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Tuesday, December 12, 2023

Will FTC put kibosh on merchant surcharging?

Alternative pricing arrangements that shift some or all of payment processing fees from merchants to their customers could come under fire from the Biden Administration's campaign against junk fees.

In October 2023, the Federal Trade Commission proposed a new "rule on unfair or deceptive fees," specifically add-on fees that inflate the total cost of goods and services, like credit card surcharges.

The CFPB issued a similar proposal specific to banks and credit unions.

President Biden has made action on junk fees a priority for his administration. According to the White House, junk fees generate more than $64 billion a year in revenues. Hidden fees on cable bills, for example, generated $28 billion in cable company revenues in 2019, while hotels accumulated $2.93 billion in resort fees. Among the most controversial fees are those levied as part of online sales for live events, which have raised the ire of lawmakers and performers, as well as consumers.

But a deep dive into the FTC's 60-plus page proposal reveals that credit card surcharges, as well as cash discount programs, could end up on the receiving end of the proposed new strictures. Ironically, payment processing fees were not mentioned in the advance notice of rulemaking the FTC submitted for comment last year. The FTC noted the issue was raised in numerous comment letters.

"Every day, I am lured into a transaction, told I am going to pay one price, only to have it raised by a large percentage at checkout due to fees that are non-negotiable or part of processing," one consumer wrote in a comment letter to the FTC.

"Fees to pay with a credit card when the fee wasn't posted or disclosed anywhere. Usually at least 3 to 5 percent of the total transaction, and that would include taxes. It's insane," stated another comment letter. One commenter, referring to restaurant fees in particular, wrote,"It's difficult to un-eat a meal if you disagree with these fees."

Jonathan Razi, an attorney and expert on credit card surcharging, isn't convinced surcharging will get caught up in the FTC's rulemaking. "There is going to be a lot of push back," he said in a telephone interview. Razi founded CardX, an automated platform that supports compliant surcharging. Payments technology fir Stax purchased CardX in 2021.

Credit card surcharging is expressly permitted under the laws of 48 states; only Massachusetts, Connecticut and Puerto Rico have laws on the books that prohibit surcharging. The Durbin Amendment to the Dodd-Frank Act includes a provision that legitimizes the practice of offering discounts for seller's preferred payment methods (that is: cash versus card).

Is disclosure enough?

"The Commission believes that the proposed rule will substantially improve its ability to combat the most prevalent unfair or deceptive practices relating to fees and other charges, and may also strengthen deterrence against these practices," the FTC wrote in it proposal. Non-compliance would result in monetary fines.

Of particular concern is what the FTC defines as an "ancillary good or service." These are offered a consumer as part of a transaction and may be mandatory or optional. Here's the example provided: "If a business includes a fee the consumer cannot reasonably avoid to process the payment for any good or service, such payment processing would be a mandatory ancillary service," the FTC said.

There seems to be an out—what the FTC describes as a "preventative disclosure requirement." To qualify, the merchant must make clear and conspicuous disclosures of the nature and purpose of any additional costs before a consumer agrees to pay. "It's important to give the cardholder a clearly disclosed opportunity to walk away," Razi said.

Restaurants in the crosshairs

The FTC said it received numerous comments complaining about fees added to restaurant bills, which can include everything from large-party service charges to credit card surcharges. While some of these fees may be disclosed on menus, the FTC noted they are often overlooked by diners.

"Restaurants may characterize some fees as optional, and, thus, avoidable in principal, but these fees are mandatory in effect because consumers may not have a way to practically avoid them if they do not learn of them until receiving the bill," the FTC wrote. "If, however, the consumer does not know about this fee in advance and does not have sufficient cash on hand, it is unlikely the consumer can obtain cash on the spot to cover the bill...the consumer has no reasonable choice but to accept and pay the unexpected credit card usage fee."

The proposed rule, if adopted, would require prices on menus be inclusive of any mandatory service fees.

The National Restaurant Association is mounting a grassroots campaign to 86 the plan. Sean Kennedy, executive vice president, public affairs for the association, said it was caught off guard by the inclusion of restaurants in the proposal. He noted the Biden Administration had not previously mentioned restaurant surcharges as an example of junk fees.

"We support the FTC on taking steps to be more transparent and have greater disclosure of fees, but to ban all of them, especially for restaurants, would be a step too far," Kennedy said. end of article

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