We’ve posted a lot of stories of businesses requiring customers who pay with a credit card to make minimum purchases, or pay a surcharge, or show ID. And as we’ve repeatedly said, the businesses’ merchant agreements with the credit card companies forbids these practices. A reader wrote in to argue that this might not be true, as many businesses contract with third-party credit card processors, and are not bound by the merchant agreement. So we did some investigating.

There’s a lot of information below, so here is an executive summary:

• Regardless of who the merchant uses to process credit card transactions, merchants that add a surcharge or require a minimum purchase to accept a Visa or MasterCard credit or debit card are violating their merchant agreement, and you should report them to the bank that issued your card.
• American Express does not forbid minimum purchase requirements, but they require parity with the other credit cards, so a minimum purchase requirement just for American Express, but not for Visa, is not allowed. American Express does not allow surcharges, unless they are assessed as a convenience fee…
• Convenience fees are allowable surcharges for specific types of payments, generally to schools and government entities (like taxes or fines).
• Asking for ID is not prohibited, but refusal to show ID cannot, by itself, be a reason for the merchant to halt the transaction.

We contacted Visa, MasterCard, and American Express about their merchant agreements and asked for clarification. We also spoke with a friend who owns a local bar that, like many other bars in the area, displays a sign requiring a minimum purchase for credit card use. He reviewed his merchant agreement to see if there were any loopholes or discrepancies with what the credit card companies post on their websites. And we asked the companies whether there were any exceptions for educational or government entities, as we’ve received reports from readers that their colleges were charging a “convenience fee” to students who paid with credit or debit cards.

Does this only apply to credit cards? What about when I use my [Visa, MasterCard, American Express]-branded debit card?

We’ve mentioned this before, but it’s worth repeating: the merchant agreement applies to a consumer who uses a debit card with a major credit card company’s logo on it, regardless of whether he signs it or uses a PIN. Note that this is for things like minimum purchases, surcharges, and requests for ID; a credit card often offers additional consumer protections for chargebacks, warranty extensions, and buyers assurance plans.

What’s the deal with third-party processors?

After we posted about a McDonald’s adding 25¢ to credit/debit card purchases, commenter Corporate Shill wrote in to tell us that many small businesses, like bars, use a third-party credit card processor to offset the expenses of purchasing credit card terminals and accepting different cards:

3rd Party CC Processing Companies offer Merchant Bank services to small businesses that cannot afford to offer CC services to their customers, or to businesses that have been denied CC processing by Merchant Bank.

(In simple legal terms the 3rd Party Companies will act as a straw man between the Merchant Bank and the business that actually accepts the CC from the customer.)

In addition to offering Merchant Bank services the 3rd Party CC Processing Company will often provide the data terminals and supporting equipment at a very low cost or even free to their clients. The data terminals, because they are accessing the 3rd Party network rather than an actual Merchant Bank network, can be programmed to accept an even wider variety of CC’s and perform other functions, such as check clearing.

We asked the credit card companies whether a merchant that contracts with a third-party processor still has to adhere to the merchant agreement: MasterCard simply said “Yes,” and American Express said that these merchants still sign a contract with the credit card company regardless of how they sign up for card acceptance. Corporate Shill disputes this, saying that using a third-party processor does not require the merchant to sign an agreement with the credit card companies, but the companies, at least American Express, disagree.

Are government and educational entities exempt from these rules? What is the exception for convenience fees?

MasterCard says:

We allow a “convenience” to be charged by certain educational institutions and public sector merchants, including:

• Elementary and secondary schools for tuition and related fees, and school-maintained room and board
• Colleges, universities, professional schools, and junior colleges for tuition and related fees, and school-maintained room and board
• Local, state, and federal courts of law that administer and process court fees, alimony, and child support payments
• Government entities that administer and process local, state, and federal fines
• Local, state, and federal entities that engage in financial administration and taxation
• Government Services; merchants that provide general support services for the government

In addition, 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. For example, a merchant that has a website that accepts MasterCard, Visa and direct debit to a checking account as its three forms of payment, may ask for a surcharge IF the fee is applied to all three methods of payment. The same applies to a merchant that has a physical store that accepts cash, checks, MasterCard and Visa. The store can charge a fee as long as the fee is applied to all four methods of payment.

American Express says such fees are only allowed “in very limited industries, for example, taxes.”

Can a merchant ask for ID with I pay with a credit card? Can I refuse to show it?

We’ve addressed this before, too, and it also bears repeating, along with a little elaboration from MasterCard: “However, to be clear, the MasterCard rule does allow merchants to ask for ID. Our rule prohibits the merchant from refusing to perform the transaction solely on the basis of the cardholder refusing to provide the ID. (If the merchant asks for ID and the cardholder refuses, then the merchant can either perform the transaction or call their acquirer for direction.)”

That being said, this isn’t going to help you when you’re out of cash and the guy at the convenience store won’t let you charge that can of Drank. But reporting these violations, to the credit card company, to your issuing bank, and to us (preferably with pictures), will draw enough attention to the merchant that it will, hopefully, change its way.

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