Since the first credit card debuted in 1958, the debate about how merchants can offer the payment method without cutting into their profits has persisted – here’s the latest
If you have dined out lately and paid with a credit card, you might have noticed an extra “service,” “convenience,” or “surcharge” fee added to you bill. You may or may not have seen a sign in the restaurant window or at the register beforehand alerting you to this extra fee for payments by credit card. Paying that fee might naturally lead you to wonder whether you could tag your rental customers similarly whenever they pay with a credit card. This article will review the rules concerning credit-card surcharges in the retail (and rental) world. However, those rules are shifting rapidly, and might change between the time of this writing and the time of your reading. So be careful. Talk with your bank or, better, a lawyer with some expertise in this arena before changing your company’s payment policies.
At one time, 10 states – California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas – as well as Puerto Rico had laws specifically outlawing credit-card surcharges, presumably in the interests of consumer protection. Over time, some of those laws were successfully challenged in federal courts and held to be unconstitutional on First Amendment or other grounds. As of this writing, the number of states still prohibiting credit-card surcharges has been whittled down to only Connecticut and Massachusetts, plus Puerto Rico.
A Little Credit History
There is a somewhat behind-the-scenes cost to processing credit-card payments, which has been the case for as long as there have been credit cards – the modern version of which was rolled out in 1958 when Bank of America introduced its BankAmericard. A version of that card became Visa in 1976, and in-between, a joint venture of banks came out with MasterCard in 1969. Transactions costs in those days, before computers became ubiquitous, were labor-intensive, involving manually verifying card authorizations – either by telephone or by checking the card against large lists of bogus card numbers – plus creating paper drafts of the transactions, which had to be circulated through several parties, including card networks, and banks at both the merchant and consumer ends.
The industry initially saw little regulation, as there were relatively few credit-card transactions compared with overall consumer transactions at the time. But even then, there was a move to make sure card companies didn’t restrict merchants’ efforts to get paid by means other than credit card – for example, by offering discounts for payments made by cash or check.
In 1976, Congress passed a ban on surcharging, adding a fee to a transaction when a credit card is used for payment. Credit-card companies championed this law because they didn’t want any financial impediments to using their cards. Merchants were against it, because when customers paid with a credit card, merchants had to pay the interchange fee, which cut into their profits. The law expired in 1984.
When the federal law expired, the card companies began restricting merchants’ ability to add a surcharge with contractual language in the agreements between the merchants and the card companies. The card companies also went to the states and lobbied for surcharge bans, arguing consumer protection. The ten states listed above and Puerto Rico eventually enacted no-surcharge statutes.
In 2005, the anti-surcharge landscape began to change when a Georgia company sued Visa for anti-trust violations – specifically price fixing – when, within its merchant contracts, Visa prohibited merchants from encouraging consumers to pay using less-expensive payment methods – like cash or check.
The case settled eight years later, and as a result, merchants in the 40 states without specific anti-surcharge legislation were able to add a surcharge to payments made with a card.
In 2013, a federal court ruled that New York’s law was unconstitutionally vague and an unlawful restriction on merchants’ constitutional rights to commercial free speech, i.e., to advertise “it is cheaper to pay with cash or a check.” A California federal court reached the same conclusion in 2015 when ruling on the state’s anti-surcharge statute.
First of all, dealers must determine the law of surcharges within their store’s jurisdiction. Even with the demise of sweeping anti-surcharge statutes, there are still some state laws regulating surcharge elements.
One way to address credit-card transaction costs is to offer a cash discount. Cash discounts are perfectly legal everywhere, and can be done in-store or online. The difference between cash discounts and credit-card surcharges is how the original cash price for an item is determined and disclosed.
An avalanche of similar lawsuits followed, all ruling against anti-surcharge measures in Florida, Texas, and other states. Today, only Connecticut’s and Massachusetts’ anti-surcharge laws have survived intact – but even there, merchants can offer discounts to consumers who pay with cash or by check or other non-credit-card methods.
Credit-Card Surcharges Today
While rental dealers in most states can add surcharges to payments made with credit card, there are still some rules that apply, and those rules change and will continue to change over time. First of all, dealers must determine the law of surcharges within their store’s jurisdiction. Even with the demise of sweeping anti-surcharge statutes, there are still some state laws regulating surcharge elements.
Under federal law, there is an overall 4% cap on the amount of a surcharge; Montana caps surcharge amounts at 3%; Colorado caps surcharges at 2%; Illinois law caps at 1% or the cost of the processing fee, whichever is less; and South Carolina, Nevada, New Jersey, and New York cap surcharge fees at the merchants’ cost of the credit-card interchange fee. Rental dealers can add surcharges only to credit-card payments, not debit-card payments or payments made with a prepaid card. The debit-card prohibition includes payments made via “signature debit payments” (also known as “running a card as credit”).
