Credit Card Surcharges now Allowed

For more than seven years, Mitch Goldstone has been fighting for the right to charge his customers extra for credit card transactions.

Begining Jan. 27, merchants such as Goldstone gained that right. Under a federal court case settlement, they can put surcharges of up to 4% on Visa and MasterCard transactions -- which account for about 70% of credit card purahases -- to cover the cost of card interchange fees, or "swipe fees."

But few merchants plan to use their newly won right -- not even Goldstone. "It's going to be used as leverage against credit card companies," the president of ScanMyPhotos.com explained. "Just knowing that merchants can (surcharge) will keep them from raising rates."

Goldstone, whose company digitizes old photos, is a lead plaintiff in an antitrust lawsuit that pits retailers against Visa, MasterCard and major card-issuing banks. The swipe fee rule that took effect Jan. 27 is one part of a preliminary settlement; the other part, a $7.25 billion cash payout to retailers, faces final approval later this year.

Expect no surcharge surge

Although the surcharge represents a big change in the rules of retailing, the reality at most checkout lines -- and at e-commerce companies such as Goldstone's -- will probably remain unchanged, at least for now, according to retail experts and card networks. Merchants can use the threat of surcharges as bargaining leverage, but most of them don't want to irritate customers with an actual fee, industry representatives said.

"While there can always be exceptions, merchants in general have no intention of surcharging," said Stephen Schatz, spokesman for the National Retail Federation. Some retailers including Target have issued statements denying plans to charge extra for card use.

There are other hurdles. Laws prohibit the surcharge in 10 states that represent about 40% of the population. In addition, the rules governing retailers who also take American Express, which is not covered by the settlement, make it more difficult for merchants to impose surcharges.

Visa, MasterCard ask surchargers to register

Retailers are supposed to register with the card networks in advance if they intend to charge the fee. However, representatives for Visa and MasterCard would not comment on the number of retailers that have signed up. Visa referred all questions to the Electronic Payments Coalition, an industry group that said it lacked surcharge registration data. At MasterCard, spokesman Jim Issokson said the company considered the information proprietary. Generally speaking, "We don't expect a lot of merchants" to surcharge, he said.

That said, there are roughly 7 million merchants covered by the settlement, so consumers somewhere will likely pay more to use their credit cards.

"I have not heard from any retailers that are looking to jump into it at this point," said Jeff Lenard, spokesman for the National Association of Convenience Stores, "but there are 90,000 (stores) out there."

Without firm data, consumers don't know whether or where surcharges will pop up. Some convenience stores were quick to offer discounts for using debit cards after the Durbin Amendment to the Dodd-Frank Act made that easier, so this sector is one to watch for credit card surcharges. Convenience stores have long said that swipe fees take a substantial bite out of their skimpy profit margins.

Australian surcharge precedent

Other experts say surcharges are likely to pop up first in noncompetitive sectors. That's what happened in Australia, which started allowing surcharges in 2003. "Initially, it was hotels, airlines and then some taxi and utility companies," said Edgar Dworsky, former Massachusetts assistant attorney general in consumer protection and founder of ConsumerWorld.org, an Internet consumer research guide. "As the fees became accepted, they extended to conventional retailers."

An analysis published by Australia's central bank found that surcharges were slow to take hold in the retail sector, but they gradually caught on. By the end of 2010, more than 40% of the largest merchants imposed an extra fee for card use, according to the analysis, with the typical surcharge being about 1.9% for Visa and MasterCard transactions.

However, some merchants charge much more. Taxis routinely add 10% to a customer's bill if they pay with credit. The high rates have sparked a backlash resulting in new rules that will allow credit card companies to impose limits on merchant surcharges, effective in March.

One argument for the surcharge in the U.S. is that consumers can opt for cheaper payment methods, holding down the cost of transactions and putting pressure on card networks to cut interchange costs. Under the new rules, merchants can impose higher surcharges for higher-cost cards such as reward cards. That in turn could focus pressure on the popular card offers.

Some consumer advocates see this as a potential benefit for consumers overall. "Cash customers are providing miles and other rewards to credit card customers, and that is wrong," Edmund Mierzwinski, consumer program director at U.S. Public Interest Research Group, said via email.

Consumers loathe card surcharges

The threat of surcharges could be a potent negotiating tool for retailers. In a CreditCards.com survey, 65% of Americans who use credit cards said they would pay another way if any fee was charged. Others said they would balk at card use depending on the size of the fee.

The credit card side disputes that consumers would see benefits stemming from card surcharges, threatened or actual. Retailers could end up "double-dipping," said Trish Wexler, spokeswoman for the Electronic Payments Coalition. "Retailers have built fees into their cost of goods -- if they're going to surcharge, I would hope they would lower their prices across the board." The group, which represents the card networks and issuing banks, has set up an information site for consumers called checkoutfees.com.

Consumer Action, a San Francisco-based advocacy group, is providing an informational pamphlet about the fees. "At first, it may be confusing for customers," says Linda Sherry, the group's director of national priorities. Retailers are not entirely behind the settlement either, raising a question of whether it will receive final approval. Several retail chains and industry groups have filed objections, saying that the settlement would lock in overcharging by card networks and protect them from future legal action over swipe fees. An objection deadline is set for May 28, with a fairness hearing for the settlement scheduled in September.

* Correction: As originally published, this article misspelled the name of Mitch Goldstone's photo digitizing business. See the CreditCards.com corrections policy.