Consumer Federation of California

A bill that would prohibit retailers from charging their customers transaction costs for using a debit card still sits on the Governor’s desk awaiting a veto or signature by tomorrow’s deadline. SB 933, authored by Senator Jenny Oropeza (D ‘ Long Beach), passed the legislature with some bipartisan support, though largely along party lines, winning Senate approval by a vote of 22-9, and the Assembly by a vote of 45-22.

The bill’s language is similar to a credit card reform law passed in the 1980s – long before debit cards were the payment option of choice. According to Oropeza, the primary goal of the legislation is transparency – ‘it is unfair for retailers to lure consumers with an advertised price, only to later tack on a surcharge, increasing the purchase price for consumers.’

SB 933 does, however, allow merchants to offer discounts for the use of other forms of payment ‘ so long as consumers never have to pay more than a sticker price for any product. Credit card payments and payments to the government and public utilities are not included, as they are already regulated until current law.

Legislation’s Impact on Consumers

Although a surcharge is typically only several cents on the dollar, the money adds up, making price sticker accuracy crucial to consumer protection. ‘Imagine,’ writes John Berlau, Director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute, in his Orange County Register opinion piece, ‘you see a sign from the street saying that gasoline is $2.50 a gallon. You pull in and fill up. Then you discover you were charged an extra 5 cents a gallon because you used a credit or debit card. What are your options? You can’t exactly put back the gas you have pumped into your car.’

What may be a minor inconvenience for some becomes a much bigger issue for those of lesser economic means. On August 26, the California state legislature unanimously approved AB 2188, a bill that would ‘allow the Employment Development Department (EDD) to contract with a vendor to deliver Disability Insurance benefits through direct deposit and debit card.’

In response, EDD introduced the ‘EDD Debit Card… the new way you will receive your Unemployment, Disability, and Paid Family Leave benefits.’ EDD hopes to start issuing these cards as early as this fall. ‘Washington [also] plans to offer Social Security and other benefits via debit cards,’ according to a San Francisco Chronicle editorial of May 17.

As the bill’s author pointed out in a June 17th San Francisco Chronicle opinion editorial, ‘It’s outrageous to allow retailers to impose extra fees on those who are unemployed, or on disability, or are senior citizens simply because they use debit cards.’

The legislation also focuses on equity by giving debit card users the same protections allotted to credit card users. As the law currently stands, credit card users can’t be charged user fees while debit card users can.

According to a Sacramento Bee opinion article from June 24, ‘Sen. George Runner, a Republican from Lancaster, reasoned that retailers who add fees for debit cards would discourage credit card use and debt. ‘We want to encourage them (consumers) to use a debit rather than a credit card,’ he said.’

Opponents of SB 933 also express concerns that it would lead to stores setting a minimum purchase price for debit card users, as authorized by the language in the bill allowing retailers to ‘[induce] payments by cash, check, or other means not involving the use of a debit card’ if they so choose. Ray Sotero, Senator Oropeza’s Communication Director, clarifies that the language of the bill specifically refers to discounts and that ‘there is no minimum purchase language in the bill. The senator believes the market should dictate what people want to use as far as payment.’

Opponents also argue that since surcharge fees decrease the cost of doing business, they allow retailers to set lower prices for all.

Alan Rosenfeld, Ph.D. disputes this assertion in his paper ‘Point-of-Purchase Bank Card Surcharges: The Economic Impact on Consumers.’ ‘The food processing industry inexplicably raised its prices under similar conditions,’ he writes. ‘Prices paid to food manufacturing companies by retailers dropped between 2008 and 2009, ostensibly in response to reductions in the cost of the raw materials they purchased from farmers and the cost of energy. Despite declines in prices paid to processors and other costs, retail food prices increased, indicating that the retail food industry failed to pass its cost savings to consumers… These findings…’ suggest that the industry cannot be counted on to pass back to consumers, in the form of lower prices, revenues obtained by imposing surcharges on bank card purchases.’

The California Retailers Association did propose an amendment to the bill that would have "mandated disclosure of any surcharge on debit transactions and required an opt-out for consumers that elect not to pay the additional cost.’ This attempt to weaken the bill was rejected because it did not deliver any meaningful change from the status quo ‘ it left the surcharges untouched and overlooked the fact that failure to disclose is already considered fraud.

Impact on Retailers

The main problem with Oropeza’s proposal, according to opponents, is that it doesn’t address the root of the problem: the interchange fees charged on retailers by the banks. This criticism is misdirected, however, because ‘state policymakers have jurisdiction over businesses based in California. Where banks are not based in one state would fall under federal jurisdiction,’ explains Sotero.

