Each time a merchant accepts a credit or debit card as a form of payment, they pay an interchange fee, which accounts for the cost of processing the transaction and removes merchant expenses associated with collecting funds and/or managing cash operations. To increase the revenue earned on goods or services sold, some merchants across the United States started adding surcharges to credit card transactions.
By law and by network policies, surcharges may reflect only the actual costs of processing a credit card transaction. As interpreted by most merchants, this means pegging their surcharge pass-through to the acceptance costs of the most expensive card they may ever accept, whether they actually receive payment via that card or not. So, while a retailer may pay an average interchange of 2 percent on credit card transactions, generally, they will charge 3 percent to 4 percent on every credit card transaction they accept. Suddenly, “recouping” the cost of credit card transactions can become a new profit center for retailers. 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.
The Fight Against Surcharging
As can be assumed, confusion around surcharges has caused problems for merchants, card issuers and consumers. Credit card issuers in some states lobbied for no-surcharge laws, resulting in these laws being enacted in California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas.
But recently, four states have had courts overturn their surcharging bans: Texas, Florida, California and 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 to 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 to reflect surcharge fees so customers know what they are paying for when they choose to use a credit card.
Laws in all of these states are being challenged as violations of free speech. 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 he or she thinks is best.
What Surcharging Means for Credit Unions
Surcharging may only lightly impact card issuers like credit unions, though, as 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. As can be expected, surcharging can have a negative impact on the customer experience as most consumers do not appreciate when the seller adds a fee at the register that was not originally listed on the price tag. In this case, customers may opt to purchase a similar product elsewhere if it is available without the surcharge.
Additionally, for retailers, adding a surcharge is not a simple task and does come with some strings attached. Merchants must notify their network at least 30 days in advance of adding a surcharge. They must also disclose the surcharge as a merchant fee and clearly alert customers that the fee has been added at the point of sale and on receipts. Additionally, surcharges cannot be charged on debit or prepaid cards.
Regardless, if a credit union’s cardholders are based in states that allow for surcharging on credit card transactions, member-facing staff should be made aware of the process and restrictions should they receive a member inquiry. Partnering with a credit union service organization like PSCU can help arm credit union employees with the information they need to address members’ questions and concerns. Credit unions across the country should be prepared to deal with credit card surcharging should it become more widespread and accepted in the coming years.
Glynn Frechette leads the Advisors Plus Consulting and Campaign Services organization and is responsible for directing and deploying the full range of Advisors Plus financial and marketing services to credit unions. He has spent 24 years in the financial services industry, specializing in credit union and community bank partnerships.