Rolling out a credit card surcharge program: hot topics and best practices

1. Rolling out a credit card surcharge program: hot topics and best practices Brad Boe Director of Credit Brad.boe@pfgc.com Mike Bevilacqua Sr. Director Credit & Collections Mike.bevilacqua@pepsico.com Ron Clifford, Esq. rclifford@blakeleyllp.com Scott E. Blakeley, Esq. seb@blakeleyllp.com

2. Increase in the Use of Credit Cards in the B2B Space Card Driver Use • Card Network Perspective • More card use – B2B space • Marketing efforts to customers • Customer’s Perspective • Card as extended terms • Improved cash flow • Convenience • Cardholder’s Perspective • Points and miles • Reimbursement Source: Wall Street Journal https://blogs.wsj.com/cfo/2014/10/28/b2b-credit-card-payments-jump/ National Small Business Association http://nsba.biz/wp-content/uploads/2018/02/Year-End-Economic-Report-2017.pdf

3. Making Credit Cards a Price Competitive Payment Channel • The Vendor’s Teams’ Evaluation of Surcharge Rollout: • Critical Supplier or One of Many • Implementation Costs • Decreased DSO • Total spend vs. profit/loss of surcharge • The Customer’s Perspective • The Cardholder’s Perspective

4. Making Credit Cards a Price Competitive Payment Channel Supplier payments

5. Card Surcharge Flow Chart Card Company Rule Compliance Rule Changes PCI Legal Compliance Anti-Surcharge Legislation Card Holder Privacy Rights Chargeback Fraud Vendor’s Card Agreement w/ Customer, including T&C’s Internal Card Policy PCI Compliance Vendor’s Best Practices

6. The Six Card Network Rules for Surcharging • Disclosure to networks and cardholders • Calculating the surcharge • Level playing field • Stratification • Debit cards • International transactions

7. State No Surcharge Laws • California • Colorado • Connecticut • Florida • Kansas • Maine • Massachusetts • Oklahoma • New York • Texas Uniform Theme: Protect consumers within their states from retailers adding a charge to cards, therefore acting as a form of tax on those consumers choosing cards to pay for their goods or services.

8. New York Litigation Challenges to No Surcharge Laws October 2013: Southern District of New York finds no-surcharge law unconstitutional March 2017: U.S. Supreme Court rules law impermissibly regulates commercial free speech and remands September 2015: U.S. Court of Appeals for the 2nd Circuit reverses decision of district court, making the ban enforceable 8 Florida September 2016: Supreme Court takes no action on the petition September 2014: District court upholds the no-surcharge statute November 2015: U.S. Court of Appeals for the 11th Circuit vacates the decision of the District Court December 2017: 2nd Circuit certifies to N.Y. Court of Appeals to answer specific question on no-surcharge law Texas February 2015: District court upholds the constitutionality of no-surcharge law March 2016: U.S. Court of Appeals for the 5th Circuit affirms decision of district court, keeping the ban enforceable April 2017: U.S. Supreme Court remands to following ruling with New York law. May 2017: 5th Circuit remands to district court to conform ruling with New York court. California March 2015: District court rules the surcharge ban is unconstitutional January 2018: U.S. Court of Appeals for the Ninth Circuit affirms, finding California’s no-surcharge law violates commercial free speech

9. U.S Supreme Court Upholds Anti-Steering Provisions in American Express Case • The federal government, along with several state Attorney Generals brought a case against American Express for its anti-steering provisions for being anticompetitive. • Anti-steering provisions in contracts between American Express and merchants prohibit merchants from steering customers to cards with lower interchange fees through incentives or other means. • The Supreme Court held that the anti-steering provisions were not anticompetitive to cardholders and actually allowed American Express to offer more benefits to its cardholders.

10. Visa and MasterCard Near a Settlement in Antitrust Litigation • A class action initially commenced in 2005 by merchants against Visa and MasterCard over interchange fees, tying and bundling, and anti-steering provisions • By July 17, 2018, a settlement agreement between the parties should be reached. • Some terms that may be included: • Visa, MasterCard, and the card issuing banks will pay the merchants $6.5 billion. • Though details on interchange fees have yet to be reported, they may be lowered even if just temporarily • Merchants who do not take the settlement will still be able to commence an action against Visa and MasterCard regarding these fees.

