How the New York Supplier Surcharge Ruling Affects the Credit Team

Scott Blakeley, Esq.

New York State Court of Appeals Ruling Requires Fuller Disclosure for Supplier Surcharging: What it Means to the Credit Team and a Nationwide Surcharge Rollout

By: Scott Blakeley, Esq

While The New York State Court of Appeals has ruled on the topic of surcharges, the matter has been sent to the Second Circuit Court of Appeals to determine the law’s validity. Pending the court’s opinion, credit practitioners should be aware of the potential impacts to the billing process. CRF will report on the Second Circuit Court of Appeals as their opinion is rendered.

On October 23, 2018, the New York State Court of Appeals (Appeals Court) delivered the response to a certified question handed down from the U.S. Federal Court of Appeals for the Second Circuit: What must the merchant (supplier) disclose to customers when they surcharge in order to comply with New York’s no-surcharge law – the percentage cost of acceptance, or something more, by actually calculating the dollar amount of the surcharge?1

According to the majority opinion from the Appeals Court, a supplier must disclose the total dollar amount of the surcharge, not merely the surcharge percentage (say 2.25%) to comply with New York’s no-surcharge law. What does the Appeals Court’s ruling mean for suppliers’ surcharge disclosure to customers, especially in contrast with the Visa and MasterCard surcharge rules?

History of litigation challenges to NY no surcharge laws
History of litigation challenges to NY no surcharge laws

Enacted in 1984, New York’s no-surcharge law prohibits sellers from imposing a surcharge on customers who use credit cards in lieu of paying by check, cash or other payment forms. In 2013, five merchants, led by Expressions Hair Design, sued New York in federal court arguing to restrict the enforcement of New York’s no-surcharge law as a violation of First Amendment rights and being unconstitutionally vague. Merchants’ claim to the violation of First Amendment rights stemmed from the method used to display price differentials to customers.

Making its way through the Southern District of New York to the Second Circuit Court of Appeals, it reached the U.S. Supreme Court in 2017. The Supreme Court vacated the Second Circuit’s ruling that New York’s no-surcharge law does regulate speech through the “communication of prices rather than the prices themselves.”2

The Second Circuit tasked the New York State Court of Appeals to clarify New York’s surcharging disclosure requirement to customers.

Visa and MasterCard Surcharge Rule Disclosures

In 2013, Visa and MasterCard amended their network rules to allow for surcharging. To comply with the network rule surcharges, suppliers must disclose to customers their surcharge, which is the interchange fee, and cannot bury the surcharge through a price increase. The customer surcharge disclosure, which can be a line item on an invoice, does not require the supplier to do the math and calculate the dollar amount of the surcharge on the invoice. For New York, the Appeals Court’s ruling requires the supplier to actually calculate the dollar amount of the surcharge.

New York’s Surcharge Disclosure Ruling

The Appeals Court’s decision provides further analysis to the recent surcharge decisions in California, Florida, and Texas. Retailer litigation challenges in each state has defeated its no-surcharge laws. The Appeals Court found the no-surcharge law to be a disclosure law and clarifies the disclosure detail suppliers must make to comply with New York’s no-surcharge law.

The Court Mandates Specific Disclosure of Surcharge Amount

A majority of the Appeals Court found New York’s no-surcharge law is violated when a supplier does not disclose to customers the full dollar cost of the surcharge. Merely disclosing the interchange fee as the surcharge is not sufficient under New York’s law, although sufficient under the card network rule, as it may be confusing for customers to undertake an arithmetical calculation to evaluate total cost.

The Second Circuit Court of Appeals will now determine whether New York’s no-surcharge law is a valid restriction on commercial speech and either accept or reject the Court of Appeal’s interpretation to issue a final ruling.

What the Court’s Ruling Means to the Supplier Surcharge Rollout

The most expedient way for a supplier to comply with the Appeals Court’s ruling is to calculate the surcharge amount by disclosing both the interchange percentage amount (say 2.25%) and multiplying that by the invoice amount. In other words, the supplier does the mathematical calculation. Given a supplier’s nationwide surcharge rollout, a best practice may be to make this calculation and disclosure no matter where the customer is located.

