BILL ANALYSIS
SB 933
Page 1
Date of Hearing: June 29, 2010
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 933 (Oropeza) - As Amended: May 3, 2010
SENATE VOTE : 22-9
SUBJECT : Debit Cards: Service Fees
KEY ISSUE : Should retailers be prohibited from imposing a
surcharge on customers who elect to use debit cards, just as
retailers are presently prohibited from imposing a surcharge on
customers who elect to use a credit card?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
Existing law prohibits a retailer from imposing a surcharge on a
customer who elects to make payment with a credit card. This
bill would extend that prohibition to debit cards and other
prepayment cards, which were not widely in use in 1985 when the
prohibition on credit card surcharges was put into place. The
bill is supported by several consumer groups, labor
organizations, and VISA, among others. Supporters argue that,
given the pervasiveness of debit card transactions in our
increasingly cashless society, consumers should not be penalized
for choosing to pay with a debit card when they would not be
charged when using a credit card. This bill is opposed by a
broad coalition of retailers who argue that most retailers do
not impose a surcharge on debit card users, but that some must
in order to cover the "interchange fee" that they are charged by
banks and credit card companies. Opponents contend that
prohibiting retailer surcharges will not eliminate the
interchange fee; it will simply mean that consumers will
continue to pay the fee in the form of higher prices as
retailers will be forced to factor the fee cost into their
overall price structure. Supporters claim, in response, that
retailers will not need to raise their prices because the
benefits of accepting the debit cards outweigh the amount of the
interchange fee.
SUMMARY : Prohibits a retailer from imposing a surcharge on a
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cardholder who elects to use a debit card and expands the
existing definition of "debit card" to include prepaid cards, as
defined. Specifically, this bill :
1)Expands the definition of "debit card" to include a prepaid
card or other means of access to prepaid funds that may be
used to initiate electronic funds transfers and may be used
without identifying information such as a personal
identification number to initiate access to prepaid funds.
2)Prohibits a retailer in any sales, service, or lease
transaction with a consumer from imposing a surcharge on a
cardholder who elects to use a debit card in lieu of payment
by cash, check, or other means. Provides, however, that a
retailer may offer discounts for the purpose of inducing
payments by cash, check, or other means not involving the use
of a debit card, provided that the discount is offered to all
prospective buyers.
3)Provides that a retailer who willfully imposes a surcharge
contrary to the provisions of this bill and who fails to pay
that amount to the cardholder within 30 days of a written
demand, as specified, shall be liable to the cardholder for
three times the amount at which actual damages are assessed.
Specifies that the cardholder shall also be entitled to
recover reasonable attorney's fees and costs incurred in the
action.
4)Specifies that charges for third-party debit card guarantee
services, when added to the price charged by the retailer if
cash were to be paid, shall be deemed surcharges for purposes
of this bill even if they are paid directly to the third party
or are charged separately.
5)Specifies that the provisions of this bill shall not apply to
payments made by credit card or debit card to an electrical,
gas, or water corporation and approved by the Public Utilities
Commission, as specified.
EXISTING LAW :
1)Prohibits a retailer in any sales, service, or lease
transaction with a consumer from imposing a surcharge on a
cardholder who elects to use a credit card in lieu of payment
by cash, check, or similar means. However, a retailer may
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offer discounts for the purpose of inducing payment by cash,
check, or other means not involving the use of a credit card,
provided that the discount is offered to all prospective
buyers. (Civil Code Section 1748.1(a).)
2)Limits, generally, a debit cardholder's liability for
unauthorized charges to $50, so long as the cardholder has
notified the card issuer that the card has been lost or stolen
before the unauthorized use occurs. However, provides
generally that if the debit cardholder fails to report an
unauthorized use within 60 days of the issuer transmittal of
the statement then the debit cardholder shall be liable for
the transactions, unless the delay was caused by extenuating
circumstances. (Civil Code Section 1748.31.)
COMMENTS : Existing law prevents a retailer from imposing a
surcharge when a customer elects to use a credit card in lieu of
cash or some other form of payment. This bill would extend that
surcharge prohibition to include debit card purchases. However,
as is also true with the existing prohibition on credit card
surcharges, this bill would permit a retailer to offer a
discount for the purpose of inducing payment by cash, check, or
some means other than a debit card. In all other ways, this
bill closely parallels the existing provisions in the Civil Code
relating to surcharges in credit cards. For example, a retailer
who violates the provisions of this bill must reimburse the
cardholder within 30 days of written demand by the cardholder or
be liable to the cardholder for three times the amount of actual
damages. A cardholder who brings an action to recover damages
shall also be entitled to recover reasonable attorney's fees and
costs. The bill exempts public utilities, who may continue to
impose surcharges on customers who pay their bills by credit
card or debit card.
