Credit Card Processing Fees

Since there is a lot of interest in credit card processing and convenience fees recently, I thought this would be a great time to write an article and try to shed some light on what you are allowed to charge.  Well, it turns out that there is what the law says and there is what Visa and Mastercard say, and there is a chasm between those two that is wide enough to drive a truck full of Visa and Mastercard profits through.

First, a little background.  For many years public agencies either didn’t take credit cards or it was such a small percent of their overall volume that the credit card fees didn’t amount to much.  When you couple that with the credit card issuers not allowing you to pass on their costs, it was an easy call to just eat the minimal processing costs as the price of doing business.  This is especially true if you want to encourage people to pay on-line and not tie up staff accepting payments at the counter.

But times have changed.  Today, credit or debit cards are becoming an ever-larger piece of the pie, whether it be on-line or in person.  With that increase in volume has come an increase in the costs that are spread to everyone, including people who pay by check or cash.

This led to pushback against the credit card providers and they ended up bending their rules a little bit.  You could now charge the cost of an on-line provider and associated software, but only for those people paying on-line, or what they call an alternate channel.  This was deemed a convenience fee and it had to be a flat fee and not a percentage of the sale.  But you still couldn’t charge any fee for people paying in person, or what they call the point of sale, and you still couldn’t charge any fee to recover the credit card processing costs.

But public agencies and utilities are different.  Section 1748.1 of the California Civil Code says that retailers are not allowed to charge a surcharge for using a credit card.  But Section 1747.02 declares that this does not include “the state, a county, city, city and county, or any other public agency.”  In addition, Government Code Section 6159(h) states that a public agency “may impose a fee for use of a debit or credit card or electronic fund transfer, not to exceed the costs incurred by the agency in providing for payment by credit or debit card or electronic funds transfer.”

Then, in January 2018, a Federal appeals panel of the Ninth Circuit ruled in Italian Colors Rest. V. Becerra, that banning surcharges for credit card purchases is unconstitutional as it interferes with the free speech rights of a business to determine how prices are presented to its customers.  But this decision only applied to the five restaurants who were part of the suit and does not apply to anybody else.  For now.  Most legal analysts expect that to change over time, either through further court decisions or an eventual Supreme Court decision.

But in the meantime, the war between credit card companies and vendors goes on.  If you are a utility and charge a credit card processing fee, Visa will remove the discounted utility interchange rate, about 0.85%, and instead charge the standard interchange rate, about 2.4%.  This of course will have a large impact on the fees charged to the utility and passed on to its customers who use credit cards.

It appears that things are slowly moving in the direction of being able to charge a credit card processing surcharge without ramifications from the credit card issuers.  But at the end of the day you need to talk to your legal staff about what you are allowed to do and what makes sense for your agency.  Hopefully the legal dust will settle soon, but not before Visa, Mastercard, and the other companies do everything they can to prolong their very profitable business model.