In recent years, market adoption of credit card surcharging—a practice by which merchants pass on the transaction fee for accepting a credit card to the cardholder—has increased dramatically. This trend is poised to continue, with a survey from the consultancy CMSPI finding that cost reduction is the top payments priority for 60% of businesses.
In parallel with growing market adoption of surcharging, more states have considered and enacted surcharging legislation, often with the stated goal of standardizing surcharging and ensuring consumer protection. In 2024 alone, more than a dozen state legislatures introduced bills related to surcharging and consumer fees generally.
Several new laws seek to ban “drip pricing” or “junk fees,” and their uncertain meaning has resulted in confusion among merchants and acquirers. We have received a number of questions about whether drip pricing laws affect credit card surcharging, and this blog post shares some of the dialogue we are having with merchants as well as our ISO and ISV partners.
What are drip pricing laws?
While the exact statutory text can differ between states, drip pricing is generally defined as “advertising a price that is less than the actual price that a consumer will have to pay for a good or service.” This language is from California’s “Honest Pricing Law,” also known as SB 478, which went into effect on July 1, 2024.
Drip pricing laws prohibit merchants from advertising a price that does not include all “mandatory fees or charges.” When mandatory fees or charges are added later in the checkout flow, they are sometimes called junk fees.
According to guidance provided by the California Office of the Attorney General (“OAG”), the purpose of drip pricing laws is to prevent merchants from using “an artificially low headline price to attract a customer” and revealing “additional unavoidable charges later in the buying process.”
Where have drip pricing laws been passed?
In addition to the California law, Minnesota also passed a drip pricing law in 2024. The Minnesota law will go into effect on January 1, 2025.
Other states are likely to consider drip pricing legislation in 2025 and beyond. In 2023, the FTC under Chair Lina Khan drafted a rule that would ban junk fees, but whether the FTC moves forward with this rule after the November 2024 presidential election is in question. With that said, the absence of federal regulation may only embolden certain states to fill a perceived void by introducing legislation of their own.
What’s an example of an additional fee that would be prohibited? Are any types of additional fees allowed?
Drip pricing laws require the merchant to include all mandatory fees or charges in the advertised or displayed price.
However, guidance from the California OAG states that merchants are not required to include optional fees in the advertised price, such as “fees that are contingent on certain later conduct by a consumer” or fees for “optional services or features.”
As an example of the former, a resort fee that is charged to all guests at a hotel, no matter what room they stay in or services they use on the property, would likely be considered a mandatory fee, which must be included in the advertised price in states with drip pricing laws.
In contrast, a fee for expedited shipping, which is only charged to customers who select that option, could be added later in the checkout flow based on the choice the customer makes.
Do these laws impact compliant credit card surcharging?
Laws like SB 478 almost certainly do not prohibit compliant credit card surcharging programs.
This is because drip pricing laws only apply to mandatory fees. As a result, these laws would only prohibit credit card surcharging if the surcharge is mandatory and applied to all customers, no matter which payment method they choose.
So long as customers are given the choice to pay by credit card or another method that does not incur a surcharge—for example, ACH or debit card—then a credit card surcharge is inherently optional. Because assessing a compliant credit card surcharge depends upon the form of payment chosen by the customer, it is an “optional service or feature” contingent on certain later conduct by the consumer, which according to the California OAG is easily distinguished from the “mandatory fees” governed by SB 478.
What should I look for in a payment technology partner?
In states with drip pricing laws, it is even more important to ensure you are delivering a fully compliant credit card surcharging solution, which includes transparent disclosure of the surcharge as well as the ability to switch to a debit card to avoid the additional fee.
In addition, given the constantly evolving state law landscape, it is paramount to select a payment technology partner with a track record of staying at the leading edge of regulatory change. CardX by Stax performs legislative monitoring in all 50 states and engages with lawmakers where necessary in order to keep our merchants and partners on the right side of new requirements. We are ready to share this expertise in conversation with you and your merchants whenever we can be helpful.
DISCLAIMER: This information is not legal advice. Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. As always, please rely on the guidance of your independent legal advisors.
Jonathan Razi is the founder of CardX and an advisor to Stax Payments. Jonathan previously served as CardX CEO and has more than 10 years of experience in the payments and surcharging space. A noted thought leader, Jonathan authored the CardX brief in the U.S. Supreme Court. He currently advises Stax on state surcharging laws, card brand rules, and product strategy. Jonathan holds a J.D. from Harvard Law School and a B.A. from the University of Chicago.