Interchange Fees and Point-of-Purchase Debit Card Surcharges :
While this bill will prohibit retailers from imposing a
surcharge on consumers who elect to use a debit card, it will
not eliminate the so-called "interchange fees" that those
surcharges are meant to cover. The interchange fee involves a
complex set of transactions between four parties: the consumer;
the retailer; the retailer's bank (or "acquiring bank"); and the
bank that issues the credit card. Although interchange fees can
vary, the total fees for the retailer are typically between 2%
and 2.5% of the purchase. (Pacheco and Sullivan, "Interchange
Fees in Credit and Debit Card Markets: What Role of Public
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Authorities," Federal Reserve Bank of Kansas City, 2005,
available at www.kansascityfed.org .) For example, when a
consumer uses a debit card to make a $100 purchase, the
information is sent first to the retailer's bank. The
retailer's bank then sends the transaction to the bank that
issued the credit card. The card-issuing bank generally charges
about a 2% fee as an "interchange fee." Thus, for the $100
purchase, the card-issuing bank transmits back to the retailer's
bank $98.00. The retailer's bank may then charge a $.50 fee and
deposit $97.50 into the retailer's account. In short, the
retailer in this scenario would earn only $97.50 for a $100
sale. The retailer then has three options: (1) absorb the cost
as the price of accepting debit cards; (2) pass the cost, or
some part of it, along to the consumer as a "surcharge" or
"service fee;" or (3) factor the interchange fee into the
overall costs of doing business and raise prices of all goods
accordingly.
Needless to say, the simple hypothetical above masks a more
complex economic reality that is reflected in the diverse groups
both in support and in opposition to this measure. One key
question is whether or not eliminating the surcharge - without
eliminating or reducing the interchange fee - will cause
retailers to pass the cost of the interchange fee along to the
consumer in the form of higher prices. A study by the New
America Foundation claims that eliminating surcharges will not
necessarily lead to increased prices because "when the benefits
of bank cards to merchants are accounted for . . . accepting
payment cards more than pays for itself." For example,
accepting debit cards arguably increases the volume of customers
(since some customers will not shop at a store that does not
accept debit cards). In addition, debit cards are also
generally more efficient than accepting cash or checks.
Businesses that accept debit cards, for example, have less risk
of theft of cash and they reduce the costs of having to
transport cash to the bank. Debit cards are less costly than
checks because the retailer does not have to deal with the costs
of bounced checks. (Allen Rosenfeld, "Point-of-Purchase Bank
Card Surcharges: The Economic Impact on Consumers," New American
Foundation Issue Brief, May 2010.)
Whether the benefits of accepting debit cards outweighs the cost
of the interchange fee - thus obviating the need for surcharges
- is a debatable point, the New America Foundation issue brief
notwithstanding. No doubt the equation differs depending upon
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the size of the business and its profit margin. Moreover,
whether benefits outweigh costs, as the New America Foundation
report claims, is largely beside the point: there is nothing to
prevent retailers who presently impose a surcharge from
responding to an elimination of the surcharge by raising prices
to cover the interchange fee. One could argue that "the market"
will prevent them from raising prices, but one could equally
argue that "the market" should prevent retailers from imposing a
surcharge when most of their competitors do not impose the
charge. After all, retailers who presently do not impose a
surcharge have apparently already factored the cost, whatever it
may be, into their price structure. Conversely, those who do
impose a surcharge presumably have not factored those costs into
their price structure. Retailers who currently impose a
surcharge may indeed respond by raising prices a small amount
across the board, and the cost of the debit card transaction
will simply be spread out over all consumers. If this happens,
cash payers will effectively subsidize debit card payers.
Retailers May Offer Discounts for Not Using Debit Cards :
Although this bill would prohibit a retailer from imposing a
debit card surcharge, it expressly authorizes the retailer to
offer discounts in order to induce payment by cash, check, or
some method other than debit card. Thus, if the costs of debit
card transactions do indeed outweigh benefits, then the retailer
could use inducements to encourage other forms of payments.