In addition to state laws that regulate without outlawing surcharges, the credit-card companies have their own rules, including notice requirements both to the company and to cardholders, surcharge caps, and other rules, which differ slightly among the credit card companies. The current MasterCard rules are one example; you can peruse them here: https://www.mastercard.us/enus/business/overview/support/merchant-surcharge-rules.html.
Such contractual obligations include notifying the card company in writing 30 days in advance of the merchant’s intent to add surcharges to transactions. (All credit-card companies require this notice except American Express.)
Merchants must have notices at their store entries and also at the counter – or prominently displayed on their website – advising customers of the surcharge if they choose to pay with a credit card. The exact language requirements of these notices varies slightly among credit-card companies. In addition to the store notices, customer payment receipts must show the surcharge amount as a separate line item.
New York: A Special Case
Earlier this year, the state of New York amended its credit-card surcharge statute. At one time, the state outlawed such surcharges, but a new law – which went into effect February 11, 2024 –specifically allows credit-card surcharges as long as they are properly disclosed to customers in advance and are capped per the law.
New York has created its own surcharge- disclosure rules. Rental dealers must disclose the credit-card price and the cash price in the same place at the same time. Or they can display the credit-card price and advise customers there is a discount for paying with cash. Or they can display the same product price regardless of payment type. The surcharge amount is capped in New York at the amount the credit-card company charges the merchant for the credit-card transaction.
All About Cash Discounts
One way to address credit-card transaction costs is to offer a cash discount. Cash discounts are perfectly legal everywhere, and can be done in-store or online. The difference between cash discounts and credit-card surcharges is how the original cash price for an item is determined and disclosed.
With a cash-discount program – and assuming some customers are going to pay with a credit card no matter what – the posted price includes what the merchant pays for processing credit- card payments. For instance, assume the merchant pays 3% to process payments made with credit cards. If the traditional cash price for a TV is $999, the merchant knows that if the customer pays with a credit card, then he will net only $969.03, because he has to pay the interchange fee of $29.97 (3% of $999).
If the merchant wants to net $999 on all TV purchases – including the ones paid via credit card – he will have to raise the cash price to $1,028.97 in order to net $999 when customers pay with a credit card. He can advertise the new, higher cash price, then advertise that customers get a discount of X% if they pay with cash or check or other non-credit-card method. There are obvious marketplace issues involved in raising cash prices to include the credit-card service fee, and cash-discount programs, while legal everywhere, will not work everywhere.
Late-Breaking Surcharge News
In March 2024, Visa and Mastercard settled a lawsuit with multiple merchants that will lower interchange fees for a period of time. The settlement technically has nothing to do with the Credit Card Competition Act (CCCA), a pending Congressional bill that would force credit-card companies to lower their fees.
At this writing, the parties have agreed to the settlement, but it still must be approved by the federal court in New York’s Eastern District. According to the terms of the settlement, Visa and Mastercard must lower their interchange fees by at least four basis points for at least three years. They also can’t raise their fees above 2023 levels for five years, and average interchange fees must be at least seven basis points lower than the current average rate.
Once the settlement has been approved by the court, interchange-fee levels will be reduced by some amount for the next five years. The settlement also puts a cap on the surcharges merchants can add to credit-card payments, both in their stores or on their websites. The proposed cap is 1% unless the merchant takes only Visa or Master Card, in which case the cap will be 3%.
Critics argue that this settlement is an attempt to forestall the pending federal legislation and keep the government out of credit-card fees and transactions overall as much as possible. According to Christopher Jones – the National Grocers Association’s Senior Vice President of Government Relations and Counsel, and a member of the merchant coalition’s Executive Committee, “The settlement does nothing to actually bring competitive market forces to swipe fees, nor change the behavior of a cartel that centrally fixes rates and bars competition. Instead, it tries to provide token, temporary relief, and then allows the card companies to raise rates yet again.” The matter is pending.
Credit-Card Conclusions
Once, it might have been that rent-toown was a cash business, but those days are long gone. The National Retail Merchants Association reports that during the pandemic – and ever since – 80% of overall U.S. retail consumer sales are paid with a credit card account. In RTO, that percentage may not be as high, but payments made with credit cards still account for a high percentage of rental payments – and that number is expected to continue to climb.
So rental dealers need to know the ins and outs of how credit-card payments work where their stores are, and we hope this information inspires dealers to learn more and make sure their practices are, first of all, scrupulously legal, attractive to their customers, and able to generate the sorts of returns that make running a rent-to-own business worthwhile.
Ed Winn III serves as APRO General Counsel. For legal advice, members in good standing can email legal@rtohq.org.
