The Basics of Credit Card Surcharges
Credit Card Surcharges are fees that merchants impose for the acceptance of credit cards. The purpose of the surcharge is to pass on to consumers the costs the merchant incurs when accepting credit cards. It is often a percentage of the transaction amount.
Some consumers resent the credit card surge when it is disclosed as a separate line item on their bill and not rolled up into the total they are charged. The credit card surcharge is intended to inform consumers of the cost of credit card acceptance and to encourage them to pay by other means, such as cash or a prepaid debit card. The card surcharges are often unpopular with consumers due to its unexpected appearance, and the fact that it essentially penalizes them for using credit cards rather than cash, which has no counterpart surcharge.
It may be that many consumers would opt to use cash, but are unable to do so due to the growing acceptance of credit cards.
The credit card surcharge is also often controversial with merchants, partly because of the confusion it brings. Most consumers, for example, do not know or understand the difference between a credit card and a debit card, and they rarely have any understanding of the differences between various debit card networks, such as Signature and PIN. Merchants frequently apply one level of surcharge for credit and one for debit , or one for a debit card with Signature processing and another for PIN-only processing. Most consumers are also unaware that there is no additional cost incurred by a merchant (outside of the bank and card networks) when a debit card is used instead of a credit card, and merchants are often unfamiliar with this fact as well. The effect of these facts is that an unsuspecting and non-plussed consumer may wind up paying different amounts based solely on inadequate consumer education, confusion over the different types of media, and how or whether the merchant chooses to impose credit card surcharges.
Merchants may choose whether and how to impose credit card surcharges in such a way as to mitigate some of these concerns. However, merchants have been confused about their ability to even impose credit card surcharges, due primarily to inconsistent delivery of information on the topic by credit card companies, and sometimes conflicting information on the subject promulgated by various state governments.
Many merchants, to avoid running afoul of various and differing merchant card rules in 50 states, prefer to avoid charging credit card surcharges altogether, and choose instead to pass on the costs of credit card acceptance to all consumers equally. This translates into higher prices for all consumers.
Understanding North Carolina’s Surcharge Statute
A merchant may impose a surcharge on a credit card transaction in North Carolina if certain conditions are met. The merchant must give prior notice to the credit card company and provide notice to the consumer that the surcharge will be charged. NC Gen Stat § 25A-37. Credit card holders cannot be singled out; the surcharge must apply to all purchasers paying by credit card. If a merchant does not wish to comply with the notice requirement, they must give a discount or price reduction to cash purchasers. However, the discount is not construed as a surcharge. NC Gen Stat § 25A-38. At this time, the law does not apply to debit cards. The statute was enacted in 1985. Prior to January 1, 2012, the statute prohibited unregulated surcharges. The statute was amended in 2011.
In J.Travel Accessory Group v. Middle Reef, Inc., No. 10 CVS 13667 (N.C. Super. Sep. 23, 2011), the plaintiff argued that a surcharge assessed on American Express and MasterCard credit card transactions in 1999 was illegal because the merchant had not given this notice. Addressing whether the statute applied retroactively, the court found that it was a "generally applicable" change in the law, and did not apply retroactively. Id. at 4.
How Other States Approach Credit Card Surcharges
North Carolina is not the only state with a law regulating credit card surcharges. Currently, there are twelve states which impose some form of limitation on when and how merchants can charge consumers surcharges for using credit cards. Most of those twelve states only allow surcharges for credit cards issued by certain foreign banks, such as those with headquarters outside the U.S. and its territories. Four states prohibit all surcharges. Only one state (Vermont) allows surcharges on the use of debit cards.
Whether credit card surcharges are allowed at all and the amount of those surcharges are largely left to the states and vary significantly. For example, while thirteen states prohibit the imposition of surcharges, the eleven states that currently allow surcharges have mandated different rules. Florida only allows merchants to impose surcharges on the use of credit cards unless the merchant’s use of the credit card results in a cost savings to the merchant. An Alabama merchant can only impose a surcharge on credit cards issued by banks headquartered outside the U.S., its territories or protectorates. California only allows surcharge amounts of up to one and a half percent of the purchase price, which decreases to one percent if there are competing merchants selling the same goods or services. Interestingly, New Jersey’s law specifically prohibits surcharges on "any card which bears a logo or name other than that of a credit card issuer" so certain merchant-issued cards can still be assessed surcharges.
