Let's take a quick vote. How many consumers are in favor of surcharges just for the convenience of using a credit card? Anybody? That's what we thought.
The European Union and the United Kingdom agree with that assessment. New rules from the British government will soon prohibit retailers from charging customers extra for paying for their purchase with a credit card. The UK rule stems from an EU directive set to take effect on January 13, 2018, and, according to the UK Treasury Ministry, British consumers could save a sizable portion of the millions of pounds spent annually on card surcharges.
Calling credit card surcharges "rip-off charges", Economic Secretary to the Treasury Stephen Barclay said that such charges "have no place in a modern Britain." Do they have a place in a modern America? Some states already say no, but the situation is not straightforward – and, despite Barclay's comment, lack of surcharges does not guarantee lower prices to consumers.
Variations on the Theme
Currently, Puerto Rico and ten states do not allow credit card surcharges (California, New York, Kansas, Florida, Maine, Connecticut, Texas, Oklahoma, Massachusetts, and Colorado). Merchants in the other states are generally allowed to pass on a surcharge that is equal to their costs associated with accepting the card (up to 4%). Surcharges on debit cards are already banned throughout the US via an amendment to the Dodd-Frank legislation.
However, each card network has a specific set of surcharging requirements that retailers must follow in order to apply surcharges using that card brand. Combine different card requirements with differing state rules and you can see why relations between retailers, banks, credit card companies, and the credit card processors are complex and tense.
For example, the American Express guideline does not allow retailers to charge a higher fee for one card network (swipe fee) compared to another. This is troublesome because fees are not the same among all card networks, and merchants are then limited to passing on only the lowest rate — or refusing to take cards with higher rates altogether.
Retailers can get around this by applying product level surcharges (types of cards) instead of brand-level surcharges, but the situation remains complex. They must still abide by any state laws and limits/restrictions imposed by each card network, post an appropriate notice of the surcharge within their store, and include the surcharge amount as a separate line item on the receipt.
There's Always a Way
What about states where surcharges are not allowed? In many of these states, merchants are permitted to offer discounts for using cash or debit cards – thus the standard price is raised to cover the cost of credit card processing.
The Supreme Court recently addressed a New York case challenging the execution of this approach, ruling that state law may be challenged with respect to the way prices are advertised on free speech grounds. New York state law allows that a merchant can advertise an item for a specific cash price (for example, $5) and a specific credit card price (for example, $5.10), or advertise the item for $5.10 with a 10 cent cash discount – but the merchant can't advertise a $5 item and a 2% surcharge for credit.
Of course, retailers are welcome to raise prices straightaway without explanation and charge the same price to every one regardless of payment type. They risk losing business in doing so, but each merchant must do the risk/reward calculation.
In short, if the US bans credit card surcharges nationwide, retailers can — and almost certainly will — continue to find ways to recoup their costs. What can change, however, is making these costs fully transparent, so consumers can decide which cards best meet their needs. The free market should take care of the rest.
Nobody wants to pay extra fees on their credit card transactions, and it's laudable that the EU and UK are trying to protect their consumers from such fees. But it is naïve for them to assume that by removing card fees, merchants will mostly absorb the costs of processing credit cards, and not pass those costs on to consumers in other ways. We remain skeptical.
Your job as a savvy consumer is to consider all fees and taxes before making a purchase, regardless of what you are buying and where you are buying it. This is not always easy – especially if you are buying an airline ticketor booking a hotel online – but you can't truly comparison-shop until you understand the total costs associated with your purchase.
New regulations may make your job of assessing costs a bit easier, but they have an equal chance of making it harder. In either case, it's still your responsibility to shop wisely for credit products, comparing features, benefits — and costs — on an apple-to-apple basis.