When CardX presented its case in Kansas District Court in defense of retailers adding a surcharge for accepting credit cards, the argument didn't stray far from its typical pitch to merchants.
Chicago-based CardX, a provider of technology that allows merchants to add a charge to credit card acceptance, wanted Kansas to join the many states that permit the practice of allowing merchants to add a fee to recoup the cost of accepting credit cards. Other courts have sided with merchants that argued a surcharge ban violated their free-speech rights to explain surcharges to consumers.
"If we could ground the case in the real-world facts about how our solution works, we knew it would benefit our case," said Jonathan Razi, founder and CEO of CardX. "We put in screenshots of what consumers actually see in our visual presentations, and I think it made it an even stronger case. It showed that consumer transparency was at the heart of our model and it paid off for us."
That strategy paid off. Last week's ruling in Kansas District Court leaves only three states — Colorado, Massachusetts and Connecticut — that still prohibit merchants from adding a surcharge for credit card transactions.
As in past cases litigated directly by merchants, CardX's legal arguments focused on whether banning the practice of surcharging violates principles of free speech. "In the First Amendment aspects of the case, we have very much in common with the surcharging litigation that preceded us from merchant groups," Razi said.
The question of free speech sits at the core of surcharge laws because a divided Supreme Court four years ago
The Kansas court determined that CardX was entitled to a favorable judgment on its claim for relief in declaring Kansas law would prohibit it from "selling and using its software that employs a 'single-sticker' price display (including the display of a price and a percentage or dollar amount fee added onto the price for credit card purchases) and violates the plaintiff's First Amendment right to freedom of speech," Judge John W. Broomes wrote in the order filed in the U.S. District Court for the District of Kansas.
“If allowed to pass on the cost of credit card acceptance, such businesses are able to offer their goods and services to the significant portion of the consumer base that prefers or needs to pay with credit," Broomes noted. "In these industries and across the economy, credit card surcharges expand consumer choice.”
While surcharging is an added cost to a credit card transaction at the point of sale, a cash discount is explained through a sign that would show the specific price for a cash transaction versus one with a card. That arrangement establishes a cash discount as not being a price change after the transaction is initiated, whereas a surcharge would be. CardX argued that if Kansas was allowing cash discounts, it should not have stipulations against surcharging if the proper notifications to consumers were present at the point of sale.
"Now more than ever, businesses are facing a difficult balancing act," Razi said. "You have to offer a credit card option as more consumers want to engage in digital transactions, and more are going online, which is an even more expensive proposition for merchants. And the card networks are expected to raise interchange rates in April."
Still, the argument over surcharging isn't likely to go away just because more states accept the practice.
One side of the argument is that the losses
But, generally, consumers are likely to balk at a sign or display revealing an extra fee for using their credit card, said Brian Riley, director of card services for Mercator Advisory Group.
"As a consumer, it could turn you off to see the surcharge added on, even at a restaurant when you see the extra 3%," Riley said. "But there is a market for surcharging, however, and it is effective for small, downscale merchants. I don't see a Macy's or Home Depot doing it though."
Plus, Riley noted, there hasn't been an official word from the card networks on what will happen with interchange fees next month.
"There has been some back and forth on that, in terms of whether the networks will do it, but we know those fees won't be coming down, and they haven't been raised in a while," Riley said.
Consumers making purchases at large retailers or even most smaller shops may never encounter a surcharge notification, but
Five years ago, it was more likely that
Plus, it took some time for smaller merchants to understand, or even hear about, the changes in how the card network surcharging rules apply to credit cards. Understandably, banks may have not been in any hurry to spread the word that merchants could add a surcharge to offset interchange.
"Businesses operating with tight profit margins often really benefit from surcharging because their alternative for taking cards when rates go up, as they have in the past, is to raise prices on their products," CardX's Razi said. "The judge pointed out in our case that such a scenario results in cash and debit payers paying more because someone else is using credit cards."
CardX tries to help merchants with the verbiage and communication templates to post notices to customers at the point of sale. Part of that communication also informs customers they can use debit cards or pay cash to avoid credit card surcharges, Razi added.
"We want the merchant's customers to know as much as possible before the transaction," he said.
