Credit and debit cards have taken the nation by storm. During the past two decades, the use of electronic payment cards to make retail purchases in the United States has increased at a phenomenal rate. Adjusted for inflation, the annual amount charged to credit cards in this country increased more than threefold between 1993 and 2007, from just over $600 billion to more than $1.9 trillion. Debit card use is increasing even faster. The Federal Reserve estimates that debit card payments tripled in just six years – between 2000 and 2006 – growing at an average annual rate of almost 20 percent. According to estimates, card transactions accounted for 56 percent of all U.S. retail purchases in 2005. Further increases are expected.
As card purchases have increased, retailers have called on lawmakers to allow them to add point-of-sale surcharges. If these surcharges are allowed, retailers would be able to add a fee to the purchase price at the checkout counter when customers use credit or debit cards to pay for goods and services. For example, say that a retailer, such as a department store, at the point of purchase tacked on a fee to the price of each sale paid for with a credit card. Suppose also that the fee was equal to two percent of the value of the sale and was designed to cover what the retailer pays banks to process the transaction. (The fee paid by the retailer is known as a merchant discount fee, which will also be referred to as a bank card fee in this paper.) As a result, a product marked $100 on the rack would be sold for $102 plus any sales tax when a customer paid by credit card.
Consequently, surcharging has become controversial, especially among consumer advocates. First, there is concern that retail shoppers who use bank cards would not be able to obtain accurate information from on-product sticker prices or ticket prices on the rack. Second, the actual price of the purchase is not revealed until the customer is at the point-of-sale — the checkout counter. This makes informed shopping, often characterized by cost comparisons and household budget consideration, difficult. Third, perhaps more troubling for consumers, the actual price of goods or services would be higher than what they expected to pay.
Under the Federal Truth in Lending Act, such surcharges were banned by the federal government until 1984. However, Congress never renewed the part of the law forbidding surcharging, and the federal ban is no longer in place. Currently, ten states have laws on the books forbidding retailers from imposing credit card surcharges on consumers. Laws in four of them also prohibit surcharges on purchases made using debit cards. In addition, a number of other state legislatures are considering bills that would extend state bans on credit card surcharging to debit cards. Rules established by credit card networks, such as Visa and MasterCard, prohibit the use of consumer surcharges. Consequently, these fees have not yet appeared in the U.S.
Merchants have pricing options other than point-of-sale surcharges that avoid the problem of unannounced price increases at the checkout counter. They can build the out-of-pocket expenses associated with bank card expenses into the prices of their products, as they do with other business expenses, thereby providing consumers with a single price and avoiding surprises at the point of sale. Also, bank card network rules and federal law allow retailers to offer discounts to customers who pay with cash. In that instance, retailers would post a single price for all customers and then make reductions in that price at the point of sale for customers who use cash.
Recently, legislative proposals have appeared that would explicitly negate no-surcharge rules by preventing credit card companies from “inhibit[ing] the ability of any merchant to direct consumers to the merchant’s preferred form of payment. Some of the nation’s largest retailers have expressed support for this approach and opposed additional state bans on bank card surcharge.
To inform this debate, this paper presents an economic analysis of point-of-sale surcharges and examines their potential effects on U.S. consumers.
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