Most states may surcharge transactions

Gavel to Gavel

published in The Journal Record | May 17, 2018

By Samuel Merchant

Few fees frustrate the average business more than those incurred by accepting credit cards. From a practical perspective, refusing credit cards is usually not a viable option.

Businesses are forced into the troubling dichotomy of either absorbing the fees and diminishing their profits, or raising prices on all goods or services. Fees are generally between 2 percent and 3.5 percent. Our firm has clients paying between a few thousand dollars to tens of millions in interchange fees annually.

For decades, contracts with credit card networks like Visa or American Express prohibited businesses from engaging in practices such as surcharging these fees, steering customers to cheaper alternatives, setting minimum or maximum transaction values. Many of these contractual prohibitions ended as a result of a class-action lawsuit against networks in 2016, where millions of merchants alleged that networks and banks artificially inflated fees behind the scenes, and that the interplay between the prohibitory rules amounted to antitrust violations. Businesses can now surcharge without being in violation of their contracts with credit card networks.

However, laws in seven states – Colorado, Connecticut, Kansas, Maine, Massachusetts, Oklahoma and Texas – and Puerto Rico prohibit businesses from surcharging. The good news for businesses is that these statutes are falling at an alarming rate. After the Supreme Court ruled in 2017 that these statutes implicate businesses’ commercial free speech (using a surcharge to convey to their customers the true cost of accepting credit cards), statutes fell in every state that businesses challenged. While there are no current challenges to Oklahoma’s no-surcharge law, the law in Texas is currently being challenged.

Businesses in states that allow surcharges must do so with caution. There are very specific disclosure and notice requirements, and a comprehensive analysis of the proposed surcharge regime is essential to ensure that a specific surcharge does not put the business in violation of contracts with another network. There are also the obvious competition-based considerations.

Although businesses in states with current no-surcharge laws cannot surcharge (including Oklahoma), these laws are unlikely to survive if challenged. There are also alternatives to surcharging, such as setting a higher price and then offering a discount for customers who do not pay with a credit card, and charging a convenience fee for online transactions. Further, while a surcharge may not fit with your business model, the theory for many of the challenges is that the freedom to surcharge alone will allow market forces to reduce the interchange fees that businesses pay.

This article appeared in the May 17, 2018, issue of The Journal Record. It is reproduced with permission from the publisher. © The Journal Record Publishing Co.