Scott Blakeley is a principal at Blakeley LLP, where he practices creditors’ rights and bankruptcy. His email:




1- Expressions Hair Design, v. Eric T. Schneiderman, &c.100.U.S.1,2[2018].
2- Expressions Hair Design v Schneiderman, 877 F3d 99, 101 [2d Cir 2017].

Delinquent Accounts Remain A Problem For All Credit Professionals

By Scott Blakeley, Esq.

Credit professionals face delinquent accounts on a regular basis. But before a company begins to take action in order to remedy the delinquent account, it’s important to know when to consider an account delinquent.

Technically, a delinquent account is one that fails to pay by the agreed-on date. However, these terms may be flexible depending on the type of customer and the type of vendor you are.

Should a customer pay beyond terms, it’s important to remember that they have still paid. Look to their payment history to determine if their lateness is business-as-usual or if it’s some sign of a major malfunction. If so, then it might be time to call it a delinquent account and work to get your money. It’s also important to consider your own business; if an account represents an important amount of business for a credit extending company, it might make sense to relax the standards a bit.

While there isn’t an industry rule on what constitutes a delinquent account, there are vendor-by-vendor guidelines on what should be considered delinquent. In certain industries, it might be acceptable to delay payment for certain reasons that wouldn’t be acceptable in other industries. Credit professionals should be well aware of these things before pursuing a delinquent buyer.

Once you’ve established that you have a delinquent account on your hands, it’s important to take action. If a company fails to do so, it could face serious losses. For some companies, accounts receivable may be their most valuable asset. If they’re not able to collect, then their revenues may be off and any consequences could be dire.

In addition to the obvious financial pitfalls, a company who fails to address its delinquent accounts could wind up raising an eyebrow or two at governmental agencies. A publicly traded company that fails to collect a large sum of money will have to change its reported numbers. It could require them to give notice that they may not be making their earnings targets.

There are a number of ways to collect on a delinquent accounts, one of which is filing suit and using litigation to your advantage. CMA offers many educational webinars on the topic, and much of the conversation at CMA-sponsored Industry Credit Group meetings focus on this topic.

For more information about Industry Credit Groups, click here.

For more information about upcoming educational events, click here.

Supply Chain Bankruptcy Preference Releases: Good News for the Credit Team, But Watch for the Claim Offset, By: Scott E. Blakeley, Esq.

As originally published in the Credit Research Foundation 2Q 2018 Credit & Financial Management Review


In managing credit risk with an insolvent customer, the seasoned credit team also appreciates not just the A/R risk, but the preference risk should the customer file bankruptcy, or an out of court liquidation such as an Assignment for Benefit of Creditors. In some settings, suppliers may have larger exposure with preferences than with A/R. The welcome news for suppliers is that a number of large Chapter 11 filings have included supplier preference releases as part of their negotiated exit from Chapter 11. But with a provision in a Chapter 11 that provides for a preference release, suppliers holding priority claims should be mindful that the debtor may take back the supplier chain preference release through a reserved claim objection.

The Bankruptcy Preference

The Bankruptcy Code vests the trustee with far-reaching powers to avoid payments to suppliers within 90 days prior to a bankruptcy filing, and is one of a debtor’s most potent weapons to discourage a supplier’s collection strategy of racing to the courthouse to seek a judgement against the insolvent customer.

Supply Chain and One-Off Preference Release

Several high-profile companies have exited Chapter 11 with a plan of reorganization that provides for release of preference actions against the supply chain. Recent case examples include Rue 21, Haggens Supermarkets, Gordmans and Central Grocers. These cases highlight the Chapter 11 exit strategy in two settings: (1) a sale of assets, with an asset purchase agreement negotiated between the debtor, the buyer and creditors’·committee, that includes a preference release; or (2) an operating plan negotiated by the debtor, secured creditor and creditors’ committee that includes in the Disclosure Statement and Plan, a preference release. In both settings, title supplier qualifies for the preference release by offering credit terms for their product or service to the buyer or reorganized debtor upon exit from the Chapter 11.

If the debtor does not propose a supply chain preference release, the supplier may seek to negotiate a preference release only for its own potential liability. The one-off preference release is commonly through a negotiation of supplier trade terms in exchange for early payment of the supplier’s 503(b)(9) claim.

