Check back here in the next few days for more specifics on the coming changes to Interchange.

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Last night I went out for dinner with my family and some friends. We all love authentic Mexican food so we went to a real “whole in the wall” restaurant and ate some incredible food. When I was about to pay the cashier I noticed a hand written sign hanging from the wall saying, “$.60 fee added for all Visa and MasterCard transactions.” This an example of what the credit card associations call surcharges or convenience fee.

Are these fees acceptable according to Visa and MasterCard?

The short answer is almost always no. Here are the actual policies regarding these fees:

Visa Rules for Surcharging

Visa Rule: Section 5.2.F of the Visa Operating Regulations Prohibits Surcharge

A Merchant must not: Add any surcharge to Transactions (Travelers cheques and Foreign Currency fees and commissions, as specified in Section 5.2.E, are not surcharges.)

Visa General Rules for Convenience Fees

Visa Rule: Section 5.2.E of the Visa Operating Regulations state:

A Merchant that charges a Convenience Fee must ensure that the fee is:

• Charged for a bona fide convenience in the form of an alternative payment channel outside the Merchant’s customary payment channels
• Disclosed to the Cardholder as a charge for the alternative payment channel convenience
• Added only to a non face-to-face Transaction
• A flat or fixed amount, regardless of the value of the payment due
• Applicable to all forms of payment accepted in the alternative payment channel
• Disclosed prior to the completion of the Transaction and the Cardholder is given the opportunity to cancel
• Included as a part of the total amount of the Transaction

A Convenience Fee may only be charged by the Merchant that actually provides goods or services to the Cardholder.

A Convenience Fee may not be charged by any third-party.

A Convenience Fee must not be added to a Recurring Transaction.

The requirement for an alternate payment channel means that Mail/Telephone Order and Electronic Commerce Merchants whose payment channels are exclusively non face-to-face may not impose a Convenience Fee.

MasterCard General Rule for Surcharging

MasterCard Rule: Section 9.12.2 of the MasterCard Bylaws and Rules state:

A merchant must not directly or indirectly require any MasterCard cardholder to pay a surcharge or any part of any merchant discount or any contemporaneous finance charge in connection with a MasterCard card transaction. A merchant may provide a discount to its customers for cash payments. A merchant is permitted to charge a fee (such as a bona fide commission, postage, expedited service or convenience fees, and the like) if the fee is imposed on all like transactions regardless of the form of payment used.

A surcharge is any fee charged in connection with a MasterCard transaction that is not charged if another payment method is used.

MasterCard General Rules for Convenience Fees

MasterCard rules specifically prohibit merchants from adding a fee for acceptance of MasterCard-branded cards. This is considered surcharging. The prohibition on surcharging ensures that MasterCard cardholders are not discriminated against at the point of sale.

However, surcharging is different from a situation in which particular business cases may warrant imposition of a convenience fee for utilization of specific payment modes, such as internet and telephone. As long as the same convenience fee, (flat rate, percentage based, tiered rate) is applied to transactions made with all payment methods accepted within a specific payment mode (in person, mail, telephone, Internet, etc.) the convenience fee is not considered surcharging. Finally MasterCard does not permit convenience fees to be advertised as offsetting the cost of accepting MasterCard-branded cards.

So there you have it, after you review all the rules above you can see the guidelines are so stringent and what Visa does not cover MasterCard does or vis versa.

What Happens if You Ignore These Rules?

If you get caught charging these fees and you do not meet the guidelines stated above the results will be fines from both Visa and MasterCard. I do not know how they arrive at the fine amounts but I have heard they can be significant, like starting at $50,000. That number could be high but do you really want to find out?

Just in case you are wondering, “how would they catch me?” The answer is usually by a customer complaint. When Visa or MasterCard receive such a complaint they always investigate and aggressively pursue the merchant. They do this because it is in their best interest. Can you imagine if most merchants charged a convenience fee? People would start paying with cash and the associations could lose billions of dollars.

Bottom Line: Allowing your customers to pay by credit card is a convenience that, most of the time, will result in increased sales for your business. Therefore, I suggest you look at your merchant account fees as a simple cost of doing business and be glad you are able to accept them.

For another take on this issue see what people are saying at answers.com on this subject.

Do you agree? Disagree? Have some thoughts to add? Please comment below.

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Straight pass through has to do with merchant account risk. Visa and MasterCard have set specific rules to deal with these risks. For example, a keyed in transaction is a higher risk than a swiped transaction, because many times the card holder is not physically present. For keyed transactions, processed correctly, Visa and MasterCard have set an edict, a very specific surcharge of .31 percent for all Keyed or Card Not Present transactions. This surcharge is to be added to your base rate. This is TRUE BANK COST. If a merchant account processor charges more than the .31 for this kind of transaction they are not giving you “straight pass through.”

If this is happening to you don’t be too upset because padding Visa and MasterCard surcharge fees is the norm in the merchant account industry. They are basically buying something from Visa, and marking it up to increase their profit. When they are taking profit on one surcharge they are usually inflating them all the way down the line, rendering your attractive “font rate” as just a facade. In fact the lower your front rate is the higher your surcharges usually are.

In regards to merchant accounts straight pass through is receiving your surcharge fees at true bank cost. This my company’s niche in merchant account processing. Typically we are able to keep our new clients front rate the same and still give them up to 50% savings just by providing straight pass through to them.

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Here is how these tiers work to increase the profit of the merchant account provider. Let’s say you have a retail business and your base rate is 1.90% + $.15 for all your card present swiped transactions. Your “mid-qual” rate is 2.75% +$.15. This category is typically for keyed in or card not present transactions and a swiped rewards card. Then you have a “non-qual” rate of 3.25% + $.15. This is for corporate or business cards and transactions that have problems . The chart below shows how lumping fees into these categories or tiers takes money out of your pocket.

Can you see that by having categories you would be paying from .54% to .89% more than you need to? That can add up over year. I just finished an analysis yesterday that will end up saving the company $15,593.82 a year! How? By getting rid of the categories.

For more information on straight pass through click here .

So what are the key lessons to be learned from this post?

1. If you have “mid-qual” or “non-qual” categories at least consider changing your merchant account provider by getting a few proposals from their competitors.

2. When shopping for a merchant account pay attention to the base rate but also pay attention to the surcharges that are added to the base rate for transactions like the ones listed above.

If you would like me to analyze your merchant account fill out this form or e-mail me ; I would be happy to review your current account and let you know how much money I can save you each month.

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