A Fee Too Far: Merchants, Surcharges, and the War on Plastic
Earlier this summer, my family took a vacation to Ocean City, Maryland, where the boardwalk offered ice cream, souvenirs, and an unexpected lesson in payment economics. Every retailer we visited added a surcharge of at least 3% for credit-card payments, yet not one posted a sign. I discovered the charges only later, while checking my receipts. Some merchants surcharged both debit and credit cards, while others targeted credit cards alone.
Ocean City was hardly an outlier. Over the past month, my dentist, mechanic, and a tree service have all charged me extra for using a credit card—and those are just the surcharges I noticed or someone disclosed.
Meanwhile, merchants have taken their fight against card-processing fees to state legislatures. In Illinois, they secured a law exempting state and local taxes and gratuities from interchange fees—the portion of a card-processing charge that goes to the bank that issued the card. The idea has since spread unevenly to several other states.
Colorado’s version was especially convoluted. It carved out smaller Colorado banks and imposed price controls on fees for charitable donations. The governor recently vetoed it. Meanwhile, Illinois has delayed its law’s effective date, and the Office of the Comptroller of the Currency has announced plans to preempt it.
Retailers have also turned to the courts. In North Dakota and Kentucky, they have filed federal lawsuits challenging the Federal Reserve Board’s formula for setting the maximum interchange fees that large banks may charge on debit-card transactions. Congress required those limits through the so-called Durbin Amendment to the 2010 Dodd-Frank financial-reform law.
Federal Reserve rules adopted in 2011 cut the permitted rates roughly in half. The result was higher bank fees, a sharp decline in free checking, and the disappearance of debit-card rewards. Retailers nonetheless argue that the remaining fees are still too generous because banks may recover costs associated with fraud prevention, fraud losses, dispute resolution, and other consumer protections. Cutting the fees further would not make those costs disappear. It would merely shift more of them to consumers.
Retailers have also spent millions lobbying Congress to extend some of the Durbin Amendment’s worst features to credit cards. That effort would raise costs, restrict access to credit, and weaken payment security—all in the name of lowering a fee that consumers rarely see but ultimately help pay.