With the sale of asset cases, a Trust is created for purpose of retaining the estate’s preference actions and sale proceeds. The party responsible for the Trust’s assets is often referred to as a plan administrator. The responsibilities of the plan administrator are to maximize the Trust’s assets and limit its liabilities. One way to limit liabilities against the Trust is through plan administrator objections to claims submitted by suppliers.

A claim objection can be such things as books and records-the debtor’s reconciliation of the supplier’s claim does not match, or a late filed claim. Another strategy for the plan administrator to reduce claims is object to a supplier’s claim based on the supplier having received a preference. But does such an objection have merit where the Plru1 provides for a supply chain preference waiver? Is such an objection, selective enforcement of the preference powers as these types of claim offsets are commonly asserted against suppliers, asserting 503(bX9) claims?

Claim Objection Based on Preference

A plan administrator may object to a supplier’s claim, most likely a 503(b)(9) claim, under section 502(d) of tl1e Bankruptcy Code. Section 502(d) provides, in pertinent part, that “the court shall disallow any claim of any entity from which property is recoverable “under the preference statute, unless the preference is repaid.

How might a plan administrator support a section 502(d) claim objection where a debtor under a confirmed Plan releases suppliers from preferences?

For example in In re Gordmans, the confirmed Plan (at Article VII. paragraph F) provides:

Any Claims…recoverable under section …547 of the Bankruptcy Code, shall be deemed disallowed pursuant to section 502(d) of the Bankruptcy Code…

However, Article VIII, paragraph C of the Plan provides an unconditional preference release to suppliers from preferences. Thus, the question for a supplier holding a 503(bX9) claim is whether a plan administrator may disallow the supplier’s claim under section 502(d) on the grounds of an alleged preferential payment, even though a preference action cannot be filed as a result of the preference release.

Does the Legal Authority Support the Supplier Dealing with a 502(d) Claim Objection?

In most Chapter 11 cases, suppliers holding non-priority claims generally do not receive a distribution. Rather, only those suppliers holding priority claims. Generally 503(b)(9), receive a distribution. Therefore, in most Chapter 11s, the plan administrator’s focus with claims·objections, including 502(d) objections, is against priority claimants.

Fortunately, the majority of courts hold that section 502(d) does not apply to 503(b)(9) claims. In re Lids Corp., 260 B.R. 680, 683 (Bankr. D. Del. 2001) (“administrative expense claims are accorded special treatment under the Bankruptcy Code and are not subject to section 502(d)”); In re Durango Georgia Paper Co., 297 B.R. 326, 331 (Bankr. S.D. Ga. 2003) (“Section 502(d) does not apply to administrative expenses that are allowable under § 503”); In re Plastech Engineered Prod. Inc., 394 B.R. 147, 161 (Bankr. E.D. Mich. 2008) (“the allowance of claims
under § 502 is entirely separate from the allowance of administrative expenses under § 503”); In re Ames Dep’t Stores. inc., 582 F.3d 422,427-432 (2d Cir. 2009) (“[w]e hold that section 502(d) does not apply to admin istrative expenses under section 503(b)”); In re Tl Acquisition, LLC, 410 8.R. 742, 750-51 (Bankr. .D. Ga. 2009) (“Section 502(d) does not contain any language or reference which would make it applicable to administrative expenses of any kind”‘); In re Momenta. inc., 455 8.R. 353. 364 (Bankr. D. .H. 20 1 1) (“Because § 502(d) is inapplicable to administrative expense claims, including an expense requested under § 503(bX9). the claim shall be allowed”); Jn re Energy Conversion Devices, Inc., 486 B.R. 872, 878 (Bankr. E.D. Mich. 2013) (“1l1e Court is persuaded that the correct reasoning and views are those taken by the Second Circuit in the Ames Dep ‘t Stores case, regarding § 503(b) administrative expenses in general, and by the courts in the Plastech and Momenta cases, regarding § 503(bX9) administrative expenses in particular”); In re Quantum Foods. UC,554 B.R. 729, 735 (Bankr. D. Del. 20 16) (“Section 502(d), by its terms, does not include administrative expense claims. Conversely, § 503, which addresses administrative expense claims, has no provision similar to 502(d) disallowing administrative claims if the administrative claimant fails to satisfy a preference liability”).

