Payments News

Why surcharging remains controversial, even when most states allow it. (John Drechny quoted)

Jan 11, 2020

Oklahoma lawmakers' decision last month to drop the state's surcharging ban was yet another signal that U.S. merchants have the final say in whether to apply extra charges to credit card transactions to offset interchange fees.

It's been a bone of contention with the card brands for years — until lifting the rules against surcharging five years ago as an initial concession in the merchants' class-action antitrust lawsuit against the card brands and the resulting swipe-fee settlement.

But even though retailers fought hard for this right — prevailing on a free speech argument in front of the Supreme Court and circuit courts — it remains a slippery slope in the minds of many merchants who fear consumer reaction or compliance issues.

With Oklahoma now allowing surcharging, only Colorado, Connecticut, Kansas and Massachusetts remain as states banning the practice of surcharging.

Other factors make merchants uneasy about surcharging to this day, said John Drechny, CEO of the Merchant Advisory Group.

"From a merchant perspective, surcharging is still pretty hard to execute and be compliant with all of the network rules," Drechny said. "One of the biggest issues is the rules do not allow merchants to differentiate the surcharge to match fees being charged for different card products or networks."

American Express still does not allow surcharging for certain merchants, Drechny added, and Visa and Mastercard require all products in credit or debit to be surcharged equally.

To avoid being singled out in the surcharging process, Amex has held tight to its rule that a merchant can only surcharge Amex transactions if they are doing so equally for credit on Visa or Mastercard. "Equally" is the key there, as a merchant might find it beneficial to surcharge higher on a premium Amex card than a standard Visa card — if the rules allowed it.

Along those lines, merchants who negotiate a lower price on a certain credit brand cannot apply a surcharge on the other brands that would not negotiate a lower price, Drechny said. In the same manner, a merchant cannot surcharge on rewards cards only, he added.

Still, surcharging can help "signal to the consumer the actual cost associated with the product, but only if the rules which create parity among all networks and card levels are removed," Drechny said.

By David Heun

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