By Patti Murphy
Surcharging. Cash discounting. Dual pricing. The nomenclature may vary, but the intent is the same: charging more when a customer pays using a credit or (at times even) a debit card. Congress opened the door to differential pricing schemes with passage of the Truth in Lending Act (TILA) in 1968. That law specifically stated that card issuers "may not, by contract or otherwise, prohibit" sellers from offering inducements to pay by cash, check or some other alternative to credit.
There was a catch, however: card issuers (as well as other lenders covered by TILA) had to disclose the cost of credit. Calculating the annual percentage rate of credit in advance of every card payment for different goods and services was virtually impossible at the time. And the card networks were averse to revealing those costs, anyway, so it didn't catch on.
Of course, it didn't take long for Congress to reverse itself, banning surcharges in 1976. It was a temporary step and was renewed once, in 1981; by 1984, the federal ban had expired. In its place, many states passed laws prohibiting surcharging and/or other forms of dual pricing within their borders.
Fast forward to 2010 and Congress reiterated its stance on differential pricing, with passage of the Durbin Amendment to the Dodd-Frank Act. The Durbin Amendment made it clear that merchants are legally entitled to steer customers to less expensive payment methods, such as cash instead of credit cards. There was also a U.S. Supreme Court ruling in 2017, which made clear that card-brand bans on surcharging violated merchants' free-speech rights.
These two things set in motion a domino effect, with many states dropping prohibitions on credit card surcharging. New York was one of the last states to drop its prohibition on credit card surcharging when, in December 2023, Governor Kathy Hochul signed a new surcharging law for New York businesses. It includes a requirement that surcharges not exceed processing costs. It also requires that merchants clearly disclose the cost of purchasing an item using a credit card before a consumer makes a payment by card.
Today, surcharging remains prohibited in just two states: Connecticut and Massachusetts. In the other 48 states, it is permitted only on credit card payments (but signature debit cards are often treated like credit cards). And there is no uniformity in the way states deal with surcharging. "The result is a patchwork of state laws that again make surcharging impractical," asserted attorneys with the Constantine Cannon Law Firm in a 2021 blog post. Notice requirements, for example, are strict and widely vary, the attorneys stated.
The card brands have never hidden their disdain for surcharging or, for that matter, any type of differential pricing. But they agreed to drop surcharging prohibitions as part of a 2013 settlement agreement in a class-action lawsuit brought against the card brands by merchants years earlier.
Then, in 2023, Visa lowered permissible surcharges from 4 percent to 3 percent, which is lower than the caps placed on surcharges by some state laws, according to some experts. More recently, Visa published a four-page memo, U.S. merchant surcharge Q and A, that also lays out requirements for cash discounting.
Despite what some might see as roadblocks, many agents contend differential pricing is a viable option, even with the seeming crackdown by Visa. "It's had no impact," said Bob Nasheim, a Montana-based agent who sells surcharging. "As the surcharging rules have been very clear."
"Most agents today are selling some form of dual pricing," said James Shepherd, CEO, CC SalesPro. For example, Channelle Hill, an agent in St. Petersburg, Fla., said about 50 percent of the deals she writes up are for cash discounting. She also sells surcharging.
The appeal of differential pricing schemes is obvious. Merchants pay little to no processing costs, as processing fees are passed on to card-paying customers. (Except in the case of debit cards which cannot be surcharged.)
And agents are attracted to the significantly higher residuals. "We earn about 160 basis points, or 1.6 percent on a dual pricing transaction," said Dee Karawadra, CEO at Impact PaySystems. "That compares to about 45 basis points to 65 basis points with traditional merchant pricing."
Bart Kohler, a Cleveland-based agent, added that merchants really like these "cost recovery" models. The key is to toe the line with the card-brand rules."The issue is that many agents are not helping merchants with compliant cost recovery models," he said. For example, he added, card brand rules require merchants to notify their merchant acquirers 30 days before commencing a surcharging scheme. (Until recently, there was a requirement to register with the card brands.)
