Surcharging: A State-by-State Guide
Surcharging, a topic we discussed in our previous blog post, is when a merchant adds a fee to a customer’s credit card transaction. The practice is an attempt to compensate merchants for the credit card processing/interchange fees they have to pay credit card companies when customers use those types of payment rails. However, consumer attitudes towards surcharging varies by demographics. Credit card companies also have policies on surcharging. But with 50 state consumer laws to contend with, the legality of surcharging also varies on a state-by-state basis. To help, we’ve put together an overview of surcharging and its legality across the country.
How Consumers View Surcharging
In a CardFellow Consumer survey, more than half of consumers (64.5%) said they would stop using credit cards if merchants added surcharges to their transactions. The surcharge abhorrence bears a strong and potentially negative effect on branding and customer retention.
Why Merchants Surcharge
Interchange fees form the bulk of the credit card processing fees charged to merchants by the major credit cards (Visa, Mastercard, etc.). As we discussed in an earlier article on the subject, the term interchange refers to the money transfer from the acquiring bank to the issuing bank for each credit card transaction. The banks charge the interchange fees to reimburse themselves for the interest they lose during the consumer's payment grace period and base fees also on the risk of the merchant. In most cases, interchange fees are non-negotiable. To keep costs as low as possible, merchants want to keep most transactions in the lowest possible categories -- as often as they can. Since these interchange fees are non-negotiable in most cases, merchants resort to surcharging in an effort to recover the costs of the fees.
What States Prohibit Surcharging
As of February 2017, surcharging is prohibited in nine states. The following states prohibit credit card surcharges because they deem the practice unfair to consumers:
- Colorado - Colo. Rev. Stat. §5-2-212
- Connecticut - Conn. Gen. Stat. §42-133ff
- Florida - Fla. Stat. §501.0117
- Kansas - Kan. Stat. Ann. §16a-2-403
- Maine - Me. Rev. Stat. Ann. tit. 9-A, §8-509
- Massachusetts - Mass. Gen. Laws Ann. ch. 140D, §28A
- New York - N.Y. General Business Law §518 (currently under legal challenge)
- Oklahoma - Okla. Stat. tit. 14A, §2-211 (1982)
- Texas - Tex. Business & Commerce Code Ann. §604A.001 et seq. (2015 Chapter 113)
However, Minnesota (Minn. Stat. §325G.051) limits its surcharge prohibition to merchants who issue their own credit cards. In addition, California's court challenge declared its surcharge law unconstitutional and it is now under review and not enforceable. The above laws also do not prevent merchants from providing incentives in the form of discounts to customers who pay in cash (or checks) in lieu of credit card payments -- unless the state otherwise prohibits them by law.
Larger companies should know that do business in more than one state can apply surcharges to credit card transactions in those states where it is legal even though some of the credit card transactions take place within one of the states where it's not legal.
It’s also important to be aware that we are talking about credit card transactions only. The federal law known as the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) prohibits applying surcharge fees to debit card or prepaid card transactions.
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