However, as a practical matter, it is not clear that this would
affect the retailer's need to factor the cost of interchange
fees into the overall price structure. Presumably a retailer
could raise the marked prices overall and provide a "discount"
to those who used cash or some payment method other than a debit
card. In the final analysis, however, the Committee is aware of
no empirical evidence indicating how retailers would respond to
this provision.
Expanding the Definition of "Debit Cards :" Although existing
law defines "debit card" to generally include bank-issued cards
that initiate an automatic transfer from the cardholder's bank
account, this bill would expand the definition of "debit card"
to include "prepaid cards" that allow consumers to prepay a
certain amount, with the available balance then reduced with
each subsequent electronic transaction. This definition of
"prepaid" cards would also presumably cover government issued
debit cards for those receiving various government benefits,
such as the electronic debit cards that have recently replaced
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paper food stamps. According to the author and supporters, the
California Employment Development Department is considering
issuing prepaid cards for recipients of unemployment insurance
and disability payments. Thus, under this bill, retailers would
not be permitted to impose a surcharge on these cards either.
Pending Federal Legislation and Interchange Fees : Both the U.S.
House and the U.S. Senate have passed bills that could lead to
greater regulation of interchange fees, which are effectively
set by VISA and MasterCard, the two major players in the
industry. Senator Dick Durbin's amendment (SA 3989) to the
proposed Restoring American Financial Stability Act of 2010
would give the Federal Reserve Board authority to regulate -
though not eliminate - interchange fees that credit networks can
charge for debit card transactions. The Durbin amendment, which
has now reportedly been accepted in principle by key members of
both houses, would allow merchants to offer discounts for
non-card purchases or set minimum transaction values for card
purchases. (Wall Street Journal, June 20, 2010.) At the time
of this writing, this legislation had yet to be taken up in a
conference committee between the houses, and it is not entirely
clear which of the provisions will remain. While this
legislation would lessen the burden somewhat on retailers by
requiring interchange fees to be "reasonable and proportional"
and would allow merchants to set a $10 minimum transaction for
debit card purchases, it does not eliminate the fee. Thus
whatever rate the Federal Reserve Board sets will ultimately be
absorbed by either the retailer or the consumer, though it may
be less than it would otherwise be in the absence of the federal
legislation.
Exemption for Public Utilities: As noted above, this bill would
carve out an exception for public utilities that accept debit
cards for payment from customers. Apparently, this exception
was added to maintain consistency with the existing law, which
imposes the prohibition on credit card surcharges and contains a
provision expressly exempting public utilities from the
surcharge prohibition for both credit cards and debit cards.
(Civil Code Section 1748.1 (f).) The exemption for public
utilities was created by AB 746 (Blakeslee, Chapter 426, Stats.
of 2005). According to the author of that legislation, the bill
was intended to afford customers the convenience of paying
utility bills by credit card, and the bill was intended to
compensate the utilities for the costs associated with credit
payments. That bill was sponsored by Southern California Edison
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and supported by Sempra Energy and PG&E.
ARGUMENTS IN SUPPORT : According to the author, prohibiting
surcharges on debit card transactions is a natural extension of
the existing prohibition on surcharges on credit card purchases.
Since the prohibition on credit card surcharges was first
enacted in 1985, debit cards have become much more commonly
used. The author believes that consumers using debit cards
should have the same protection as consumers using credit cards.
The author also argues that extending the surcharge prohibition
to debit cards is especially timely in light of the fact that
both federal and state agencies have either begun, or are
considering, distributing government benefits through prepaid
debit cards. These benefits, the author contends, are generally
distributed to those who can least afford to pay a surcharge
above and beyond the marked price.
Supporters generally argue that this bill is a basic consumer
protection measure that merely follows the existing prohibition
against credit cards. Many of the supporters, including the
Center for Responsible Lending (CRL) and the California
Federation of Labor (CFL), among others, point to the
potentially perverse incentive created by prohibiting surcharges
on credit card transactions while allowing them for debit card
transactions. As the CFL writes, "consumers should not be
penalized for choosing to use payment methods that carry no
interest instead of charging their purchases on credit cards.
Being forced to use a credit card to avoid a debit surcharge
simply increases the potential for more personal and household
debt."
Some supporters of this bill stress the misleading and deceptive
nature of "check out" fees. That is, a consumer selects
products based upon the marked price but then only learns upon
reaching the counter that the actual price will be higher if he
or she uses a debit card. By that point, if the consumer does
not have cash, he or she is faced with the prospect of paying
the surcharge or suffering embarrassment and lost time by not
purchasing the goods at that point. For example, VISA writes
that, "At a time when working families face numerous challenges
to make ends meet, they shouldn't have to face an added cost and
in many cases, embarrassment, when they learn they must pay an
unexpected additional 'check out' fee."
