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Come October 1, 2015 there are big changes coming to the payment industry.

The US is the last major market that is still using the old swipe and sign cards.

The familiar card technology is blamed for the fact that the US accounts for nearly half of the world's credit card fraud while only accounting for a quarter of the transactions.

Here are some of the highlights from an article that showed up in my inbox from the Missouri Restaurant Association about the changes taking place on October 1, 2015:

  • Swipe and sign credit cards are being replaced with cards with a chip and will require either a signature or a PIN at the point of sale
  • The way they are incenting everyone to move to the new system is by placing liability on the party that doesn't comply by the date ie:
    • If a customer uses a swipe and sign card the liability is on them.
    • If a customer has a new chip card, but an establishment doesn't have chip technology and forces the client to use a swipe and sign card the liability is on the merchant
  • The new chip based cards will erase themselves if they sense that they are being tampered with.
  • The NRA predicts that the industry will lag behind other industries in adopting this technology with the main reason being that there doesn't seem to be a lot fraud in our industry.

Has anyone started looking into this at all?

How are the payment vendors handling this?

Are the fees and equipment more expensive?

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On July 13, 2012, Visa and MasterCard agreed to a Memorandum of Understanding and a proposed settlement for what may become the largest recovery ever in an antitrust matter (with expected settlement payments valued at approximately $6.6 billion), as well as the second largest class action settlement ever.

In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, 05-MD-1720 (JG) (JO) (E.D.N.Y. Aug. 27, 2010) has been a high-profile case, with a plaintiff class of approximately seven million merchants challenging the practices of Visa, MasterCard, and several of the largest financial institutions in the United States.

The class includes large national retailers and small businesses, many of which are franchise systems (such as restaurants, hotels, and convenience stores), as well as trade associations (such as the National Association of Convenience Stores (NACS) and the National Federation of Retailers).

NACS swiftly rejected the proposed settlement and has already issued a lengthy statement on their website, stating that the proposed settlement does not go far enough in encouraging competition or challenging Visa and MasterCard to be more transparent in their implementation of interchange fees.

The matter dates back to 2005, when several retailers filed a class action complaint alleging the named credit card companies and banks had unlawfully conspired to fix interchange fees paid by retailers for consumer purchases (sometimes referred to as "swipe" fees) and committed other statutory violations.

The interchange rates are determined by Visa and MasterCard. The fees are paid by the retailers to the banks who issue the credit cards and are considered a huge expense to the retailers, especially as more and more consumers prefer to use credit cards for purchases. Trial was scheduled for September of 2012, but if certain conditions are met and the settlement is approved by the U.S. District Court for the Eastern District of New York, the effects of the settlement could prove to be far-reaching for both retailers, including franchisees and other small business owners, and consumers alike.

How the New Rules for Visa and MasterCard Affect Franchise Systems

According to the settlement agreement, Visa and MasterCard must modify their "no surcharge" rules to permit retailers to add a surcharge to credit card transactions at either (but not both) the "Brand Level" (the same surcharge to all Visa or MasterCard credit card transactions, regardless of the card's issuer or product type) or the "Product Level" (the same surcharge to all Visa or MasterCard credit card transactions of the same product type, e.g., Visa Classic Card or Visa Signature Card, regardless of the card's issuer).

Retailers have been allowed to offer consumers incentives for paying by debit card or with cash (already a common practice at many gas stations), but to date, retailers have not had the ability to add a surcharge for purchases made with credit cards in order to offset the expense of processing credit card payments.

The settlement agreement sets forth several disclosure requirements retailers must abide by if they wish to surcharge, which may be burdensome for some franchise systems. These disclosure requirements include the following:

(1) Notifying the credit card companies of their intent to surcharge at the brand or product level at least 30 days in advance;
(2) Posting a clear disclosure notice of the surcharge for consumers at the store entry;
(3) Posting a clear disclosure notice at the point of sale (which states specific information in a manner that does not "disparage the brand, network, issuing bank, or the payment card product being used"); and
(4) Clearly disclosing the dollar amount of the surcharge on the transaction receipt provided to the consumer.

For franchise systems that allow franchisees to accept credit cards as a method of payment, each of these requirements to surcharge raises potential issues for franchisors to consider. Based upon the terms of the settlement, the following are issues for the franchisor to consider if the settlement agreement is approved:

Franchisors should determine whether to adopt a system-wide policy on whether to permit or prohibit surcharges by franchisees for credit card transactions.

While some franchisors may want to adopt a systemwide policy requiring franchisees to add a surcharge on credit card transactions, franchisors must keep in mind that some states' laws (California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas) currently prohibit surcharging for credit card transactions. Also, franchisors should review their franchise agreements to confirm that they have the right to impose such a policy.

Franchisors may want to consider providing their franchisees with the required surcharge notices and require franchisees to use that form of notice if they elect to add a surcharge for credit card transactions. The terms of the proposed settlement agreement require franchisees who elect to surcharge to notify the credit card companies as well as to clearly display disclosure notices at the entrance of the franchised outlet and at the point of sale (similar to how franchisees currently must display state-specific alcohol and tobacco notices).

Franchisors should note, however, that the settlement agreement does not provide guidelines on how the notices must look, so there remains a risk of preparing "non-compliant" notices.

Franchisors should consider revising their operating manuals to include any system policies on the franchisees' ability (or prohibition) to surcharge for credit card transactions.

With respect to franchisors that require franchisees to utilize a proprietary or required computer or POS system, it may be necessary for the franchisor to update its software to enable the surcharge amount to be added to the transaction receipt. However, doing so may be difficult, especially if not all franchisees in the network accept credit cards or if some of the franchisees operate in one of the states that currently prohibits surcharging for credit card transaction.

In determining whether or not to implement a system policy regarding the surcharging of credit card transactions, franchisors should take into account both how many customer purchases are made with credit cards, and whether their franchisees would be negatively affected by implementing a surcharge. For some franchise systems, such as hotels, which rely heavily on credit cards, the decision on whether to permit franchisees to implement a surcharge may be different than with other franchise systems, such as quick service restaurants, which rely on credit cards as a payment method merely for customer convenience.


The disputes between the retail industry and Visa and MasterCard will likely continue, especially if more members of the plaintiff class reject the settlement in In re Payment Card Interchange Fee. Meanwhile, franchise systems will continue to cater to the consumers and their preference for convenience. If the settlement agreement is ultimately approved, franchisors should consider providing their franchisees with guidance on surcharging for credit card transactions before franchisees decide to take action on their own. While the proposed settlement agreement must still be approved, these new developments should prompt franchisors to revisit credit card acceptance policies.

This has been a guest post by Alan Greenfield, Victor Vital and Jenine Hinkle of Greenberg Traurig, LLP.

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