James Huber, partner at Global Legal Law Firm, doesn't agree the rules are clear. He believes they are deliberately obtuse. "The surcharge/discount rules are unclear on purpose to allow only Visa and the issuers to benefit and squeeze out any margin for the ISOs," he asserted. Huber is the lead attorney representing a proposed class of ISOs suing Visa over its surcharging and cash discounting rules.
"We were promoting cash discounting about two years ago, then last year transitioned to dual pricing and worked toward switching previous cash-discounting merchants," said Linda Easter Gabriel. She noted that she lost a customer who didn't want to remove the non-cash adjustment from his receipts—a non-starter for cash discounting under Visa rules.
Visa has become adamant about compliance with its surcharging and cash discounting rules, and this has had the effect of rendering a "non-cash adjustment," a common line item employed in cash discounting programs, in violation of Visa's rules, since the "adjustment" is added to the total purchase price, a practice that is not permitted by Visa. (Government and educational entities are the lone exceptions to the added fee prohibition.)
The card company also has deployed an army of secret shoppers to identify merchants with differential pricing programs that do not comport with its rules. (Like cash discount programs that add non-cash adjustments.)
"Visa has declared war on differential pricing," Shepherd asserted. "To be fully compliant you need a system that displays prices side-by-side." Shepherd recounted how some ISOs have begun printing shelf labels and menus that display dual pricing—cash and card—for fear of seeing clients caught in a compliance bind.
Because, after all, you never know when a secret shopper might hit a particular merchant. What is known is that when a secret shopper identifies an errant merchant, it can be costly for that merchant.
MiCamp Solutions, an ISO based in Arizona, discovered this the hard way: $70,000 in fines for one merchant's violation of Visa's surcharging rules. While MiCamp, or any ISO for that matter, is free to pass along such fines to customers, Huber suggested the fines are for amounts that could well put small merchants out of business.
MiCamp is suing Visa in U.S. District Court for the Northern District of California, alleging violations of state and federal antitrust law, as well as merchants' free-speech rights. "By prohibiting certain disfavored speech by merchants – and enforcing that prohibition with criminal penalties on those merchants' ISOs – Visa's surcharge rules violate First Amendment rights, as applied to the states through the Fourteenth Amendment" to the Constitution, the lawsuit alleges.
The suit was brought against Visa specifically, Huber explained, because competing networks (American Express, Discover and Mastercard) either do not have or do not enforce policies as stringent as Visa's requirements. Huber bristles at mention of Visa's secret shopper program. "Visa's use of paid employees, or as Visa has coined them, 'secret shoppers,' to audit merchants and enforce its surcharge rules, is akin to utilizing privately paid police officers to effectuate its goal of continuing to assess quasi-criminal penalties on ISOs," he said.
There are indications that these fees could get caught up in the Biden Administration's declared war on junk fees. In November 2023, the Federal Trade Commission proposed a new rule on "unfair or deceptive fees," for the non-bank financial services providers it oversees. The commission said it was specifically interested in add-on fees that inflate the total cost of goods and services.
While credit card surcharges were not mentioned in the original proposal, the FTC said the issue was raised in several comment letters. So, it's on the agency's radar. The FTC suggested, for example, that "If a business includes a fee the consumer cannot reasonably avoid to process the payment for any good or service, such as payment processing, [that] would be a mandatory ancillary service."
Jonathan Razi, an attorney and expert on credit card surcharging, characterized the notion of the FTC going after merchants for surcharging as "a big if" under the proposed rule—especially since the existence of surcharges must be clearly posted at the checkout under Visa rules. Razi also said that he expects "a lot of push back" if the FTC moves forward with such language. 
Patti Murphy, self-described payments maven of the fourth estate, is senior editor at the Green Sheet. She also co-hosts the Merchant Sales Podcast, and is president of ProScribes Ink. You can reach her at patti@proscribes.net.
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