The minority position is that § 502(d) applies to all claims, including administrative expenses. In re MicroAge, Inc., 29 1 B.R. 503, 508 (B.A.P. 9th Cir. 2002)(“[W]e believe that the better analysis is that §502(d) may be raised in response to the allowance of an administrative claim”); In re Circuit City Stores, Inc.,426 B.R. 560, 571 (Bankr. E.D. Va. 20 10) (“(T)he Court concludes that § 502(d) may be used to temporarily disallow § 503(bX9) claims”).

Supplier·Strategy to Ensure Priority Claim is Free from 502(d) Objection

If the supplier has a provision in a confirmed Plan that provides for a supply chain preference release, the next step is to confirm that a 502(d) claim objection is not preserved by the plan administrator. If so, consider objecting to that provision of the Plan.

If an objection to the Plan is not lodged, the supplier still has an alternative to preserve the priority claim. The court in In re Energy Conversion ruled that a provision in a confirmed plan does not override Congressional intent. In In re Energy Conversion, the Trustee requested the court delay payment of a supplier’s 503(b)(9) administrative expense until after the preference claim against it had been determined. The Court explained that, whatever discretion a court may have to allow a Chapter 11 debtor to defer paying allowed administrative expenses before a plan is confirmed, such discretion no longer exists once a plan has been confirmed; the confirmed plan controls when allowed administrative expenses must be paid.

Supplier Takeaway

As more large Chapter 11 debtors are considering supply chain preference releases, the supplier, especially one holding a 503(b)(9) claim, should be vigilant as to whether the plan administrator seeks to retain 502(d) claim objections. lf a supplier preference release is obtained, but 502(d) claim objections are retained, consider objecting to that provision. Otherwise, case authority supports the 502(d) claim objection be overruled.

Scott Blakeley, of Blakeley LLP, advises companies regarding creditors’ rights and bankruptcy law. His email:

Missed the Webinar on Credit Card Acceptance? We Have Your Playback Recording Here

Credit card acceptance and surcharging continue to be two of the hottest topics among credit professionals. With more and more companies opting to pay by credit card, the surcharges can definitely eat into your company’s bottom line. At our recent webinar, Michael Williams from UTA and Ronald Clifford, Esq., addressed some of the most frequently asked questions they hear regarding credit card acceptance and surcharging from a practical and legal standpoint. Additionally, the question-and-answer session at the end of the webinar from fellow credit practitioners is worth your time to listen to.

The playback recording of the webinar is available free to CMA members, while non-members can get the recording for $79. Click here to request a recording of the webinar.

The U.S. Supreme Court to Rule on Whether States May Bar Credit Card Surcharging: What it Means to a Supplier’s Right to Surcharge in the B2B Space?, by Scott Blakeley, Esq.

Credit cards are the fastest growing payment form. But the payment form is the most expensive for suppliers, leading many to rollout surcharge programs to offset the majority of the card costs. The Supreme Court’s recent decision will settle the constitutionality of state no‐surcharge laws.

For many suppliers, credit cards have not only become the preferred payment form for customers, but one of the most significant operating costs for suppliers. A mandate from the finance team is to make cards cost competitive with other payment forms. The way to offset rising costs is through a surcharge, passing the interchange fee (approximately 85% of the card charge) to the customer.

As part of a class action settlement with retailers in 2013, Visa and Mastercard amended the network rules to allow merchants, including suppliers, to surcharge. With the card networks allowing surcharging, suppliers considered as part of their nationwide surcharge rollout, whether 10 states that enacted nosurcharge laws limit the suppliers’ surcharge strategy.

The constitutionality of the state no‐surcharge laws has been vigorously challenged, with the litigation focused on whether the no‐surcharge laws violate the First Amendment and commercial speech on pricing, or instead whether they regulate economic conduct. No‐surcharge states allow merchants to provide discounts to cash and check payers, but not add a surcharge to credit cards. The Supreme Court has agreed to hear an appeal from the Second Circuit Court of Appeals that involves the constitutionality of no‐surcharge laws. The Supreme Court is expected to rule not later than June, 2017. How will the Supreme Court’s ruling affect suppliers’ right to surcharge? Are there steps suppliers should take during the pendency of the Supreme Court’s review, whether a surcharge has been rolled out or is about to be?

