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More states allow surcharging, playing right into CardX's hands

If a merchant seeking to avoid credit card fees turned to cash discounting, it was at least partly because the other option — putting a surcharge on credit card use — was complicated and illegal in many states.

But more states are allowing surcharging, with a Fifth Circuit Court in Texas last week ruling in favor of merchants and taking the state's no-surcharging law off the books. The court ruled the law violated free speech, a legal maneuver that lawyers representing merchants presented at Supreme Court hearings last year.

This is good news for Chicago-based CardX, a payments technology company specializing in providing merchants with payment terminals loaded with the software and specifications to apply the industry norm of a 3.5 percent surcharge on credit card transactions and also be compliant with any federal, card network or state rules governing its use.

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"We advocated in the Supreme Court case as the only payments company to have a brief, describing how surcharging affects a market when done at scale by expanding consumer choice, resulting in more transparency and lowering merchant costs," said Jonathan Razi, CEO of CardX. "The argument presented by plaintiffs was, what is the difference between charging more for credit and charging less for cash, because they are economically equal. It's purely a matter of how you frame and communicate your prices, therefore it is not the conduct being regulated, it was speech. It was an ingenious argument and it carried the day."

Still, courts have debated card surcharging as it compares to cash discounting, particularly if a merchant lured a customer in with the promise of lower prices for using cash, but had a significant price increase if the customer instead wanted to use a credit card. Or, put another way, the courts were not enamored with retailers offering lower prices for cash at the same time it was charging more for credit card transactions.

As the number of states outlawing surcharging has continued to fall, the free speech concept has won out — that if merchants were going to surcharge, they had the right to educate their customers as to why with signs and other materials within the physical store.

The ruling in Texas on Rowell v. Paxton follows similar merchant wins in Florida and California, leaving only a pending hearing in New York where the law is being challenged. Currently, there are no merchant challenges regarding laws against surcharging in Maine, Colorado, Oklahoma, Kansas, Connecticut or Massachusetts. All other states allow surcharging.

The slow but steady conversion of state laws to allow merchant surcharging means more merchants will find the policy an attractive option to offset credit card fees. Until now, the concept has not taken widespread hold, even after the major card brands eased their rules against surcharging as part of an initial interchange litigation settlement six years ago.

But merchant adoption will be gradual, according to Paul Martaus, acquiring industry consultant and industry researcher. "It's really a marketing issue now, because if merchants don't know it is out there, they can't react to it," Martaus said. "A lot of them are not doing surcharging, and you have to reach critical mass on this."

If not enough merchants decide to add surcharges to credit card transactions, then others might be reluctant to jump in for fear they would lose customers who could find the same products at less costs because of no fees, Martaus added. "Understanding that it is out there and available is one thing, but understanding the implications and nuances is something entirely different," he said.

CardX believes it has good momentum in that regard, having signed up more than 3,000 merchant locations across the country in what Razi is calling the company's best year.

"ISOs have a huge demand to sell a product like" surcharge-ready terminals, Razi said. "Traditional merchant pricing has become so competitive, they are racing to the bottom as far as profitability because the only way to sign up a merchant is to undercut someone else's price."

By comparison, Razi feels that a solution that makes a transition to surcharging easy for the merchant will result in high sales margins and increased retention. "No one can undercut your price when merchants are processing credit cards at zero percent cost," he said.

Mostly, merchant acquirers and companies like CardX just have to wait for the other no-surcharge dominoes to fall to make it an acceptable nationwide practice.

"Even after Visa and Mastercard allowed surcharging, there were state laws prohibiting it," Holli Targan, attorney at partner at Jaffe, Raitt, Heuer & Weiss PC, said at a recent acquirers conference. "So there was always a question from larger merchants as to how they would be able to implement surcharging across the country."

Because of the cited First Amendment violations, and the fact that only surcharging is prohibited but not other methods like cash discounting, the acquiring industry is "expecting all state laws to be shot down eventually," Targan said.

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