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Visa/MasterCard Interchange Settlement Permits Merchants to Impose Surcharges

Preliminary approval to the $7.25 billion class action interchange was granted in November, 2012, providing for a $6.05 billion fund, a temporary reduction in interchange fees worth $1.2 billion, modifications to the Visa/MasterCard rules, and the ability for merchants to impose a surcharge on credit card purchases under certain circumstances. In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation applies to all persons, businesses, and other entities that have accepted Visa- and MasterCard-branded credit cards in the U. S. since January 1, 2004, as well as anyone who will accept such cards in the future. A class action lawsuit against American Express is still pending.

The settlement was preceded by seven years of contentious litigation, beginning in 2005 when the first of more than 40 class complaints was filed. The class plaintiffs allege that Visa and MasterCard conspired with its member banks to establish default interchange fees, and that the network rules insulated those interchange fees from competition by preventing merchants from steering customers to less expensive forms of payment (such as rules preventing surcharging and discounting).

For a pdf version of this Client Alert, please click here.

With respect to the settlement’s surcharge provision, the Class Settlement Agreement with Visa and MasterCard (“Agreement”) provides that merchants are permitted to assess surcharges on Visa/MasterCard transactions either at the “Brand Level” (e.g., an assessment on all Visa-branded credit card transactions) or “Product Level” (e.g.,, an assessment on all Visa-branded “Reward Card” credit card transactions), provided that (i) the fees are not prohibited by state law, (ii) the fees do not exceed the costs that the merchant pays to accept cards and (iii) the merchant complies with the disclosure requirements at the point of entry, point of sale and on the receipt. A checkout fee at the issuer level (e.g., an assessment on Visa-branded credit cards issued by Citibank and Bank of America, but not on Visa-branded credit cards from Capital One or from local banks) is not permitted. The Agreement also requires a level playing field by permitting a surcharge if (i) the merchant is able to surcharge each other credit card it accepts or actually does so and (ii) the merchant also surcharges equal or higher cost cards on networks that maintain non-discrimination rules (e.g. American Express, Discover).

Permitted “Brand Level” and “Product Level” Surcharges

More specifically, a permitted “Brand Level” surcharge with respect to Visa/MasterCard credit card transactions is one in which:

  • A merchant adds the same surcharge to all Visa/MasterCard credit card transactions, regardless of the card’s issuer or product type, after accounting for any discounts or rebates offered by the merchant at the point of sale; and
  • The surcharge on each Visa/MasterCard credit card transaction is no greater than the merchant’s Visa/MasterCard surcharge cap (which is the average Merchant Discount Rate applicable to transactions at the merchant for the preceding one or twelve months, at the merchant’s option).

“Merchant Discount Rate” is defined as the fee, expressed as a percentage of the total transaction amount, that a merchant pays to its acquirer or processor for transacting on a credit card brand.

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CFPB Issues Bulletin on Marketing Credit Card Add-On Products

Concurrent with its enforcement action against Capital One, the CFPB issued a Bulletin on its expectations for the marketing of credit card add-on products, such as those at issue in the Capital One action. The Bulletin also warns institutions that the CFPB will take “all necessary steps to ensure that consumers are protected from deceptive sales and marketing practices, including those resulting from failures to adequately disclose important product terms and conditions, or other violations of Federal consumer financial law.” These include having a comprehensive compliance management program ensures that telemarketing and customer service scripts do not mislead or pressure consumers.

The Bulletin outlines a number of steps that CFPB-supervised institutions should take to ensure that they market and sell credit card add-on products in a way that limits the potential for statutory or regulatory violations and associated consumer harm. The Bulletin also lists a number of compliance management programs that should be employed by institutions offering credit card add-on products.

Although the Bulletin focuses on credit card add-on products, the CFPB notes that institutions should take this guidance into consideration when offering similar products in connection with other forms of credit or deposit services.

The Bulletin is available here.

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CFPB Issues First Enforcement Action

In its first public enforcement action, the Consumer Finance Protection Bureau (CFPB) found that Capital One Bank, (USA) N.A. engaged in deceptive marketing practices, which the CFPB says mislead customers into buying credit card “add-on products.” The large size of the total payment required under this action ($210 million) has raised speculation that the CFPB will be seeking larger penalties than bank regulators in the past, because such previous penalties have not stopped banks from using unfair tactics to seek profits.

The CFPB found through its supervision process that Capital One’s call-center vendors engaged in deceptive tactics to sell its credit card add-on products, which included payment protection plans, debt forgiveness and credit monitoring services. To activate newly issued credit cards, Capital One customers with low credit scores or low credit limits were directed to a third-party call center and subjected to “high-pressure [sales] tactics.” In particular, the CFPB found that Capital One customers were misled about the benefits of the add-on products, deceived about the nature of the products, mislead about eligibility, misinformed about the cost of the products and, in some cases, enrolled without their consent.

The CFPB’s enforcement action requires Capital One to cease all marketing of these products until the Bureau approves a compliance plan to help ensure against future violations; refund to 2 million customers approximately $140 million, which covers the cost of these add-on products as well as a refund of the finance charges associated with fees paid, any over-the-limit fees incurred and interest; pay claims denied based on ineligibility at enrollment; make convenient repayment to consumers; assure compliance with the terms of the consent order through the work of an independent auditor and pay a $25 million civil money penalty into the Bureau’s Civil Penalty Fund.

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Prepaid Cards That Access Lines of Credit Are "Credit Cards"

On March 18, 2011, the Federal Reserve Board of Governors issued a Supplementary Information and Final Regulation and Commentary (“Supplementary Information”) which, among other things, clarified the definition of credit card. The following Client Alert focuses on how the new Supplementary Information impacts debit and prepaid cards that access a separate line of credit. Learn more about Visa credit cards | american express card | atlantic union bank at the link.

Since publication of the February 2010 and June 2010 Final Rules, the Board has become aware that clarification is needed to resolve confusion regarding how institutions must comply with particular aspects of those rules. In order to provide guidance and facilitate compliance with the final rules, the Board published proposed amendments to portions of the regulation and the accompanying staff commentary on November 2, 2010. See 75 FR 67458 (November 2010 Proposed Rule).

With respect to prepaid cards, the Supplementary Information discusses what happens when a customer opens a line of credit in connection with a prepaid card account.  Depending on how the line of credit works, the prepaid card or prepaid card account number, or both, may be deemed a “credit card” under Reg Z. If the prepaid card or its account number is a credit card, then all Reg Z requirements applicable to a “credit card account under an open-end (not home-secured) plan” would apply.

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