In this episode I’ll discuss the relation between the concept of passing processing costs to consumers and debit transactions.  There are several programs which assist merchants in passing costs to consumers, such as cash discounting, in-kind incentive programs, non-cash adjustments, and surcharging.

The “craze” in our industry concerning this concept was started by the court case involving Expressions Hair Design of New York.  Expressions Hair Design lead a group of merchants to allege that the state of New York was unconstitutional in banning merchants’ freedom to surcharge.  The case went all the way to the Supreme Court.  They won their case.  The Supreme Court unanimously agreed that telling merchants how to communicate their prices to consumers is a violation of the First Amendment free speech rights.

Although the case was won, merchants are still not allowed to surcharge debit.  I am not an attorney; this is not legal advice.  But to my knowledge there are no federal laws which discriminate between a debit and credit transaction.  I’m not familiar with the state laws of every state, but most states don’t have any such laws either.  The reason merchants can’t surcharge debit is Visa rules.  Visa has specific rules about surcharging.  Visa rules prohibited surcharging until the Expressions Hair Design case ruling.  Surcharging is now permitted by Visa but not on debit transactions.

There is some confusion among industry sales people concerning signature and pin debit.  Understand these are different and that surcharge fees are prohibited for both.  When a debit card is swiped for payment, consumers must answer whether to use the card as credit or debit.  In either case, to add surcharge fees is not compliant with Visa rules.  Some reps assume if there is no set-up of pin debit, the surcharge can be applied to everything.  Whether the card is run as signature debit or pin debit, it is still a debit card.  The machines doing surcharge will recognize the card as debit and won’t add the fee.

Can the service fee be added to debit when using a cash discount program (these could also be called non-cash adjustment or in-kind incentive)?  The concept of these types of programs is to incentivize consumers to use cash.  If the payment is not cash, the service fee (or “price increase” is the proper term to use from a compliance perspective), is added.  When running a transaction as a credit card, the transaction is running over Visa/MasterCard rails and logo.  Therefore, the industry pretty well accepts that signature debit is their brand.  That is considered credit rather than cash.  Thus, the price increase is added on those transactions.

I’ve noticed a trend lately relating to the use of pin debit cards for cash discount programs.  Companies are looking at pin debit as cash.  Thus, the fee is not added for those transactions.  This is interesting from a compliance perspective; the transaction seems a bit more compliant.  This trend also gives consumers an option to avoid fees or price increase.  However, I’m not 100% sold on the trend yet.  Surcharging has strict law that forbids fees on pin debit or signature debit.  Thus, adding a fee to signature and not pin debit does get tricky.  Today I’m not giving my opinion whether “yes” or “no”, “good” or “bad” on that issue.  I think there are pros and cons.  One other benefit is that consumers might be less likely to complain about this type of arrangement.  Consumers’ complaints to their banks are the foundation for all the industry issues.  The complaints get to Visa.  Visa investigates, reaches out to the acquirer, and troubles ensues.

The Durbin Amendment mentions two programs which are protected – cash discount and in-kind incentives.  It also specifies that “discount” means not increasing the regular price.  Personally, I prefer the non-cash or cash discount programs to mean, “If you pay with cash, great.  If you don’t pay with cash, there is a non-cash adjustment.”  But this is certainly a complicated issue.

The big take-aways from this episode:

#1.  If doing a surcharge program and desiring to be compliant, you absolutely cannot surcharge pin debit or signature debit.  Even if merchants don’t have a pin pad, there can only be surcharge on 40% to 60% of transactions, the rest being signature debit.

#2.  If you have an in-kind incentive program like non-cash adjustment, consider saying, “Let’s give them the pin debit option and not add the non-cash adjustment to that.  We’re going to tell them that pin debit is considered the same as cash or cash equivalent.”  That gives consumers an extra out.  I’ve seen a lot of larger ISOs going that direction.  In talking to them about it, I find that strategy very interesting and helpful with compliance.
Hope you have an awesome day!

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