11. Canadian Credit Card Settlement • In 2014, after discussions with the federal government, Visa and MasterCard agreed to voluntarily reduce their merchant fees for 5 years • In 2017, the class merchants and Visa and MasterCard agreed to a settlement, under which each Visa and MasterCard will modify its no-surcharge rules and each pay C$19.5 million (US$14.7 million) • The rules will come into effect no later than 18 months after court approval of the settlement • Merchants should expect a transition period following court approval of the settlements: • Card Companies will publish literature that officially establishes the new card network rules • Card Companies will distribute new payment terminals to merchants with labels notifying customers of the merchant’s right to surcharge

12. Credit Card Acceptance Policy Review • Give a background for adopting the policy • Define the policy requirements in a policy statement • Define the reasons for establishing a policy • Define the scope of the policy • Address the Visa and MasterCard rules modifications

13. Credit Card Acceptance Policy Should Define Policies and Procedures • Acceptable payment cards • Who is the policy applicable to • Are surcharges imposed at the brand level or product level • Define banner exceptions • Define prohibited card activities, i.e. cash advances • Define debit card prohibitions • How are payment card fees allocated to your various operating companies, i.e. on a transactional basis or monthly basis • How do you handle refunds • How do you handle chargebacks • How are discounts handled • Reconciliations • Define your rate structure • Maximum surcharge cap adjustments • Methods to accept credit cards • Under what terms of sale will you accept credit cards and are your operating companies given discretionary autonomy in this matter • Level I, II, III processing • Card not present processing • How to ensure the lowest possible transaction rate • Security of cardholder information • PCI compliance policy • Choice of law/venue enforceability

14. The Surcharge Rollout • This may be complex and should be preceded by a Credit Card Surcharge Project Matrix with the following: • Define and document customer treatment • Establish/declare universal surcharge, variable surcharge and maximum surcharge rates • Establish/declare surcharge applicability • Implement infrastructure and technology capabilities • Develop and publish disclosures • Operationalize credit card surcharge administration and application

15. The Surcharge Rollout • It’s a Negotiation! • Vendors should negotiate with credit card companies for exceptions and concessions • The larger a vendor’s credit card sales volume, the more leverage that vendor has in negotiations

16. Lowering the Interchange Fee • Depending on the detail of the information that is passed along with the card transaction, it may qualify for lower interchange rates. Below is the information required to lower interchange fees categorized into three levels: • Level 1: Customer location, zip code; merchant name; transaction amount; date; • Level 2: Level 1 information and customer tax ID number; business and corporate cards must include sales tax number; purchasing cards must include sales tax and customer code; customer minority code and customer state code; and • Level 3: Level 1 and Level 2 information; corporate cards must include line item data; item product code and/or item name

17. Best Practices for a Vendor’s Credit Card Payment Program • Internal Credit Card Policy • In-house procedures for accepting cards, surcharging cards, storing cardholder information and mitigating risk of chargeback and fraud • Ensures company-wide compliance with anti-surcharge statutes and credit card company rules • Vendor’s Credit Card Agreement • Key language: • “Applicant” should be defined as “the customer buying from [vendor] or any person, natural or legal, who uses their credit card to make payments on behalf of the customer • In this way, agreement is applicable to both personal cards and corporate cards • Governing Law and Venue provision: • Vendor may also consider venue provision

18. Reducing Processor Fees • How can your processor assist your company with implementing level III credit card processing – level of effort, cost, IT resources, testing, etc.? • Does your processor have a recurring engine for setting up recurring credit card payments automatically with flexible billing intervals with either a fixed or variable amount owing and can such transactions be processed at level III? • Does your processor support straight through processing (STP)?

19. Reducing Processor Fees • Does your processor support VPP and does your processor charge for participating in the VPP program by implementing the rates through a custom interchange table? • Does your processor have the ability to eliminate a gateway thereby reducing costs and increasing authorization approval rates? • Does your processor have a card updater that automatically updates cardholder cards that are about to expire? • Can your processor process all credit card transactions at level III? The reason being is that some processors will drop transactions that are not level III eligible (rewards cards, etc.). Ineligible level III transactions will be dropped by some processors to shed level III data and must be resubmitted involving another layer of coding complexity for your EIPP site. Level III data would have to be omitted from consumer cards which would be a function of your EIPP provider through additional coding with your processor.

20. The Logistics of Accepting Credit Cards In the B2B space, a card-not-present transaction over the phone or internet is the most likely means of processing credit cards. Virtual Terminals can be established wherein the customer’s credit card information is manually entered by the vendor before being sent through a payment gateway for processing by a processor. Does your processor have a hosted pay page, e.g. its own virtual terminal outside of your system, for offloading credit card transactions away from your source systems in a card not present environment?

21. PCI Policy and Considerations • Purpose • Audience and Scope • Statement of Policy • What is PCI? • PCI and Card Settlement Opportunities • PCI Breaches • PCI Overview • What are your current challenges with PCI? • Assessment Approach • Credit Card Handling Summary • Electronic Data Handling • Physical Data Handling • Enforcement and Exceptions