strategy. The constitutionality of the state no‐surcharge laws has been vigorously challenged, with the litigation focused on whether the no‐surcharge laws violate the First Amendment and commercial speech on pricing, or instead whether they regulate economic conduct. No‐surcharge states allow merchants to provide discounts to cash and check payers, but not add a surcharge to credit cards. The Supreme Court has agreed to hear an appeal from the Second Circuit Court of Appeals that involves the constitutionality of no‐surcharge laws. The Supreme Court is expected to rule not later than June, 2017. How will the Supreme Court’s ruling affect suppliers’ right to surcharge? Are there steps suppliers should take during the pendency of the Supreme Court’s review, whether a surcharge has been rolled out or is about to be?

Receptionist

Stamp


States No‐Surcharge Law Overlay In 1976, the U.S. Congress enacted a federal law prohibiting surcharging. The credit card networks enacted contractual provisions in their merchant agreements barring surcharging. In 1983, the federal law barring surcharging expired. With the sunset of the federal law, the credit card networks lobbied state legislatures to enact no‐surcharge legislation to discourage retailers from surcharging consumers. Those 10 states that enacted no‐surcharge laws are: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas.

The uniform theme of the states enacting no‐surcharge laws is to protect consumers within their states from retailers adding a charge to cards, therefore acting as a form of tax on those consumers choosing cards to pay for their goods or services. The no‐surcharge laws allow merchants to charge higher prices when a customer pays with a credit card, provided they disclose that the price difference is a cash discount and not a card surcharge. While surcharging is a more accurate disclosure the costs the merchant incurs with accepting cards rather than a cash discount, the card networks were concerned in lobbying for no‐surcharge legislation that surcharging may discourage card use. Litigation Challenges to No‐Surcharge Laws Of the ten states that have enacted no‐surcharge laws, four have had their laws challenged as unconstitutional. In 2013, the first litigation challenge was brought in New York, where five New York businesses sued New York, challenging the law on free speech grounds. The District Court found the no‐surcharge law unconstitutional and overturned the law, but was reversed on appeal to the Second Circuit Court of Appeals. The Second Circuit determined that prices set by retailers was not “speech”, and therefore, the First Amendment was not relevant. The Second Circuit focused more on how surcharging was labelled, rather than the implications of the fee or its cost to merchants and consumers. Similar litigation challenges were brought in California and Texas. In March 2015, a federal court in California found its no‐surcharge law unconstitutional and unenforceable, which the state attorney general has appealed to the Ninth Circuit Court of Appeals. On the other hand, in Texas the no‐surcharge law was upheld, and that decision was affirmed by the Fifth Circuit Court of Appeals. By contrast, the Florida no‐surcharge law was upheld, but reversed on appeal by the 11th Circuit Court of Appeals. The card networks are not directly involved in the litigation challenges, but deferring to the states’ no‐surcharge defense.


The Topic for the Supreme Court to Decide The U.S. Supreme Court granted review of the Second Circuit Court of Appeals, where the court dismissed the free speech arguments and found the New York law only regulated economic conduct. The Supreme Court is the highest federal court and has the final ruling on constitutional law, which is at issue with the no‐surcharge laws. The businesses challenging the state no‐surcharge laws contend the surcharge bar violates their free speech rights because it prevents them from freely disclosing their pricing alternatives. Merchants are not allowed to say they charge card customers a higher price for cards, although a surcharge is a more accurate description of the costs of cards. An example: a product is priced at $1,000, plus $20 if a credit card is used. This is a surcharge and impermissible under the no‐surcharge laws. But if the product is priced at $1,020, with a $20 discount for cash, is permissible.

Litigation Challenges to No-Surcharge Laws

California

Texas

Florida

New York

October 2013: Southern District of New York finds no-surcharge

law unconstitutional.

September 2015: U.S. Court of Appeals for the 2nd

Circuit reverses decision of district court, making the ban enforceable.

September 2016: Supreme Court agrees

to hear appeal.

September 2014: District court upholds

the no-surcharge statute.

November 2015: U.S. Court of Appeals for the 11th Circuit vacates the decision of the

District Court.

September 2016: Supreme Court takes

no action on the petition.

February 2015: District court upholds the

constitutionality of no-surcharge law.

March 2016: U.S. Court of Appeals for the 5th Circuit affirms decision of district

court, keeping the ban enforceable.

September 2016: Supreme Court takes

no action on the petition.

March 2015: District court rules the

surcharge ban is unconstitutional

April 2015: Appeal to circuit court

filed.


