Credit Card Surcharging in the U.S.A.

By: Elizabeth Rowe, Financial Services Strategist

What are credit card surcharges?

Merchants pay an interchange fee each time they accept a debit or credit card for payment. Debit card interchange fees are so small that they may not be recouped through surcharging. Only credit card interchange costs may be added as a surcharge to credit card transactions, and merchants assert that surcharges allow them to recover the interchange costs of an individual transaction. Merchants say that otherwise, they have to pass along aggregate interchange costs to all customers through higher ticket prices on all goods and services sold.

By law and by network policies, surcharges may reflect only the actual costs of processing a credit card transaction. As interpreted by most merchants, that means pegging their surcharge pass-through to the acceptance costs of the most expensive card they may ever accept. So, while a retailer may pay an average interchange of 2% on credit card transactions, generally, they will charge 3% to 4% on every credit card transaction they accept. Suddenly, “recouping” the cost of credit card transactions has become a new profit center for retailers.

Why do merchants have a problem with anti-surcharging restrictions?

In 2013, Visa and Mastercard offered 12 million merchants $5.7 billion to settle an antitrust class action lawsuit that contested the interchange fees merchants were charged and the business practices that the networks imposed on them. The card networks hailed it as the largest legal settlement in the history of antitrust actions and the nation’s largest merchants immediately rejected the settlement and took the networks right back to court.

Three years later (2016), a federal appeals court rejected the 2013 settlement and broke the case into two separate classes: One was the monetary damages incurred by retailers who paid Visa and Mastercard $43.4 billion in “swipe fees” and the second, was the business practices of the networks.

The appeals court found that the networks had overly restricted future commerce through a mandate that merchants accepting the settlement’s terms were precluded from suing the networks over interchange fees now and into perpetuity. And by binding retailers in perpetuity, the accepted settlement would be compulsory even for merchants that did not yet exist.

Did the antitrust actions deal with credit card surcharges?

Absolutely. In their settlement with merchants, the card networks agreed to jettison their bans on all surcharges on debit and credit card transactions. While the ban on debit card transaction surcharging remains in effect in all U.S. states and territories, the networks allowed merchants to begin recouping the costs of their interchange expenses by surcharging on credit card transactions.

Were there strings attached?

Yes. A merchant wishing to add a surcharge to a transaction had to first notify Visa and Mastercard 30 days prior to putting the surcharge into effect. A sign had to be posted both at the front door and at the POS terminal and the surcharge had to be itemized on the receipt.

Were surcharges allowed everywhere in the U.S.?

No. Credit card issuers had lobbied for no-surcharge laws and those laws were enacted in California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas. Puerto Rico also has a no-surcharge law.

Are those laws still in effect?

Not all of them. Recently, four states have had courts overturn their surcharging bans: Texas, Florida, California and the newest member of the club, New York. New York’s surcharge ban was effectively stricken from the state’s laws after the U.S. Supreme Court sided with a lower court in agreeing that surcharge bans violated a merchant’s rights of free speech. The consensus coming from the appeals court, appellate court and U.S. Supreme Court boils down to this: Don’t surprise the customer. Merchants must use numbers on receipts (rather than percentages) so customers don’t have to do math to know what they are paying for a credit card transaction.

Laws in all of these states are being challenged as violations of Free Speech. Here’s how the Free Speech argument works: Even when surcharging was banned, merchants could offer their customers discounts for paying with cash. The courts now agree that forcing a merchant to offer a cash discount rather than imposing a surcharge was an inappropriate curtailment of a merchant’s ability to communicate the same ultimate price in the way she/he thinks would be best.

Gasoline Pricing:
Cash Discount vs Credit Card Surcharge
Model #1 Model #2
Credit Card Customer Pays $2.00 Cash Customer Pays $1.92
Cash Discount $0.08 Credit Card Surcharge $0.08
Cash Customer Pays $1.92 Credit Card Customer Pays $2.00

So, then what is happening in the states that still have surcharging bans on the books?

Now that the Supreme Court has ruled that merchants are free to recover the cost of credit card interchange, the remaining states with surcharging ban legislation on their books find themselves in a position of non-enforcement. Legislators are now waiting for the opportunity to remove surcharge bans from their state laws.

What does that mean for PSCU and our Member-Owners?

Let’s look at what credit card surcharging has meant in other countries that have adopted the policy. In European Union, there are 12-member states that allow surcharging on both credit and debit card transactions, 14 states that prohibit it and Denmark, which allows surcharging only for credit card transactions.

In none of the countries that allow surcharging has there been a widespread adoption of the practice. In fact, the industries that have widely embraced surcharging are the very ones in which consumers have the least flexibility in their choice of payment methods: Hotels, airlines (particularly discount airlines) and sellers of high-ticket durable goods.

Merchants selling to consumers on a daily basis (e.g., grocery stores, drug stores, quick serve restaurants, etc.) are unlikely to add surcharges to their transactions for fear of losing customers to competitors.

In the U.S., it would appear that surcharging may only lightly impact card issuers. Online retailers and daily shopping establishments will fear providing a competitive advantage to others and one-off, big ticket merchants will add surcharges because they know their customers will use credit cards regardless of additional fees.