Most merchants dread the idea of surcharging consumers at the point of sale, even if Visa and MasterCard are giving them explicit permission in a proposed legal settlement. But the option could prove valuable to merchants as they negotiate new contracts.

The "no surcharge" clause is part of a multi-billion dollar settlement proposed to end a lawsuit over the networks' fees. The clause could become an important lever for merchants to demand lower credit card interchange rates across the board, several observers say.

"Merchants would be more likely to use the threat of surcharging as a bargaining chip to negotiate lower interchange with the networks," Ken Paterson, a vice president specializing in credit operations at Mercator Advisory Group, said in an interview.

Visa and MasterCard will not be eager to take the risk of driving consumers to another payment method, Madeline Aufseeser, a senior analyst with Aite Group, said in an interview.

"I think merchants are going to try to use the opportunity to surcharge as a way get Visa and MasterCard to lower their overall credit card interchange rates somehow," she says.

Merchants face some obstacles to adding surcharges. New York, California, Texas, Florida, Connecticut, Massachusetts, Colorado, Oklahoma, Kansas and Maine currently ban credit card surcharging.

Even where it's allowed, the complexities of rejecting certain payment cards during the checkout process would be a nightmare to execute.

"Merchants don't want to introduce anything that's going to slow down transactions at checkout in the states that allow surcharging, and the challenge of implementing surcharges for certain cards only in certain locations and training staff would be a huge hassle for them," Aufseeser says.

If the settlement is approved, merchants will have permission to tack an additional fee onto certain card brands or certain products within those brands, if they prove the costs of accepting them cut into their profits. Consumers would be able to avoid the surcharge by using cash instead.

A judge has not yet approved the settlement, and the possibility exists that merchants could void the settlement by exercising a clause enabling them to opt out en masse.

At this early stage, it is not certain yet how merchants will react, Aufseeser says. "But my sense is that merchants are not going to want to turn down a $7 billion settlement; they will use this to push forward through other channels for what they want."

The settlement includes a temporary cut of 10 basis points in interchange rates Visa and MasterCard set. The cut would endure for eight months, which merchants estimate would account for about $1.2 billion.

That is relatively incremental for the card networks and involved banks, Paterson says.

"It's a short-term hit, and one they can plan for," he says.

But the temporary rate-cut opens the door to long-term cuts, which merchants have spent years pressuring Congress to require.

"What lies ahead may well be a permanent reduction in interchange rates, with this settlement as a very clear precedent," Robert Hammer, CEO of RK Hammer Associates, said in an e-mail.

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