US States Consider Surcharge Disclosures Amid Rising Cost Of Living

September 5, 2023
New Jersey has capped credit card surcharges, while several US states are mulling bills to ensure transparency and fairness in how merchants pass on the costs of credit card processing.

New Jersey has capped credit card surcharges, while several US states are mulling bills to ensure transparency and fairness in how merchants pass on the costs of credit card processing.

On August 18, New Jersey became the latest state to amend its legislative framework to cap surcharges on credit card payments and require merchants to disclose the amount they will surcharge a customer prior to accepting a payment.

The purpose of the legislation is to protect New Jersey consumers by “improving transparency” and “curtailing unfair practices that disproportionately burden low- and moderate-income New Jerseyans”, New Jersey governor Phil Murphy said in a statement.

Surcharges, whereby the merchant charges the consumer for accepting their credit card, have become more frequent since the COVID-19 pandemic and often go unnoticed by the consumer, according to Senator Nellie Pou.

The disclosure requirement, which applies both to physical stores and online businesses, will help consumers make “an informed decision” about choosing their method of payment, Assemblyman Paul Moriarty added.

The act also establishes that the surcharge cannot exceed the actual cost of processing, which in the case of credit cards often ranges between 1.5 and 3.5 percent.

“It seems in recent months credit card surcharges have been popping up all over the place with no consistency of what to expect from business to business,” said Senator Gordon Johnson.

The new law will ensure that merchants only pass on the processing fees that they are charged “rather than making a profit on someone using a card over cash”, Johnson added.

“We understand these processing fees can be burdensome for businesses, but we also don’t want them taking advantage of the situation,” the senator noted.

The bill passed the legislative body with sweeping support, 34-0 in the state Senate and 74-3 in the Assembly.

States push for more transparency but not bans

Credit card surcharges are generally legal in the United States, unless states decide otherwise.

Currently, ten states have adopted a surcharge ban, namely California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas.

Meanwhile, the practice is illegal on debit and prepaid cards.

Setting the level of surcharge, however, is a delicate question. Although it can help merchants offset the costs of credit card processing, it may also lead to customer dissatisfaction or a shift in their payment behaviour.

“It’s important to note that price signalling due to high card fees could be a sign of a broken payments market,” said Callum Godwin, chief economist at payments consultancy CMSPI, when speaking to Vixio.

For example, CMSPI estimates suggest that there have been more than $2.6bn annual additional fees introduced in the US market in the last five years alone.

“We find more and more merchants are considering surcharging and cash discounting as a solution because of rising pressure with card costs,” said Godwin.

As the financial burdens of both consumers and merchants are growing, lawmakers in several states now turn their attention to the issue. 

In the latest legislative sessions, lawmakers in seven states have introduced 15 bills, with measures ranging from an outright ban to surcharge caps or reversing an existing prohibition.

Most of these proposals impose disclosure requirements on merchants that wish to surcharge card payments, while a few other bills would cap the surcharge, typically at the actual cost of payment processing.

In New York, for instance, Assembly Bill 1370 would cap the surcharge at 4 percent or the amount charged to the merchant to process the credit card, whichever is lower.

The bill would also require the merchant to post a notice at entry and at the point of sale informing the customer of the existence of the surcharge. This requirement would apply also to online and phone sales.

Similar bills regarding disclosure requirements have also been filed in Kansas and Massachusetts.

Minnesota, which caps surcharges at 5 percent, has recently passed an omnibus commerce appropriations bill, which provides further details on when and how merchants should inform their customers of the surcharge in physical and online stores.

Meanwhile, in Maine and Texas, legislators have introduced bills to reverse the existing surcharge ban and allow merchants to recover the costs of credit card processing.

There was only one bill, filed in the state of New Jersey, which proposed a ban on surcharges.

Despite this recent activity in state surcharge bills, in general, the number and provisions of bills seem to suggest there is little interest from lawmakers to prohibit merchants from passing on the costs of credit card payment processing to their customers.

In most cases, the legislative interest involves making sure that the passing on is communicated with consumers in a fair manner.

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