Thursday , December 2, 2021

COMMENTARY: How a New Ruling Sets the Stage for Surcharging in All 50 States

The national trend of merchants passing on their credit card fees continues to accelerate, aided last week by a federal court striking down Texas’s “no-surcharge” law as unconstitutional.

The Texas ruling follows the defeat of no-surcharge laws in Florida and California, but it is a unique milestone: Texas is the first state in which a surcharge ban that was previously upheld has now been struck down under last year’s Supreme Court precedent in Expressions Hair Design.

Weese: “When cardholders bear the cost of their own rewards, they are motivated to choose a lower-cost option.”

The decision in Rowell v. Paxton opens Texas, the second largest state in the country, to credit card surcharging—representing both a significant expansion of market opportunity and a landmark step toward legal adoption in all 50 states.

Merchants have embraced surcharging as a means to push back against the rising cost of credit card acceptance, which has increased 24% for Visa and Mastercard rewards cards in just four years.

Demand among independent sales organizations for surcharging is equally strong, as these solutions are high-margin alternatives to traditional merchant services, which have been heavily commoditized by price competition.

But, for all its economic benefits to both merchants and ISOs, the rise of credit card surcharging in the United States has been first and foremost a regulatory story.

Last year, the U.S. Supreme Court held that “no-surcharge” laws regulate constitutionally protected speech, turning the tide in favor of merchants challenging bans in Florida, California, and Texas.

Now, businesses in these states have the option to pass on the fee when their customers choose credit cards for convenience or rewards, so long as they comply with the card network rules introduced in 2013.

As the market for surcharging has expanded, so too has the emphasis on compliance. The card brands and processors have increasingly sought to shut down non-compliant programs, especially when surcharges masquerade as “cash discounts.”

In September, First Data Corp.’s Clover unit removed all “cash-discount” programs from its app marketplace, stating in an email to users, “A ‘true cash discount’ does not add any fees or surcharges at the register.”

After legal victories in Florida, California, and Texas, the only pending challenge is the litigation facing the New York “no-surcharge” law.

Jonathan Razi, chief executive of CardX and author of an amicus brief in the U.S. Supreme Court for Expressions, weighed in on the prospects for the New York case.

Razi explained that the New York law may be struck down outright as a violation of the First Amendment, as the other state laws have been. However, he noted that it is also possible the Second Circuit may reframe the law as a consumer-disclosure requirement.

“In the latter scenario, the law may survive, but in a far narrower form—and ‘no surcharge’ would actually mean ‘no surprise,’ with merchants allowed to pass on their credit card fees so long as they make the required disclosure,” Razi said.

In the clarity that could follow the New York decision, smaller states with no-surcharge laws still on the books (i.e., Colorado, Connecticut, Kansas, Maine, Massachusetts, and Oklahoma) are likely to narrow or drop their bans.

When surcharging reaches all 50 states, it will trigger a seismic shift, as merchants that require nationwide pricing strategies will jump in.

At that point, the American landscape will look more like Australia’s, where 42% of all merchants, and a full 60% of large merchants, pass on the credit card fee.

Even for those who stay on the sidelines, this means progress. When cardholders bear the cost of their own rewards, they are motivated to choose a lower-cost option when the cost becomes too high—driving down interchange for the market as a whole.

—Evan Weese is marketing lead for CardX, a Chicago-based provider of turnkey solutions for credit card surcharging.

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