States No‐Surcharge Law Overlay

In 1976, the U.S. Congress enacted a federal law prohibiting surcharging. The credit card networks enacted contractual provisions in their merchant agreements barring surcharging. In 1983, the federal law barring surcharging expired. With the sunset of the federal law, the credit card networks lobbied state legislatures to enact no‐surcharge legislation to discourage retailers from surcharging consumers. Those 10 states that enacted no‐surcharge laws are: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas.

The uniform theme of the states enacting no‐surcharge laws is to 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.

The no‐surcharge laws allow merchants to charge higher prices when a customer pays with a credit card, provided they disclose that the price difference is a cash discount and not a card surcharge. While surcharging is a more accurate disclosure the costs the merchant incurs with accepting cards rather than a cash discount, the card networks were concerned in lobbying for no‐surcharge legislation that surcharging may discourage card use.

Litigation Challenges to No‐Surcharge Laws

Of the ten states that have enacted no‐surcharge laws, four have had their laws challenged as unconstitutional. In 2013, the first litigation challenge was brought in New York, where five New York businesses sued New York, challenging the law on free speech grounds. The District Court found the nosurcharge law unconstitutional and overturned the law, but was reversed on appeal to the Second Circuit Court of Appeals. The Second Circuit determined that prices set by retailers was not “speech”, and therefore, the First Amendment was not relevant. The Second Circuit focused more on how surcharging was labelled, rather than the implications of the fee or its cost to merchants and consumers. Similar litigation challenges were brought in California and Texas. In March 2015, a federal court in California found its no‐surcharge law unconstitutional and unenforceable, which the state attorney general has appealed to the Ninth Circuit Court of Appeals. On the other hand, in Texas the no‐surcharge law was upheld, and that decision was affirmed by the Fifth Circuit Court of Appeals. By contrast, the Florida no‐surcharge law was upheld, but reversed on appeal by the 11th Circuit Court of Appeals. The card networks are not directly involved in the litigation challenges, but deferring to the states’ nosurcharge defense.

The Topic for the Supreme Court to Decide

The U.S. Supreme Court granted review of the Second Circuit Court of Appeals, where the court dismissed the free speech arguments and found the New York law only regulated economic conduct. The Supreme Court is the highest federal court and has the final ruling on constitutional law, which is at issue with the no‐surcharge laws.

The businesses challenging the state no‐surcharge laws contend the surcharge bar violates their free speech rights because it prevents them from freely disclosing their pricing alternatives. Merchants are
not allowed to say they charge card customers a higher price for cards, although a surcharge is a more accurate description of the costs of cards. An example: a product is priced at $1,000, plus $20 if a credit
card is used. This is a surcharge and impermissible under the no‐surcharge laws. But if the product is priced at $1,020, with a $20 discount for cash, is permissible.

More States Enacting No‐Surcharge Laws?

During the pendency of the Supreme Court’s consideration of the no‐surcharge laws, is there an effort by other states to adopt no‐surcharge laws? The answer is no. The chart below summarizes recent states’ efforts to consider enacting no‐surcharge laws. Not one state has adopted anti‐surcharge legislation since Visa and Mastercard settled their class action litigation and amended their rules to allow suppliers to surcharge customers in 2013.


Retail/Consumer vs. Supplier/Business Customer and No‐Surcharge Litigation

The focus of the no‐surcharge litigation is retailers complaining about pricing disclosures with point of sale payments by consumers. A number of national retailers filed amicus briefs in support of the plaintiff retailers requesting the Supreme Court to rule on the issue. While the Circuit Court rulings have not expressly carved out suppliers and their business customers from the reach of no‐surcharge laws, the entire focus of the no‐surcharge litigation challenge relates to the facts of retailers and consumers.

What It Means to the Supplier and a Surcharge Rollout

What is a supplier’s surcharge strategy in light of the Supreme Court agreeing to weigh in on the nosurcharge laws? Whether the supplier has rolled out a nationwide surcharge program, or is in the process of doing so, the focus is on the customer base. If the supplier is selling to B2B customers, as opposed to selling directly to consumers, the supplier’s best practice is to condition card acceptance on the customer and cardholder agreeing to a card payment agreement form, that includes a contractual waiver and governing law provision. That provision provides that customers consent to waive the application of the surcharge prohibition when paying by credit card. That language may read:

