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Lawsuit May Allow the Use of Credit Card Surcharges

Posted: August 20, 2012

By: T. Scott Gilligan, NFDA General Counsel

Funeral homes trying to squeeze out profits while facing an increasing rate of cremation and poor preneed returns are often confronted with a dilemma when deciding whether to accept credit cards. Like all merchants, they appreciate the quick payment that credit cards provide, thereby helping cash flow. On the other hand, the payment of a 1.5 percent to two percent swipe fee to VISA, MasterCard or American Express takes another chunk out of the funeral home's bottom line. For a funeral that costs $10,000, a two percent swipe fee costs the funeral home $200 out-of-pocket.

The credit card dilemma gets even stickier with the payment of cash advances. If a funeral home allows a consumer to pay for cash advance items with a credit card, the funeral home is losing money unless it marks up the cash advance items. In those states where marking up cash advance items is prohibited by state law, the funeral home has no way to recoup the swipe fee on cash advance items.

Many funeral homes, especially those accepting credit card payments on cash advance items, have asked whether they may impose surcharges on consumers paying with credit cards. In other words, could the funeral home require consumers electing to use a credit card to pay a 1.5 percent to two percent surcharge to recoup the swipe fees paid to VISA, MasterCard or American Express? The answer has always been no, but that may soon change for funeral homes in 40 states.

The reason that funeral homes have not been able to impose credit card surcharges is found in the contractual restrictions that VISA and MasterCard impose upon merchants. In providing credit card processing, VISA and MasterCard require that merchants agree not to impose any type of surcharge on consumers who elect to pay by credit card. Therefore, while merchants may offer discounts for payment in cash (like gasoline stations do), it is a violation of the standard VISA and MasterCard contracts to impose a surcharge on credit card users to recoup the swipe fee. Although American Express does not directly restrict the use of surcharges, it does prohibit merchants from offering less favorable terms to consumers who use the American Express card. Therefore, it indirectly prohibits credit card surcharges.

All of that may soon change. A seven-year-old class action antitrust suit against VISA and MasterCard has reached a proposed settlement. Under the tentative agreement, VISA and MasterCard will pay out $6 billion, reduce swipe fees for eight months (which nets another $1.2 billion for merchants), and eliminate the restrictions on merchants imposing credit card surcharges. If approved, the settlement will free up many of the country's seven million merchants, including funeral homes, to impose a surcharge on credit card customers.

Before redrafting funeral home contracts to add credit card surcharges, there are two matters to keep in mind. First, the ten states (California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas) all have state laws prohibiting merchants from imposing credit card surcharges. For the most part, these laws have been superfluous since VISA and MasterCard did not allow surcharges pursuant to their contracts. However, assuming that the VISA and MasterCard restrictions will soon be eliminated by the class action settlement, these laws will come to into play. Unless the laws are repealed, funeral homes in those ten states will still not be able to impose surcharges on consumers using credit cards.

The second caveat is that the proposed settlement in the class action lawsuit must still be approved by the federal district court. The court has scheduled a hearing in October to determine whether the settlement is fair to the seven million merchants that comprise the plaintiffs' class. Several powerful players in the plaintiffs' class, including the National Association of Convenient Stores, the National Cooperative Grocers' Association, Wal-Mart and Target, oppose the settlement because they do not believe it goes far enough to protect merchants and to compensate them for past acts.

Although the $7.2 billion in damages and reduced swipe fees is significant, opponents to the settlement point out that these amounts represent only about two months' worth of the $50 billion in swipe fees that VISA and MasterCard collect on an annual basis. More significantly, opponents argue that the settlement will not prevent VISA, MasterCard and other credit card issuers from raising swipe fees in the future.

Assuming that a settlement is worked out and businesses are able to assess credit card surcharges, all merchants, including funeral homes, will have to make decisions on whether to impose surcharges and how much to charge. Whether there will be consumer backlash against credit card surcharges is still to be determined. Also unknown will be whether merchants will choose to offer different surcharges on different credit cards. For example, a merchant may elect to impose a higher credit card surcharge on a credit card with a higher swipe fee and lower charges on cards with lower swipe fees. How this will play out in the market remains to be seen.

NFDA will continue to advise members on the status of the proposed settlement in the VISA and MasterCard antitrust suit. In the meantime, NFDA members with questions regarding this matter may contact Scott Gilligan at 513-871-6332.