More States Enacting No‐Surcharge Laws? During the pendency of the Supreme Court’s consideration of the no‐surcharge laws, is there an effort by other states to adopt no‐surcharge laws? The answer is no. The chart below summarizes recent states’ efforts to consider enacting no‐surcharge laws. Not one state has adopted anti‐surcharge legislation since Visa and Mastercard settled their class action litigation and amended their rules to allow suppliers to surcharge customers in 2013.

States That Considered No-Surcharge Legislation After 2013

State Date Proposal Introduced Status

Hawaii January 18, 2013 February 2014, Committee on Commerce and Consumer Protection deferred the measure

Illinois January 21, 2013 December 3, 2014, adjourned indefinitely

Kentucky February 6, 2013 House February 19, 2013 Senate

Proposal adjourned indefinitely

Maryland February 8, 2013 Hearing February 22, 2013. “Died in committee” i.e., defeated, February 22, 2013

Michigan February 14, 2013 Referred to Committee on Commerce/Banking and Financial Institutions, February 2013, no further action

Missouri February 7, 2013 Public hearing March 2013, bill not currently on legislature calendar

Nevada March 8, 2013 Sent to Committee on Commerce and Labor; pursuant to Joint Standing Rule, no further action allowed, April 2013

New Hampshire February 20, 2013 October 30, 2014, Interim study report: Not recommended for future legislation

New Jersey February 4, 2013 February 7, 2013, defeated in chamber

New Mexico February 12, 2013 Referred to Judiciary Committee February 28, 2013, adopted by House March 1, 2013. No further action taken. Reported as “died” on NM Legislature 2013

Pennsylvania February 14, 2013 Referred to Consumer Affairs Committee, February 14, 2013. “Died in Committee” i.e., was not referred to and no further action taken

Rhode Island January 31, 2013 February 15, 2013, Committee recommended measure be held for further study. No further action

South Carolina February 5, 2013 February 5, 2013, referred to Committee on Labor, Commerce and Industry. No further action

Tennessee February 5, 2013 Taken off Notice – Insurance and Banking Subcommittee, March 20, 2013

Vermont February 7, 2013 Referred to Committee on Judiciary. No further action West Virginia March 12, 2013 Last action: Sent to Banking and Insurance March 12, 2013 Wisconsin June 6, 2013 April 8, 2014, Failed to pass Assembly

Retail/Consumer vs. Supplier/Business Customer and No‐Surcharge Litigation The focus of the no‐surcharge litigation is retailers complaining about pricing disclosures with point of sale payments by consumers. A number of national retailers filed amicus briefs in support of the plaintiff retailers requesting the Supreme Court to rule on the issue. While the Circuit Court rulings have not expressly carved out suppliers and their business customers from the reach of no‐surcharge laws, the entire focus of the no‐surcharge litigation challenge relates to the facts of retailers and consumers.


What It Means to the Supplier and a Surcharge Rollout What is a supplier’s surcharge strategy in light of the Supreme Court agreeing to weigh in on the no‐surcharge laws? Whether the supplier has rolled out a nationwide surcharge program, or is in the process of doing so, the focus is on the customer base. If the supplier is selling to B2B customers, as opposed to selling directly to consumers, the supplier’s best practice is to condition card acceptance on the customer and cardholder agreeing to a card payment agreement form, that includes a contractual waiver and governing law provision. That provision provides that customers consent to waive the application of the surcharge prohibition when paying by credit card. That language may read:

All credit card commerce between [Applicant] and [Vendor] shall be governed by and interpreted in accordance with the laws of the State of [ ] without regard to conflict of law provisions thereof, and all actions, disputes, and proceedings arising from, relating to or in

connection with credit card commerce between [Applicant] and [Vendor] shall be subject to the exclusive jurisdiction of the federal district courts for [State] or, in the event the district court lacks subject matter jurisdiction, the [State] state courts located in [County]. For the avoidance of doubt, the foregoing is intended to be a mandatory forum selection clause divesting all other courts of jurisdiction to hear any actions, disputes, and proceedings arising from, relating to or in connection with credit card commerce between [Applicant] and [Vendor].

The contractual surcharge waiver for B2B customers would be enforced during the pendency of the Supreme Court’s consideration of the no‐surcharge ruling, and after the ruling if the Supreme Court upholds the enforceability of the no‐surcharge laws.

The takeaway for the credit team is that a conclusive ruling on the constitutionality of the no‐surcharge laws will be forthcoming by Q2 of 2017. Having said that, suppliers selling in the B2B space may contract around the no‐surcharge laws through a card payment agreement with customers containing a contractual waiver and choice of law provision.

Scott Blakeley is a principal at Blakeley LLP, where he practices creditors’ rights and bankruptcy law. His email is [email protected]

Documents

Accepting Payment by Credit Card, Surcharging the Customer ... · The Credit and Financial Management Review 5