Discover Card agreed to drop its requirement that merchants not add a surcharge onto purchases made with its credit cards, according to a joint press release from the two law firms representing credit card merchants in a class action lawsuit against the major credit card payment networks. In return, Discover was removed from the list of defendants in the suit. Credit card surcharges are added on top of the sale price of items for customers that make purchases with credit cards. If you’re not familiar with them, it’s because so far they are rarely a reality — merchants are generally not allowed to charge them, due to their agreements with the credit card payment networks including Visa, MasterCard, American Express and Discover, and, in some cases, due to state laws that forbid sellers from charging customers more based on the type of payment used.

The class action lawsuit, brought by law firms Friedman & Shube of New York City and Reinhardt Wendorf and Blanchfield of St. Paul, Minnesota, aims to require all the payment networks to drop the rules against credit card surcharges. The class action suit has not been resolved, but Discover’s decision to change its rules removes the company from any further legal issues associated with it. According to Noah Shube of Friedman & Shube, merchants are currently forced to raise prices across the board in order to compensate for the burden of the fees they must pay the credit card payment networks (usually between 1 and 3 percent of a credit card purchase).

Without the surcharge restriction, Shube says merchants would have the freedom to add a charge for those who use credit cards as payments while giving a break to those who use other payment methods. He says the current rules against surcharges allow card issuers and the payment networks to charge high fees, which in turn allows them to offer rewards to credit card users who are unaware of the fees that merchants pay. In his view, this forces merchants into paying unfairly high fees without the possibility of new, lower-priced payment networks entering the market. Shube praised Discover as “the low cost provider” in payment networks and said Discover dropped their requirements after seeing the writing on the wall in terms of how the class action suit will play out.

Late yesterday a contrary viewpoint to Shuba’s appeared. Americans for Consumer Education & Competition, a group chaired by former Republican Congresswoman Susan Molinari and financed by Visa, issued a press release with the headline “Discover Card Abandons Cardholders in Battle Against Check Out Fees”. From the ACEC’s viewpoint, Discover’s move is simply giving in to the merchants’ attempt to strongarm the payment networks into providing a valuable service without getting adequate compensation. “Discover Card waved the white flag to merchants and handed over their cardholders in the battle by retailers to impose check out fees on consumers who pay with plastic,” said Molinari.

“The fact is that merchants benefit from offering credit and debit options to consumers,” according to Molinari. “Merchants seem to think consumers ought to pay for their own goods and the retailer’s decision to provide the credit option.” Whether the courts will see the “no surcharge” requirement as a hindrance to competition or a consumer-friendly stipulation remains to be seen, but as of today Discover has taken itself out of the dispute.

Published 02/14/06 (Modified 05/07/12)