Push to Ban Credit Card Surcharges Sputters

In a setback for credit card issuers and a win for retailers, legislation that would bar merchants from charging customers to pay with plastic has stalled in about 15 states.

The wave of state bills, which were introduced earlier this year, came in reaction to new rules from Visa (NYSE: V) and MasterCard (MA) that let merchants impose so-called checkout fees. That concession by the two giant card networks was part of the proposed settlement of a lawsuit over the fees card companies charge merchants when consumers swipe their credit cards.

The new rules essentially allow retailers to more directly pass on the cost of swipe fees to customers who use credit cards. But the state-level legislation would have effectively overturned, on a state-by-state basis, the impact of those rule changes. The card industry quietly supported the bills, which they drew strong opposition from merchants.

Since late January, when Visa and MasterCard began allowing the checkout fees, very few retailers have actually imposed them, likely due to fear that the charges would drive away customers. But merchants argue that merely having the right to charge such fees gives them greater leverage in negotiations with card companies.

Vermont is one of more than a dozen states where the legislature adjourned without passing a proposed surcharge ban.

"It is our sense that lawmakers didn't see any evidence of surcharging in the marketplace," which sowed doubts about "whether legislation was really necessary," emails Jim Harrison, president of the Vermont Grocers' Association.

Among those lobbying against the state bills were law firms representing merchants in the massive suit that spawned the rule changes by Visa and MasterCard. The proposed settlement of that case has divided the U.S. retail community, with many merchants arguing that the deal amounts to a giveaway to the card companies. But the proposed bans on checkout fees have united merchants who favor the settlement with those who oppose it.

"These bills, if they pass, threaten to dilute the ability of merchants to push back against high merchant fees charged by card networks," says Craig Wildfang, a lawyer at Robins Kaplan, a Minneapolis law firm representing the merchants that support the settlement. "It's just a bad policy to prevent merchants from using price signals to their customers as to what it's actually costing them to use their credit card."

Mallory Duncan, general counsel of the National Retail Federation, which opposes the settlement, calls the proposed state surcharge bans a distraction. The real issue, he argues, is the unfair way in which so-called swipe fees are set.

"And if the legislators have asked around, they have found out that these were bills that were largely ginned up by the banks," Duncan says.

The Electronic Payments Coalition, a trade association that represents Visa, MasterCard and banks that issue credit cards, did not respond to a request for comment on the state bills.

In the past, a spokesperson for the group has described the state bills as an "organic" reaction to the prospect of surcharges at the cash register, rather than the product of a coordinated push by the card industry.

Utah did impose a ban on credit card surcharges this year, but that law expires in a year, which will give Beehive State lawmakers a chance to revisit the issue in 2014.

Similar bills stalled before the end of the legislative sessions in Arkansas, Hawaii, Illinois, Indiana, Kentucky, Maryland, Nevada, New Mexico, Rhode Island, South Carolina, Tennessee, Vermont, Washington and West Virginia.

Bills remain pending in three states with year-round legislatures: Pennsylvania, Michigan and New Jersey.

In addition to playing defense against the proposed surcharge bans, retailers are also going on offense. There are 10 states that had existing bans on credit card checkout fees prior to this year, and a group of merchants recently filed a lawsuit aimed at overturning one of those laws.

The suit, filed last month, challenges New York's ban on credit card surcharges as unconstitutional. The retailers' argument is that charging a fee to use a credit card is functionally equivalent to offering a discount for paying with cash. So banning surcharges but not cash discounts amounts to a violation of merchants' First Amendment rights, since it prevents retailers from choosing the label they want to use.

"Those are really just two ways of framing the same price information," argues Deepak Gupta, a lawyer representing the retailers. "It's like calling a glass half full instead of half empty."

Apart from the bans on credit card surcharges, at least one state, Texas, recently outlawed checkout fees on debit card purchases. That legislation was backed by community banks, which feared negative fallout from rules that result in lower swipe fees for retailers when their customers use bigger banks' debit cards.