Credit Card Basics

In the face of rising credit and debit card use nationwide, the Janssen Law Firm hopes to inform small businesses in Humboldt County and elsewhere to make the best decisions for their growth.   Whether or not to accept plastic forms of payment involves knowing the parameters of what can and cannot be done in compliance with the law and merchant contracts.   Since small businesses have little to no bargaining power in the contracts they must sign to accept cards, they should at least familiarize themselves with the rules (for an illustration of the rising use of credit and debit cards, see  New York Times .

The Senate recently passed an amendment which would regulate credit/debit cards if it stays in the final version of the financial bill.   It would impose limits on charges to merchants and it would also change how merchants can charge consumers for paying with cards.
Merchants would legally be allowed to require minimum purchase amounts for using a credit card.   While some retailers already require this, they are acting in violation of their agreements with the credit card companies.  However, the new law would specifically allow businesses to impose such requirements.  New York Times Article
Businesses can only accept a credit/debit card pursuant to a contract it signs with the credit card companies.  They pay fees for using the electronic network and fees that are delivered to the card’s issuing bank (Chase, Bank of America, Citibank, etc.).  Generally between one and three percent (1-3%) of the purchase price goes to pay these fees.  What happens to this percentage?  Assuming that 2.25% of each transaction is taken and a customer charges $100 to a Visa card at a store, the store’s bank receives about $2.25 of the $100.  The store’s bank forwards about $1.80 — the interchange fee— to the customer’s bank.  Both banks then pay 10 cents each to Visa.  The store’s bank pays another nickel to a third-party processor and keeps the remaining 30 cents.  These funds kept by banks help finance the award programs customers have enjoyed in recent years.
Besides prohibiting minimum purchase requirements, California law also does not allow surcharges (or “convenience fees”) for using a credit/debit card.  Civil Code § 1748.1(a)-(c).  Violating businesses must return the money to the cardholder’s account within 30 days if they receive a letter demanding the refund from the consumer.    If they do not, the customer may sue and the retailer will have to pay three times the money wrongfully charged and will also be liable for attorneys’ fees in the action.
In addition to violating state law, the credit card acceptance contracts (at least for Visa and Mastercard which together control about 80% of the market) also do not allow merchants to charge extra for use of a credit card.  Under those contracts, a small business not following the contract terms could be penalized by the credit card companies themselves for breach of the agreements.
The good news for retailers trying to recoup costs is that existing law does allow retail businesses to offer cash discounts for consumers that choose not to pay with a card.  Civil Code § 1748.1(a); 15 U.S.C.A. § 1666f.  However, the cash price must be presented as a discount to the true price.   More information can be found here.

It is always wise to consult with an attorney if a business has questions regarding its interpretation of a contract.

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