All credit card commerce between [Applicant] and
[Vendor] shall be governed by and interpreted in
accordance with the laws of the State of [ ] without
regard to conflict of law provisions thereof, and all actions,
disputes, and proceedings arising from, relating to or in
connection with credit card commerce between [Applicant]
and [Vendor] shall be subject to the exclusive jurisdiction of
the federal district courts for [State] or, in the event the district
court lacks subject matter jurisdiction, the [State] state courts
located in [County]. For the avoidance of doubt, the
foregoing is intended to be a mandatory forum selection
clause divesting all other courts of jurisdiction to hear any
actions, disputes, and proceedings arising from, relating to
or in connection with credit card commerce between
[Applicant] and [Vendor].

The contractual surcharge waiver for B2B customers would be enforced during the pendency of the Supreme Court’s consideration of the no‐surcharge ruling, and after the ruling if the Supreme Court upholds the enforceability of the no‐surcharge laws.

The takeaway for the credit team is that a conclusive ruling on the constitutionality of the no‐surcharge laws will be forthcoming by Q2 of 2017. Having said that, suppliers selling in the B2B space may contract around the no‐surcharge laws through a card payment agreement with customers containing a contractual waiver and choice of law provision.

Scott Blakeley is a principal at Blakeley LLP, where he practices creditors’ rights and bankruptcy law. His email is

The Advantages (and Disadvantages) of Accepting Credit Card Payments, by Scott Blakeley, Esq.

Customers in the B2B space are increasingly using credit cards to pay supplier invoices. The upside for the cardholder and paying customer is the 30 extra days to pay the cardholder statement that includes the supplier’s invoice. Cards also reduce paperwork and allow the customer to eliminate the time and cost of processing A/P checks. The upside for suppliers is that payment by credit card means near immediate remittance, reduced credit approval and collection activities, reduced credit and bankruptcy risk, and new sales channels (attracting customers who otherwise may not qualify for terms). Further, by accepting cards only when the order is placed, the supplier also enjoys increased cash flow, improved DSO and reduced A/R.

Still, there are complications involved with accepting credit cards in the B2B space. One area where suppliers may have particular legal questions surrounding their policy concerning credit cards is in collections, particularly in suppliers using credit cards as a collection strategy on past-due accounts.

As a speaker at the upcoming CreditScape Fall Summit in Las Vegas, I will address the use of credit cards as a supplier collection strategy in scenarios where the customer has failed to pay. I will cover the rules of the supplier accepting credit card payments on past due invoices from a customer who cannot pay. The discussion will also include the possibility of a surcharge rollout, and the legal issues associated with surcharging the credit card using customer, including how handle the 2-4% interchange fee that credit card companies charge their customers.

Join me as we cover this topic in much more detail at the upcoming CreditScape Fall Summit, September 17-18 at the Tropicana in Las Vegas. For more information about the conference, visit I hope to see you there.
Scott Blakeley, Esq., is founder of Blakeley LLP, where he advises companies around the United States and Canada regarding creditors’ rights, commercial law, e-commerce and bankruptcy law. He will be speaking at the upcoming CreditScape Fall Summit, and can be reached at

Apple Pay And Its Implications As A Payment Channel For Customers To Pay Vendors’ Invoices In The B2B Space, By Scott Blakeley, Esq.

Scott Blakeley, esq.

By Scott Blakeley, Esq.
Blakeley & Blakeley, LLP

Apple has made a media splash with its announcement of Apple Pay, the latest foray of a tech company entering the mobile card payment space. While the B2B space has been slow to embrace electronic payment channel alternatives, especially those designed for smart phones and tablets, these alternatives are thriving in the B2C space. In another article “Payment Channel Alternative (Traditional and Emerging) For The Customer (And The Credit Team’s Preferences),” Lyle Wallis (VP Research, CRF) and I considered the topic of mobile payments. Apple Pay advances this payment form. But does Apple Pay provide insight for the credit team in the B2B space of what the payment channel may look like in the near future?

The Mobile Wallet: A B2B Payment Channel in the Near Term?

