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The rules on credit card surcharges in the US make for a complex and confusing landscape for vendors, merchants and issuers alike, with proposed regulatory amendments and potential administrative change in Washington, DC only adding to the uncertainty.
Credit card surcharges are charges that merchants impose on customers to cover the cost of processing and swipe fees imposed by credit card companies.
These can vary in size, either amounting to a small percentage of the overall cost, say 2 percent, or a set value.
The laws on surcharging differ by state, and the resulting lack of clarity has prompted credit card companies to step in and impose their own rules, with hefty fines for non-compliance.
The patchwork is complex, and without careful legal attention can lead to severe financial penalties for small companies that are least able to afford it.
The topic has come under intense scrutiny in recent years, with lobbyists representing vendors in the retail and restaurant industries keen to allow surcharging so that members can recoup losses that are often among their greatest financial outlays.
In contrast, consumer advocates are keen to outlaw the practice to ensure low costs and full cost transparency for purchases made with credit cards.
Surcharges apply only to credit cards, with debit cards protected in the Durbin Amendment, which was passed as part of the Dodd-Frank Act of 2010.
Doug Kantor, general counsel of the National Association of Convenience Stores (NACS), a representative of one of the largest groups of users of surcharges in the country, told Vixio most retailers do not apply surcharges “because of the risk of customer satisfaction”.
Despite this, he said the practice has “definitely increased” over the last few years, although most companies are implementing the charges incorrectly.
A complex framework
This incorrect usage may be because the legal framework surrounding credit card surcharges is complex and often confusing.
Despite the compliance challenges in the US, most vendors in states where surcharging is allowed are able to use them freely. However, they are generally applied only by smaller businesses such as local convenience stores and restaurants.
“The politics in each state are unique,” said Kantor. “As of ten or so years ago there were quite a few more states where it [surcharging] was illegal, so the longer-term trend is for more states to get rid of bans on surcharging.”
The national shift towards legalising surcharges started in 2013, after a successful class action lawsuit saw merchants in several states allowed to implement the fees.
As recently as a decade ago, surcharging was illegal in around two dozen states, but now only Connecticut, Maine and Massachusetts and, as of July 1, California, ban the practice. The incorporated territory of Puerto Rico also has a ban in place; Colorado was the most recent state to lift the ban, in 2021.
“Different states have had stories in the media about individuals being upset or feeling like they were misled, and that can lead to political action,” added Kantor.
In New York, for example, a recent legal change effectively bans surcharging without full disclosure on transactions, stipulating that the final sales price cannot exceed the posted price for credit card transactions.
Although similarly not outright bans, varying levels of restriction also exist in Colorado, Illinois, New Jersey, Nevada, South Dakota, Texas, Kansas and Georgia. Minnesota currently allows surcharging in certain instances, but a new law banning the practice will be effective January 1, 2025.
Federal action unlikely
This patchwork is certainly confusing, especially for vendors operating in multiple states, and the situation is unlikely to change.
“I'm not sure there's a solution to simplify it — simplicity is a great goal, but that's not really on the cards here,” said Kantor.
He said the Federal Trade Commission (FTC) could apply an outright ban, but that political influence means that would be unlikely to hold up in court.
The FTC has issued a notice of proposed rulemaking on unfair or deceptive fees, seeking to scrap hidden junk fees and make pricing more transparent for consumers. However, this does not apply to credit card surcharging.
It is unlikely that there will be federal legislation either way on the topic. An outright ban on surcharges is marginally more likely, given that it would be more straightforward than attempting to impose a ban on prohibiting surcharges.
“It is most likely that we're going to continue to have a hodgepodge of some states trying to ban it or restrict it and some states opening it up,” said Kantor.
Rules from issuers
In an attempt to create transparency for customers, the two leading credit card networks in the US, Visa and Mastercard, have established specific rules of their own for vendors looking to implement surcharges.
They require merchants to notify the issuers of their intent to impose a surcharge and to clearly inform customers about the additional fee incurred with the purchase.
The networks stipulate that surcharges may not exceed the initial cost of processing the credit card payment.
“Being realistic here, the average customer doesn’t always understand and can get frustrated with credit card surcharging that ends up at the bottom of the receipt without having any prior notice,” Brennan Duckett, director of technology and innovation policy at the National Restaurant Association, told Vixio.
The rules imposed by Visa and Mastercard are designed to help to avoid this situation and ensure vendors are transparent, even where state law may not.
Visa has reportedly cracked down on breaches of surcharge rules, with one memo from the company suggesting that fines for non-compliance could be as high as $1m.
In May, one Wisconsin restaurant was reportedly fined $25,000 for breaking the rules.
Duckett added that as welcome as this is within the industry, it is only “a band aid for a much larger systemic problem, which is Visa and Mastercard controlling the entire marketplace and price fixing”.
One way for companies to get around bans on surcharging is to encourage customers to avoid credit card payment at all by offering discounts for payments in cash, something that is commonplace among smaller businesses.
Last month, New York Judge Margo Brodie rejected the proposed settlement between Visa and Mastercard over the fees they can charge customers, which addressed surcharges. The rules would have allowed the pair to maintain their respective surcharge rules and to prevent merchants imposing a surcharge of greater than 1 percent unless they apply the surcharge consistently across other issuers such as Amex.
The root of the issue
At the heart of this debate is the discussion on the high level of swipe fees that vendors have to pay in the first place.
The use of surcharges is simply a way for merchants to pass on high swipe fees to customers if they choose to use credit for a purchase.
As Vixio has discussed, the proposed Credit Card Competition Act (CCCA) is aiming to change the way these fees are calculated at the source, which would have a direct impact on the need for credit card surcharging fees.
The CCCA is not looking to introduce an interchange fee cap, such as those in place in the EU and other jurisdictions, but to increase competition.
“If we were to try to put legislation out that created a fee cap like there is on debit, for credit, we would get laughed out of the room on Capitol Hill,” said Duckett.
“That would be perceived as a price control, and very few Republicans would sympathise with it.
“Of course, in a perfect world, in a vacuum, we would love for those fees to be capped in the same way that Europe, Australia and Canada are.”
Critics of the Visa and Mastercard duopoly want legislation that would look to tackle the system where the pair are able to set their own swipe fee rates, which typically happens twice a year.
The CCCA will essentially insist that credit cards have another network option listed beyond just Visa and Mastercard, which would help to encourage greater competition in the industry. The law has yet to move through Congress but it is expected to pass during the current administration.
“It is always more fee increases and new fees that are created, it has gotten to the point where there are no checks and balances,” said Dylan Jeon, the senior director of government relations at the National Retail Federation.
“Credit card processing fees are now most retailers' second highest operating costs after labour, so more than utilities or any business expenses.”
Consumers feel that as well, he continued, because a lot of retailers operate on thin margins and cannot fully absorb rising costs. Part of these costs are passed to consumers, such as with surcharge fees or cash discounts.
“Businesses are trying to be creative about how to operate on these rising costs, but when you're talking about $172bn collected in swipe fees last year, that cost has to go somewhere,” said Jeon.
Visa and Mastercard had not responded to requests for comment at the time of publication.
