New rules allowing merchants to impose surcharges on MasterCard and Visa credit card purchases are raising the ire of lawmakers in states across the country.

In recent weeks, legislation to ban the surcharges has been introduced in Illinois, Hawaii, Rhode Island, and New Jersey. Lawmakers in Pennsylvania, West Virginia and Vermont are planning to introduce their own bills soon.

Any new state laws on the issue would likely strengthen the bargaining power of the card networks and credit card-issuing banks in negotiations with retailers over swipe fees.

Merchants have long sought the right to impose surcharges because they believe it would improve their leverage in those negotiations. Their reasoning is that if consumers have to pay an additional fee when swiping their Visa or MasterCard, they will be more likely to use other forms of payment, and that possibility would lead the card networks to lower their fees to retailers.

Retail trade groups at the state level are gearing up to fight efforts to prohibit surcharging.

"This is simply a way to hide the fact that Visa and MasterCard charge exorbitantly high prices," says David Vite, president of the Illinois Retail Merchants Association. "We think it's unnecessary. We think it's an overreach."

"If the legislature wanted to go down that road," Jim Harrison, president of the Vermont Grocers' Association, said in an email, "there are all kind of surcharging in the marketplace, such as ATM fees, that could also come under scrutiny."

As part of a legal settlement on swipe fees reached last year, MasterCard (MA) and Visa (NYSE:V) agreed to allow merchants to levy the surcharges on card purchases, subject to certain restrictions. That new provision took effect on Jan. 27, sparking a wave of news coverage across the country that warned consumers they could soon face surcharges of up to 4% on card purchases.

Those reports appear to be overblown, at least for now.

Large merchants including Target, Wal-Mart and Home Depot have said they have no plans to impose a surcharge. And merchants of all sizes fear suffering a backlash if they impose a fee and their competitors do not.

"I've talked with a lot of retailers at this point," says Mallory Duncan, general counsel at the National Retail Federation, "and nobody's interested in surcharging."

Still, the possibility of surcharges has set off alarm bells in state capitals across the country, with some lawmakers arguing that bans are needed to protect consumers.

Illinois Rep. Barbara Wheeler, a Republican, says she became aware of the surcharge issue when a constituent who saw a news report about the new MasterCard and Visa rules emailed her. Her new bill to ban surcharging in Illinois has been co-sponsored by four Democrats.

"I don't think it's fair for businesses, retailers, to charge the cost of business, in addition to the cost of the product, to their customers," Wheeler says.

Wheeler recounted a conversation about the issue that she had with a retailer who does about $600,000 worth of credit-card sales per year. Doing back-of-the-envelope math, they calculated that a 4% surcharge would bring him $24,000 annually.

"I said, 'It's tempting, isn't it?'" Wheeler recalls. "And he said, 'Damn right it is.'"

West Virginia Sen. Truman Chafin, a Democrat, says that his proposal to ban surcharges aims to protect merchants — not harm them, as many in the retail community contend it would do.

"I believe that card issuers are unfairly gouging merchants and retailers, and hopefully this legislation can slow that practice," Chafin says in an email.

That kind of reasoning is drawing mockery from members of the retail community.

"This is silly season on the part of some legislators," says Duncan of the National Retail Federation. "You want to believe in a representative form of government, and you hope that members of state legislatures won't make themselves look silly, but we can't do anything about that."

The National Retail Federation is among a number of merchant trade groups that oppose the swipe fee settlement, arguing that its terms are too favorable to Visa, MasterCard and card-issuing banks. The settlement has yet to be approved in federal court, and these merchants are pushing for its rejection.

One of the arguments that the dissenting merchants make is that the new rules to allow surcharging are still riddled with restrictions.

For example, the dissenting merchants say that one provision in the settlement agreement would have the effect of barring merchants that accept American Express cards from imposing surcharges on Visa and MasterCard purchases. They also note that the settlement would require chain stores to have the same policy on surcharges in all of their locations. Banks and the two major card networks dispute both claims.

But in this context, the state-level proposals to ban surcharges take on greater importance. Already 10 states — California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas — have bans on credit-card surcharges.

Soon more states could be added to that list. According to merchants that oppose the settlement, retail chains that do business in any of those states would not be allowed to impose surcharges on MasterCard and Visa sales anywhere else in the United States.

Craig Wildfang, a Minneapolis attorney who represents the merchants that agreed to the settlement, counters that the settlement proposal is not the only factor that affects whether retailers can impose surcharges.

"The ability of merchants to surcharge is affected by a lot of things, including state law, including the settlement agreement, including whether they accept other cards or not," he says.

Wildfang says that he hopes no more states impose bans on surcharging. "I think that if legislators look into this seriously, I think they will come to understand that they're not doing consumers any favors," he says.

Meanwhile, card-issuing banks and the two major networks are keeping a low public profile. The Electronic Payments Coalition, which represents the banks and card networks, is not taking a position on the state bills, spokeswoman Trish Wexler said in an email.

Consumer groups could wind up playing a key role in deciding the fate of the state legislative measures, but not all of them are on the same page right now.

Consumer Action, a nonprofit organization with offices in Washington, San Francisco and Los Angeles, opposes surcharging, according to spokeswoman Ruth Susswein.

"We don't want to see extra fees tacked on that aren't accounted for," she says.

But the U.S. Public Interest Research Group, a federation of state-level consumer groups, supports merchants' right to tack on surcharges, says Ed Mierzwinski, the group's federal consumer program director.

"I think the threat of surcharging is a small one, but it might keep interchange swipe fees from increasing as fast as they otherwise might," he says.

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