Electronic payments, especially in mobile form, are showing to be a most efficient and cost effective payment channel. Banks have invested in mobile options, which allow consumers to deposit checks, view balances and make transfers between accounts, all from their smart phone or tablet. Javelin Strategy and Research estimates that the average cost for a mobile banking transaction (deposit or transfer) is 50% cheaper than a desktop computer transaction and 90% cheaper than an ATM transaction. It costs J.P. Morgan Chase $0.03 to process a customer’s mobile check deposit, versus $0.65 where the customer physically deposits a paper check.

The mobile wallet has arrived. A mobile wallet can be peer-to-peer, consumer-to-business, or both. To use a mobile wallet, the consumer registers a new account with a provider and then connects that mobile wallet to their existing debit card and bank account. Once money is loaded onto the digital wallet, it can be sent to other peers and/or businesses also on the mobile wallet network. Then, should they desire, the consumer may “cash out” all or a certain percentage of their mobile wallet, and the funds are automatically routed back to the original bank account.

Consumers may choose a variety of mobile wallets: Google, Amazon, PayPal, Square, Venmo, and now Apple. Apple announced that its new iPhone 6 and digital watch give users the ability to pay for products and services just by tapping the device to payment terminals using Apple Pay. The service is a take-off of the Google Wallet, which has been available on Android phones since 2011. The mobile payment system uses a technology known as Near Filed Communication (NFC), which transmits a radio signal between the device (smartphone in this instance) and a receiver, when the two are fractions of an inch apart or touching.

Apple Pay, Data Breach and Card Security: Applications to the B2B Space?

The headlines regarding the Home Depot, Target Stores and Neiman Marcus data breaches have affected hundreds of millions of their customers. Vendors rolling out card payment programs in the B2B space are reminded to consider a cardholder’s privacy rights when they store the cardholder’s card information electronically. Apple recognizes the significance of cardholder privacy and intends to distinguish itself through greater card security. Major payment networks and banks have all been working on a system that allows customers to make a payment without handing over any personal details, using a kind of digital token that can be used only once. Apple Pay is the first program to use the tokenization system on a widespread basis. With each Apple Pay transaction, a user’s credit card number won’t pass through the system, just a scrambled, one-time code that can’t be used in any future transaction.

If a retailer’s systems are hacked, Apple Pay customers’ personal information is not compromised. The service also requires a thumbprint scan for each transaction, meaning that only the phone’s owner can use it to make purchases–a stolen smartphone cannot be used for fraudulent purchases. The devices’ operating software iOS 8 will also encrypt more of the user’s personal data (photos, messages, email, contacts, call history, iTunes content), where previous versions of iOS only encrypted a device’s email. These added security features are important and one of the reasons that Apple Pay has won over credit card companies and retailers. The iPhone 6 and the Apple Watch will use Apple Pay at merchant locations that have purchased the hardware that can read the wireless signal from Apple’s devices. Because merchants are already under pressure to upgrade their POS systems to accept EMV, a new card technology to reduce fraud, there is thus greater opportunity to add-on the NFC technology at the same time. Upgrades to POS systems have been mandated by the credit card companies and must be in place by late 2015 else the merchant will be liable for fraudulent credit card use.

Both Visa and MasterCard are on board with Apple Pay, and Apple is not charging them for allowing their products on Apple phones. Banks have agreed to accept lower fees from Apple than what they usually accept on credit card transactions, with their hope that cardholders will opt to use the technology in place of cash and other payment methods, thereby driving up the total number of transactions. Safer credit card transactions will lower the instance of fraud and thereby reduce card fees for everyone.

Apple Pay and B2B Implications

Can mobile solutions accommodate transactions in the B2B space? Mobile payment technologies have focused on the consumer sector. However, given the push for electronic payment alternatives in the B2B space, developers are pursuing B2B mobile payment technologies. Will businesses move to this payment channel, given the transactional efficiency and low processing costs of mobile payments? According to the AFP, only 11% of US companies surveyed are using mobile payment technologies.

Apple Pay is presently geared toward brick and mortar stores. Online application for card-not-present transactions is a key for the B2B space. The single use nature of Apple Pay technology (digital token) rules out use for multiple transactions (the credit team storing a card on file).

Applications will be developed that provide for Apple Pay technology to be used to pay vendor invoices in the near term.


Scott Blakeley, Esq., is a founder of Blakeley & Blakeley LLP, where he advises companies around the United States and Canada regarding creditors’ rights, commercial law, e-commerce and bankruptcy law. He can be reached at his email address.