Despite some of the serious differences in states’ regulations, there is no federal law that prohibits surcharging. The federal government has said that it will not issue any regulations on this issue. In 1984, the Department of Energy proposed regulations that would have banned credit card surcharges under the Energy Policy Act of 1992. However, the Department never adopted those regulations and Congress subsequently repealed the law in 1996 and prohibited the Department from adopting rules. Stay tuned to see whether our nation settles upon a uniform position on credit card surcharges.
How Are North Carolina Businesses Affected?
The multi-billion dollar credit card industry should be aware of North Carolina’s new credit card surcharge law. This new law, which is one of only a couple of its kind in the country, takes effect October 1, 2014.
North Carolina enacted the law to soften the blow of its prejudice law. The enactment of the law can be seen as an "either/or" approach by the N.C. Legislature. It is encouraging credit card payments by consumers while softening the impact of its long-held prejudice law and removing a potential antitrust violation for North Carolina’s retailers that employ the surcharge. However, it is difficult to predict its practical application in the long term with respect to other state and federal laws that predated this recently enacted legislation.
North Carolina retailers and other businesses in the state, who accept credit cards as a form of payment, must comply with strict notification requirements in the event a surcharge is imposed. The statute requires that the consumer be notified in writing of the surcharge (including the dollar amount of the surcharge), that the surcharge be clearly labeled as a surcharge, that the surcharge be calculated as a percentage of the purchase price (not to exceed 4%) , that the surcharge be either stated as part of the posted or displayed price or in addition to the posted or displayed price, and that the surcharge be separately stated on the receipt. In addition to the written notification ignoring the interested privity of contract and interfering with the bank credit card agreement, the only other front-end requirement of the law is that the retailer disclose to the card issuer the retailer’s intention to charge a surcharge.
The ability of certain card issuers to impose a contractual prohibition against assessing a surcharge arguably results in an impairment to the interest, if any, that a retailer in North Carolina has in imposing a surcharge. The potential economic effect of the law on retailers may be to adversely affect the retailer’s overall volume of sales by reducing the amount paid by a customer for a particular product when the surcharge is added to the displayed price. A simple example may be illustrative. If a retailer decides to impose a surcharge of 3% for credit card payment, a $100 sale becomes a $103 sale. If the 4% is imposed, the $100 becomes a $104 sale. The $3 or $4 difference might affect the decision of a consumer to purchase from the merchant who is charging the surcharge.
Consumer Implications of the Surcharge Statute
Consumers have important rights and protections when it comes to surcharging customers who choose to pay with a credit card. As noted above, businesses cannot apply a surcharge to credit card transactions in North Carolina unless that information is clearly disclosed to the consumer before the transaction is completed. If a business violates that rule by charging a credit card customer a surcharge without an effective disclosure, consumers have the right to report the violation to the North Carolina Department of Justice. The Department may commence a civil action to enjoin the violation and obtain civil penalties for the violation.
The law is not intended to interfere with any business that offers a discounted price to consumers who choose not to use credit cards to complete a transaction. Such a discount cannot be termed a "cash discount" unless just that: the consumer is given a discount when the purchase is paid for in cash. In other words, businesses are entitled to use price differentials to incentivize cash purchases, but the law prohibits them from using price differentials to penalize credit card purchases.
The Future of Surcharge Legislation
As it stands, North Carolina businesses may impose a surcharge if they wish; however, they must follow the guidelines established by the surcharge law. With that said, changes to the surcharge law may be more likely if the National Retail Federation gets its way and the federal ban on credit card surcharges is lifted. A recent U.S. Supreme Court ruling left the door open by lifting the nationwide class action ban against retailers for enforcing credit card surcharges and does not enjoin the states from enact their own bans.
The National Retail Federation has long been a strong advocate of surcharging legislation and continues to actively push for the federal ban to be lifted. With 42 states allowing credit card surcharges at the state level already , the Supreme Court’s recent ruling may provide further impetus for the General Assembly to adopt a statewide law. North Carolina ranks in the bottom tier of states by population in allowing credit card surcharges, so if the retail card industry gets its way at the federal level, the General Assembly may very well decide to fall in line with the national trend in the coming years.