‘That’s something that the feds would have to take care of, this isn’t anything that the state could regulate,’ argues Michelle Jun of the Consumer Union.

And the feds did, in fact, regulate this. The ‘Durbin amendment,’ included by Senator Richard Durbin (D ‘ Illinois) in the financial reform bill passed by Congress in July ‘would direct the Fed to issue rules to ensure that debit interchange fees are reasonable and proportional to the processing costs incurred’ (this rule applies to banks with assets over $10 billion).

As a San Francisco Chronicle article from August 24 points out, although ‘enticements for cash purchases always have been allowed [under SB 933], card companies effectively blocked their use through agreements with merchants that made them cumbersome.’ Again the Durbin amendment takes care of this ‘ it ‘prevents card networks like Visa and MasterCard from penalizing sellers for offering discounts to customers.’

Even without the Durbin amendment, a catastrophic loss scenario for retailers would be highly improbable. As a January 4 New York Times article points out, interchange fees on credits cards are actually higher than those on debit cards. The same system proposed for debit cards has been in place in relation to credit cards for over two decades, yet the clouds above the heads of businesses never precipitated.

SB 933 does not require stores to accept debit cards, yet even with the elimination of surcharges debit payments would remain extremely profitable. ‘Benefits that extend beyond pure transactional or processing efficiencies from card acceptance,’ argues Rosenfeld, ‘include broader operating efficiencies, payment guarantees, reduced risks of theft of cash, elimination of the risk of uncollectible checks, the gains from efficient resolution of customer disputes… access to (and benefits from) network marketing programs, and improvements in merchants’ cash flow.’

Because consumers typically have more money in their bank account than their wallet, accepting debit cards also incentivizes more consumer spending. The argument that without being able to cover transaction costs with surcharge revenue, retailers would be forced to abandon debit cards in favor of cash is misleading since ’empirical evidence shows, electronic payments are more cost-efficient than paper payments,’ according to James McAndrews’ and Zhu Wang’s paper ‘The Economics of Two-sided Payment Card Markets: Pricing, Adoption and Usage.’

In fact, most businesses would not be affected at all, since ‘many merchants have reluctantly decided not to levy debit card fees, concluding the money isn’t worth the hassle,’ according to the Los Angeles Business Journal article of May 17. The California Chamber of Commerce is neutral on the bill, while several local chambers, including the San Francisco Chamber of Commerce, the San Jose Chamber of Commerce, and the Oakland Metropolitan Chamber of Commerce have actually spoken out in its favor. The only large business which continues charging surcharge fees is ARCO Gasoline, a British Petroleum affiliate, ‘which imposes a 45 cent debit-card swipe fee at all its gasoline service stations and am/pm minimarts.’

Impact on Debit Card Companies

Another assertion by SB 933 opponents is that it’s really ‘a wolf in sheep’s clothing’ which Visa bankrolled in order to increase its interchange fee revenue. This anti-corporate, populist rhetoric sounds strange coming from a campaign whose main backer is BP and whose public relations firm, Woodward and McDowell, also manages the ‘Yes on Prop 23’ campaign, (the proposition which would repeal AB 32, an ‘air pollution control [law] requiring major polluters to report and reduce greenhouse gas emissions.’)

In addition, although debit card companies set the interchange fee rate, it is the banks, not Visa, which collect the revenue. Most likely, Visa supports the bill because surcharge fees discourage people from using credit cards, which is its principal product.

In fairness, Visa is on record supporting SB 933. It also contributed $6000 to Senator Oropeza’s reelection campaign. It’s also safe to assume its reasons for both were far from philanthropic. But whatever Visa’s interest in the bill may be, in this case it corresponded with the interests of consumers, as evidenced by SB 933’s backing from the state’s major consumer rights organizations, including Consumers Union, Consumer Federation of California, Consumer Action, Consumer Attorneys of California, and AARP.

The Bottom Line

The fact is debit cards are consumer’s primary transaction type choice since 2006, and in 2008, 34 billion debit card transactions were made totaling $1.3 trillion.  It seems reasonable that since retailers are already prohibited from imposing a surcharge on consumers who pay for goods or services with a credit card, the same rules should apply to what has become a more popular option, the debit card.

As the Governor weighs SB 933’s pros and cons, he would do well to consider the words of the bill’s author before making a decision: ‘At a time when California working families already face tough challenges making ends meet, they shouldn’t bear penalties for simply how they choose to pay.  Fair is fair, whether it’s by cash, check, credit or debit card.’