Texas Outlaws Debit Surcharges — Are More Bans Coming?

In a reflection of fears that big-box retailers will start freezing out community banks, the state of Texas has barred merchants from imposing surcharges when customers use their debit cards.

The ban, signed into law by Gov. Rick Perry on June 14, is the latest fallout from the 2010 federal law that shook up debit card pricing. It follows new rules from Visa (NYSE: V) that are expected to help retailers and big banks, and could prompt other states to consider barring surcharges.

The Texas law was spearheaded by the Independent Bankers Association of Texas, which represents banks with less than $20 billion in assets. In talking points posted to its website, the community banking trade group explained the concerns that prompted the law.

"Financial alliances between 'big-box stores' and the largest banks could 'steer' consumers toward those particular banks by creating financial disincentives for those wishing to utilize the debit cards of smaller community banks," the document states.

Stephen Scurlock, executive vice president of IBAT, says he is unaware of any retailers that are currently imposing a surcharge on debit card purchases. But he adds, "We believe that that is possible."

Spokespeople for both Visa and MasterCard (MA) say that their rules currently prohibit surcharges on debit card purchases. However, the two leading card networks can amend their rules at any time, and they have recently made certain changes that are favored by retailers.

As part of a proposed court settlement with retailers, Visa and MasterCard recently lifted their long-standing bans on credit card surcharges. And in February, Visa agreed to give merchants more flexibility in offering discounts to consumers who use both debit and credit cards.

Shortly after the latter change was announced, JPMorgan Chase announced a new partnership with Visa that will allow the megabank to negotiate directly with merchants over how they process payments on Chase credit and debit cards.

The larger context for the new Texas law involves changes to the debit-card market wrought by the nearly three-year-old Durbin Amendment in the Dodd-Frank Act. It caps the fees that large banks can charge to merchants, but leaves uncapped fees charged by banks with under $10 billion in assets.

That price discrepancy gives merchants a financial incentive - apart from the restrictions imposed by Visa and MasterCard rules - to encourage their customers to use debit cards issued by larger banks.

"In theory, it provides an incentive for big-box retailers to drive people to that lower-cost alternative," says Kenneth Clayton, chief counsel at the American Bankers Association.

But there are questions about whether the new Texas law will actually prevent mutually advantageous deals between retailers and big banks. For example, the law does not ban discounts to users of a specific bank's debit card. If big banks and retailers team up on such offers, they could take business away from smaller banks.

The ABA, whose members include both big banks and small banks, opposed the Durbin Amendment. On Friday, Clayton offered a similarly critical assessment of the new Texas law.

"This is the irrationality of the Durbin price control," he says. "It breeds more price control, because unintended consequences occur."

Others argue that the Lone Star State measure is unnecessary. Ronnie Volkening, president of the Texas Retailers Association, which opposed the new law, says that he polled members of his trade group and found no interest in imposing debit-card surcharges.

But nationally, some retailers have tried to impose debit-card surcharges, in spite of the Visa and MasterCard rules that bar them, says Trish Wexler, spokeswoman for the Electronic Payments Coalition, a trade group that represents Visa, MasterCard and big banks.

Nonetheless, the coalition is not taking any position on the Texas law, she says.

Texas is the second state to ban surcharges on debit card purchases, according to research by the American Bankers Association. In 2011, Maine enacted a law that bans the fees on both debit and credit card transactions.

It is too early to tell whether the Texas law will serve as a catalyst for similar legislation in other states.

Texas had a preexisting ban on credit-card surcharges - it is one of 11 states with such a law - and backers of the debit card legislation argued to legislators that the new law would simply ensure that the two payment methods are treated the same way.