Spokane-area merchants are wrestling with whether to begin assessing customers a credit-card surcharge—or swipe fee—of up to 4 percent of a purchase amount, as now allowed following the recent settlement of a class-action lawsuit.

Beginning Jan. 27, businesses could impose the surcharge under certain requirements in most states as part of the settlement approved by a U.S. District Court judge in New York. The settlement followed a 2005 lawsuit brought by retailers against Visa Inc., MasterCard Inc., and bank credit-card issuers.

Under the settlement terms, retailers are allowed to charge customers a fee that is roughly equivalent to the amount they are charged in credit-card swipe fees, typically between 1.5 percent and 4 percent of the purchase price based on a number of factors, including processing fees.

"We pay over $1,000 a month in credit-card fees, which is huge for a small business," says Kammy Magnuson, owner of Rockwood Bakery, on Spokane's South Hill. "I'm not sure what I'll do. I can't imagine people being willing to pay more with what costs are today."

A credit-card surcharge can't be levied in 10 states, including California and Colorado in the western U.S., where state law prohibits them. The settlement also doesn't apply to debit cards held by bank or credit union customers for access to their bank accounts. Typically, businesses pay a flat fee for debit-card swipes. Provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that took effect in October 2011 cut in half debit-card swipe fees, but didn't affect credit-card fees.

The court settlement requires businesses that opt to impose a credit-card surcharge to post signs that disclose the percentage being applied, and the fee must appear on a client's receipt as a separate line item.

Dave Hooke, owner of a Senor Froggy eatery at 3024 S. Regal on the South Hill, doesn't think many restaurants will add the surcharge. Until recently, he served for several years on the Washington Restaurant Association board.

"My understanding of it is, it really doesn't do the restaurant industry any good," Hooke says. "I don't think that is very realistic. You'd have to know if it's a debit card or a credit card, and what the restaurant pays."

Hooke adds that understanding the cost of the fees becomes complex depending on the type of credit card used, and Visa's and MasterCard's pricing schedules.

"It would be a competitive thing," he adds. "If it caught on, I'd love it, but I wouldn't be the first to try it. You're in a sense penalizing a customer for using a credit card. I think most restaurants including myself would just reflect that expense in overall pricing."

Geoff Forshag, co-owner of Two Wheel Transit Bicycles at 817 S. Perry, used to work in the banking industry and is familiar with the court settlement. However, he says the bicycle shop doesn't have any plans to impose the surcharge.

"It's about costs, versus convenience and relationship with the customers," he says. "I think every merchant is weighing that. So many people don't carry cash or checks anymore. We wouldn't want to penalize customers who use credit cards as a convenience."

Mike Shellenberger, Washington Trust Bank senior vice president and manager of its commercial-retail services group, says the bank recently emailed information about the surcharge option to between 1,500 and 1,600 merchant customers in Washington, Idaho, and Oregon.

He says the bank provides credit-card processing merchant services, mainly to small- and medium-sized businesses. He adds the responses so far to the bank's email indicate that many merchants hadn't heard about the option or were confused whether it might be a bank-imposed fee.

"I think many of them are having to think about the amount of transactions they have, and whether psychologically it could put a bit of a barrier up with customers," he says. "There is a lot of decision-making going on at the merchant level about whether this is a good idea or not."

He adds, "I'll be surprised if many of our merchant clients actually avail themselves of this, mainly because of how it might impact their sales."

Rich Conley, who manages the family-owned business that operates two White Elephant toy and sporting-goods retail stores here, says he'll have to research the surcharge option before deciding.

"It's hard to say whether I'll do it or not; I'll have to see what the competition is doing," Conley says. "We're very price conscious. If the big box stores aren't, then we probably won't."

He adds that in the past, credit-card companies made it clear that merchants couldn't add any fees to customers at checkout. "That's all we've known up to this point. On fishing and hunting licenses, we make no profit, and if customers use credit cards, we have to pay the fee."

Business owners say small purchases on credit, such as under $5, are what really cut into profits.

The High Nooner, with four Spokane-area sandwich shops, has posted signs notifying customers the business will charge a small percentage for purchases under $5, says manager Jim Lucas.

"We currently do charge a surcharge for any purchase under $4 for both credit and debit; our machine doesn't know the difference and runs them the same," Lucas says. "If you want to purchase a $2 soda, that's going to cost you $2.25."

He adds, "For the most part, customers are OK with it. We don't have a lot of purchases under that amount. We do have one outlet that serves lattes, and they do come in under that amount. We persuade them to pay for a prepaid gift card, and that actually saves them money."

Several business owners who were interviewed, as well as Washington Trust's Shellenberger, say that the fees on credit cards have a complex pricing structure that varies, depending on such factors as a card's brand, any reward incentive, and whether the purchase was made online or in a store.

Within three days of the Jan. 27 effective date, Shellenberger says the bank still was waiting to get final fee pricing information from Visa and MasterCard as a result of the settlement. However, he says bank employees were gearing up to act if business owners elected to collect the surcharge.

"If one of our merchants does decide to charge customers a surcharge, we'd have to download new software to their terminal, so that surcharge would show up on the receipt," Shellenberger says.

The original court battle alleged Visa and MasterCard conspired with large banks that issue credit cards, including Bank of America Corp. and J.P. Morgan Chase & Co., to set the fees at arbitrarily high levels, a Wall Street Journal story says. Visa and MasterCard set the fees. The settlement reached in July would result in payments totaling $6 billion going to a class that could include up to 8 million merchants, as well as a temporary reduction in the fees worth $1.2 billion.

The Wall Street Journal also reported in December that large retailers, including Home Depot Inc., Wal-Mart Stores Inc., and Target Corp., and several trade groups such as the National Retail Federation, have lobbied against the settlement. The groups argue it grants overly broad releases from future litigation to Visa and MasterCard and will do little to stop future swipe fees increases, the article says.

Despite whether the swipe-fee debate continues, merchants here say a majority of consumers are paying more often with plastic than with cash or checks.

Forshag, at Two Wheel Transit, says between 90 and 95 percent of that shop's transactions are with credit cards, "so it's a significant expense for the fees paid." However, at the shop's average transaction of $200, a credit card user would pay up to an $8 surcharge if applied, he says.

He adds, "Then there would be the need to notify customers, then separating it out. That becomes a pretty onerous part of the transaction. That's probably on business owners' minds."

Senor Froggy's Hooke says the reality is that more people are using plastic even for small amounts.

"Now I do 60 percent of my business with credit and debit cards," he says. "About 20 years ago, it was 3 percent. People are paying with plastic. The next thing is paying with cell phones."