Finally, this bill is supported by several chambers of commerce,
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who claim that surcharges are harmful to our economy since
"every dollar captured by a surcharge is one less dollar that
can be spent elsewhere and one less dollar generating economic
activity." For example, the several chambers claim that pending
federal legislation [see above] will ensure that interchange
fees with be "reasonable and proportional" to the costs
incurred. Therefore, retailers "will soon enjoy lower
interchange fees, but without SB 933, there is no guarantee that
these reduced prices will be passed onto consumers."
ARGUMENTS IN OPPOSITION : Opponents reject the notion that SB
933 is a "consumer protection" bill. First, opponents point
out that this bill does nothing to eliminate or reduce the
interchange fees that retailers must pay to acquiring and
issuing banks. Those fees will still be charged to retailers,
and retailers will be forced to either absorb those fees or
raise prices. "The truth," opponents argue, "is that this bill
eliminates the transparency that currently exists through
point-of-sale disclosure, shifts the costs onto the backs of
small businesses, and puts the big payment networks [credit card
companies] in a position to raise rates at will." In short,
opponents claim, consumers will still pay for using their debit
cards, but this cost will be less transparent - hidden in the
costs of higher prices. "Small businesses will suffer the brunt
of increasing interchange fees," opponents contend, "and
consumers will pay more for all goods and services in order to
subsidize those who use debit cards."
Opponents additionally contend that this measure will limit
consumer choices by forcing some retailers to refuse acceptance
of debit cards or establish a minimum purchase price (commonly
$10.00) for acceptance. Indeed, as noted above, the proposed
federal legislation would explicitly authorize retailers to do
just that.
Opponents contend that this bill will be especially hard on
small businesses. According to the California Retailers
Association (CRA), "very few retailers charge consumers for
debit transactions even though we incur fees on every card
transaction. Those that impose a charge are smaller merchants
or retailers who are recognized for offering low price products
or services." For small businesses with very small profit
margins, the opponents contend, the interchange fee is a
significant cost. "If those retailers are prohibited from
imposing debit card surcharges, they will ultimately be forced
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to raise their prices which will have a negative impact on all
customers - not just those paying with debit cards."
Finally, the opponents also suggest that this bill is targeted
at retailers when the problem actually lies with the issuing
banks and credit card networks that impose these fees in the
first place. The transaction fee does not originate with the
retailer, but with banks and credit card networks that charge
the interchange fees. Indeed, many opponents point to the fact
that retailers and merchants have initiated anti-trust
litigation against the major credit card companies challenging,
not only the allegedly excessive amount of the interchange fees,
but whether the credit card networks can contractually prevent
retailers offset interchange fees. (In re Payment Card
Interchange Fee and Merchant Discount Antitrust Litigation, MDL
No. 1720, E.D.N.Y.) Opponents allege that VISA is supporting
legislation like SB 933 in other states in order to achieve
through legislation what they may lose through litigation - the
right to contractually prohibit retailers from imposing a
surcharge to recover the costs of interchange fees. The National
Federation of Independent Businesses (NFIB) thus concludes that
"SB 933 favors the interests of big electronic payment networks
over that of the consumers and small businesses that drive our
economy."
REGISTERED SUPPORT / OPPOSITION :
Support
Consumers Union (sponsor)
AARP
California Conference Board of the Amalgamated Transit Union
California Conference of Machinists
California Hispanic Chamber of Commerce
California Labor Federation
Center for Responsible Lending
City of Lakewood, California
Coalition of California Welfare Rights Organizations, Inc.
Consumer Action
Consumer Federation of California
Engineers and Scientists of California
Greenlining Institute
International Longshoremen & Warehouse Union
League of United Latin American Citizens
Oakland Metropolitan Chamber of Commerce
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Professional & Technical Engineers, Local 21
San Francisco Chamber of Commerce
San Jose-Silicon Valley Chamber of Commerce
TechNet
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United Food and Commercial Workers Union, Western States
VISA
Opposition
BP America, Inc.
California Grocers Association
California Independent Grocers Association
California Independent Oil Marketers Association
National Federation of Independent Businesses
California Restaurant Association
California Retailers Association
California Small Business Association
Northern California Independent Book Sellers Association
Southern California Independent Book Sellers Association
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334