Surcharging Rules are Multiplying, and ISVs Are in the Middle

Surcharging compliance, once the sole domain of card brands, has spread into a patchwork quilt of state regulations that is making software providers and their payments partners feel the squeeze.

The issue has little to do with the card brands, which altered their rules in 2013 to allow surcharging on credit card transactions, says Tyler Kattre, president of Wind River Payments, a Madison, Wis.-based payments company. Between 30% and 40% of its clients surcharge on credit card transactions, he says, with simpler programs for a business ranging from a bait shop to an e-commerce site, which has to accommodate consumers outside of the merchant’s home state.

The complexity today is that many states have their own regulations for surcharging, creating a compliance matrix that is challenging and difficult to meet. “The concepts themselves aren’t complex,” Kattre tells Digital Transactions News about how surcharging works. He likens the compliance matrix to that of obtaining money- transmitter licenses, with each state having its own compliance stipulations.

*Kattre: “Often these ISVs are stuck between software development and the merchant, who is ultimately held responsible for compliance.”*

This creates an issue for independent software vendors and their payments partners, especially for those with e-commerce operations. Kattre says tracking regulatory changes is a growing compliance function, though it’s a type of non-product work that is hard to quantify and easy to overlook when more pressing priorities surface. Software developers are a limited resource for many, and that can move the compliance issue to companies like Wind River, he says, though the ultimate responsibility lies with the merchant.

“Compliance is ultimately the merchant’s responsibility, but there are two separate areas to consider: applicable laws and card network rules,” says Peter Michaud, chief payments officer at TSG, an Omaha, Neb.-based payments advisory. “States periodically change their laws, typically with some lead time. The networks also update their rules every six months and generally provide advance notice. The merchant is responsible for keeping up with both.”

This kind of flux means the regulatory landscape is hardly settled. “Often these ISVs are stuck between software development and the merchant, who is ultimately held responsible for compliance,” Kattre says. “Their challenge is they’re the ones playing messenger.” To help ISVs, Wind River has staff who track the changes, though it’s a combined effort and challenging to track each change.

Compounding this issue is that there is no unified directory of all the state regulations, though most states abide by the card-brand rules alone. Surcharging is not allowed in Connecticut, Maine, Massachusetts, or Puerto Rico, a Stripe Inc. post says.

“Regardless of the type of compliance involved, there hasn’t been enough public information about enforcement actions to determine who may ultimately be held responsible for non-compliance,” Michaud says. “If the merchant violates the law, it may be subject to the fines or other penalties. Would the state seek fines or assess penalties to the processor, independent sales organization, or payment facilitator?”

Whoever helps the merchant navigate its surcharging compliance, Kattre suggests the merchant not be satisfied with a one-size-fits-all answer. “It’s far more complex,” he says. To help, Wind River uses a checklist during its consultative discussion with a merchant or ISV. The goal is to ensure they understand what they’re signing up for, he says.

Until enforcement becomes clearer, Michaud says, the industry lacks visibility into the problems that may arise. His analogy is driving: you can exceed the speed limit, but you’re penalized only if you’re pulled over, and the judge decides the severity.

Kattre’s advice is to ask now. If merchants don’t, he says, “the fines are going to hit you.”