By Josh Herndon
Global Legal Law Firm
The fees charged are one of the big selling points for professionals in the payment processing field. That's the case despite all the value-added services available, which in a business sense, would justify the interchange and other fees that make the industry lucrative.
Over the years, some organizations have had success by allowing merchants to surcharge their customers. But the risk of having one customer complain about surcharge fees and post a negative review, coupled with unclear laws and regulations regarding surcharges, have deterred merchants from implementing surcharge programs, thereby stifling their broad acceptance and stunted their success.
A recent ruling by the United States Supreme Court clarified the options available to merchants who seek to impose surcharges. The Court held that a New York statute allowing surcharges amounted to free speech, which is highly protected, and any attempt to limit free speech requires an extreme justification, such as protecting the public.
In Expressions Hair Design v. Schneiderman, the Court ruled that Section 518 of New York's general business law, which prohibits merchants from imposing a surcharge for using a credit or debit card, is regulated speech, and the Court remanded for the lower court to determine whether Section 518 is unconstitutional.
The Court's decision was fact specific and limited to whether Section 518 was unconstitutional as applied to one specific type of pricing practice – posting a cash price and an additional credit card surcharge, expressed as either a percentage surcharge or a dollars-and-cents additional amount. Essentially, this was a cash-discount program, where the price is lower if paid by cash or check. The Court's decision may not only result in Section 518 being struck down, it may also impact the laws banning surcharging that are currently in effect in California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Oklahoma and Texas.
Cash discount programs have historically been entirely defensible. A successful defense was mounted for a merchant with such a program. The program allowed for a discount for debit-only transactions over credit transactions, which tend to cost the merchant more for high-dollar transactions. The proprietary program also allowed for credit-only and credit and debit discounts. With legal assistance, the program prevailed against regulators in the state where it does business, as well as won approval by demonstrating its conformity with the card brand rules and bank and processor's internal policies and procedures.
The Expressions Hair Design case further opens the doors for surcharge programs.
The opportunities available to merchants to impose surcharges will depend on where their customers are purchasing their products. For merchants whose customers purchase their products in one or more states that do not have laws banning surcharging, surcharging is essentially wide open as long as the merchants comply with the card brand rules. Merchants in those states – particularly marijuana dispensaries and other high-risk merchants, nutraceutical companies, and certain loss leader outfits – could be surcharging their customers across the board for credit card purchases. But doing so brings inherent risks.
To mitigate the risks, payment companies should work with merchants to help them consider all the ways surcharging could negatively impact the customer experience, as well as the damaging results unfavorable customer experiences could have on their businesses.
For instance, merchants need to consider their customer base, and their reaction to a surcharge. A coffee shop surcharging $0.30 on a $3 transaction may lose customers who are looking to keep their coffee budget under $900 per year. In addition to assessing the possibility of losing upset customers, merchants also need to consider that even one upset customer can create a negative reputation for them on Yelp and other social media. However, merchants who are not concerned about such practical considerations can lower their costs substantially by surcharging their customers.
An area where surcharging has received wide acceptance is in sectors where accepting card payments is difficult. Businesses in the cannabis space are one example of this. Dispensaries that accept card payments are happy to impose a surcharge because a dispensary that accepts card payments is likely only one of a few that have procured the appropriate vendors.
As for the potential pitfalls for merchants whose customers purchase their products in states that have enacted anti-surcharging laws, those merchants could face stiff penalties, including potential prison time, if they try to surcharge their customers in violation of the anti-surcharging laws – as long as those laws remain in effect. But even in the states with laws that prohibit surcharging, imposing a discount program is defensible, as shown through the Expressions Hair Design case.
Payment companies and merchants must navigate a minefield of potential legal and practical pitfalls when considering whether to impose surcharges and maximize the potential opportunities available to them. To successfully navigate that minefield, businesses that desire to offer surcharging programs should tailor their programs to comply with the applicable rules and regulations, and continue to monitor developments. Doing so is a logistical challenge for entities operating in multiple states, but with proper counsel, it's relatively easy.
Essentially, considerations must be focused on other potential non-legal unintended consequences that could undermine the economic opportunities of implementing surcharging programs.
Josh Herndon is an attorney at the Global Legal Law Firm, whose attorneys are experts in the payments industry. The firm's passion for this field derives from working with a number of payment companies run by exemplary people who provide opportunities for their employees and workers to reach higher levels of fulfillment in their careers and personal lives. Herndon works in the compliance field helping electronic payment companies avoid violating rules, as well as avoid being fined, arrested or sued from internal or external threats. He is also involved in litigation in the payments space, including defending and pursuing electronic payment companies. He can be reached at firstname.lastname@example.org.
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