Wednesday, August 11, 2010
A debate has emerged in California over the practice of merchants surcharging consumers when they use debit cards to make purchases at the POS. On one side stand proponents of a California State Senate bill designed to prevent merchants from applying fees to debit and prepaid card purchases. On the other side are retailers and representative associations who protest that the proposed ban would hurt business.
SB 933, authored by California State Sen. Jenny Oropeza, D-Long Beach, passed the Senate on a 22 to 9 vote on June 3, 2010. A date for a floor vote on the bill in the California State Assembly has not yet been set.
The legislation would close what advocates call a "loophole" in state law that allows merchants to apply surcharges on debit and prepaid card transactions. (Credit card surcharges are already banned under state law.)
The bill is sponsored by the consumer group Consumers Union. Many other consumer action groups, including the AARP, as well as chambers of commerce are in support of the bill. Visa Inc. has also thrown in its support.
In an April 5, 2010, letter to Sen. Oropeza, Paul Russinoff, Vice President, State Relations at Visa, wrote that the bill would "expand existing consumer protections for credit card use to debit cards." Rusinoff argued that "checkout" fees undermine the convenience and efficiency of electronic payments and place a burden on low-income consumers in particular.
The bill "recognizes that, at a time when working families face numerous challenges to make ends meet, they shouldn't have to face the confusion, embarrassment and added cost of getting to the counter only to learn that they must pay an unexpected additional 'checkout' fee," Rusinoff said. "Some of the hardest hit would include California's neediest citizens, those whose state benefits are distributed on prepaid cards."
In a statement to The Green Sheet, Sen. Oropeza said, "Social Security, veterans' benefits and child support payments are paid via debit cards, and unemployment insurance and disability payments will soon be paid through debit cards as well. Now is certainly the time to prohibit these surcharges.
"Prohibiting surcharges on credit cards is recognized as an important consumer protection; surely prohibiting debit card surcharges must be as well."
But Bill Dombrowski, President of the California Retailers Association, believes Visa's support of the bill is tied to potential action the U.S. Department of Justice may take against Visa concerning its prohibition against merchants surcharging and "steering" transactions to payment forms on which lower interchange rates are charged. In 2008 the DOJ began to question whether Visa's surcharge ban violated anti-trust laws.
"Visa is facing a class action suit by the retailers in a federal case in Brooklyn, and one of the proposed remedies is that retailers would be able to pass on the interchange fee to the customers and break it out like you do sales tax on the receipt," Dombrowski said. "In California, that's against the law for all credit card transactions, but it's not against the law on debit card transactions.
"And so [Visa is] trying to argue that debit cards should be treated like credit cards, and customers shouldn't be hit with these fees. And they are trying to ignore the fact that it's the interchange fee that's being passed on that they caused."
Retailers argue that the surcharges are necessary to offset rising interchange rates. A November 2009 Government Accountability Office report concluded that "from 1991 to 2009, 43 percent of the individual Visa rates and 45 percent of the MasterCard rates that prevailed in 2009 had been increased since they were originally introduced."
The card brands counter that while merchants might be spending more on interchange, it is only because consumers are using payment cards more often.
Ken Musante, President of Humboldt, Calif.-based ISO Eureka Payments LLC, said it appears the bill is targeting PIN debit transactions. While the actual language of the bill does not make that claim, Musante believes that is the bill's purpose because of the nature of businesses that surcharge on debit card purchases.
"Typically it's at locations that don't take credit cards, right?" he said. "And so they're using and working within PIN debit rules and the few PIN debit providers that allow them to put a surcharge in place."
Musante gave as an example the ARCO gas station chain that does not accept credit cards because of the higher interchange costs associated with credit. But because ARCO doesn't take credit cards, it can discount gasoline, which serves as an enticement for consumers to fill up there, he said.
That the station imposes a surcharge on debit card purchases does not reduce consumer options, according to Musante. "You've got the option of using your PIN debit card or you put cash in the machine," he said. "As a consequence their prices are less expensive, and they are charging the consumer for what their charges are for that type of acceptance."
A third option is for the consumer to go elsewhere. Musante compared the ARCO example to ATMs that charge fees; for instance, consumers can pay the fee to use a nonbank ATM because it is conveniently located, or the consumer can opt to find a surcharge-free ATM tied to the particular bank that issued the consumer's debit card.
Musante pointed out that while Visa forbids merchants to surcharge for debit card purchases, Visa does allow merchants to provide discounts on cash-only purchases.
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