The big news in the credit card industry this year has been the settlement between credit card payment networks and retailers that has opened the door to merchants charging credit card surcharges. Although this agreement is largely meaningless in the ten states that currently prohibit these credit card surcharges, there are exceptions to these agreements and regulations. Case in point: in most states, government entities and public agencies have always been able to impose surcharges on credit card transactions.
The Law on Credit Card Surcharges
Perhaps you have seen surcharges imposed on credit card transactions at your state’s department of motor vehicles (DMV), or noticed that tax payments also have surcharges added by the companies authorized to collect them. This is both perfectly legal and in compliance with credit card agreements. The State of California is one state that prohibits retailers from adding surcharges, but makes an exception for government agencies and public utilities. Is this fair?
Like most controversies, there are two sides to this story. On one hand, the government could be accused of acting hypocritically by imposing surcharges on payments it collects while prohibiting them on payments to private companies. These surcharges increase the cost to drivers, taxpayers and anyone else who pays a fee for government services or receives regulated utilities.
On the other hand, we have a government of the people, and we can look at these charges as adding to our city, state, or federal budges. This allows governments to offer more services while reducing the tax burden on everyone.
A Question of Fairness
In my perfect world, every retailer would be like gas stations where the price displayed includes all taxes and fees. Few things aggravate me as much as walking into a retailer and seeing a small sign indicating that they will be tacking on extra fees for one thing or another. I am willing to accept taxes being calculated separately, but I think it reflects poorly on a company when it doesn’t include its costs in the price they advertise. And with most companies, I can take my business elsewhere, an option not available when I need to pay my taxes or renew my vehicle registration.
I also realize that governments, like private industry, benefit tremendously by accepting credit cards. They are able to increase transaction speeds while reducing costs. For example, consider the labor and security costs needed to accept cash and checks at your local DMV. Even then, a certain percentage of checks will always bounce, and a certain amount of cash will inevitably go unaccounted for. And since businesses are aware of these costs, the vast majority choose to accept credit cards despite paying merchant fees.
So for smaller transactions, it is not a question of whether it is fair that governments can pass along merchant fees, but whether they actually should. For agencies that accept a high volume of low value transactions, they can probably save money by dropping surcharges and encouraging credit card payments. For higher value and less frequent transactions, like tax payments, I believe that governments still come out ahead on surcharges which are based on a percentage of the transaction.
What I would say to leaders in both to government and the credit card payment industry is to come up with some creative solutions. Imagine if the federal government was able to negotiate a way to accept tax payments using a credit card, but with a vastly reduced percentage of merchant fees, or even a simple flat fee per transaction. Perhaps card networks and issuers would be able to cut their costs by excluding tax payments from earning rewards. Governments would largely get out of the business of processing payments in the form of cash and checks, while the credit card networks would gain a tremendous new source of business.
By seeking innovative solutions to streamline government payments, the banks, the American people, and our governments can all save time and money through credit card payments.
This is an Op/Ed contribution to Credit.com and does not necessarily reflect the views of the company.