Chicago startup CardX is on a crusade to overturn state bans that prohibit merchants from imposing surcharges on customers who want to pay with credit cards, but it faces a major industry foe: American Express.

While rivals Visa, Mastercard and Discover Financial have been mainly mum on the CardX campaign to repeal the bans, American Express has refused to stand quietly by as CardX benefits from new laws at card companies' expense.  

New York-based American Express battled in vain this summer to stop Colorado’s legislature and governor from overturning that state’s ban on credit card surcharges. Last week, the state enacted a law scrapping its credit surcharge ban and installing restrictions that cap merchant surcharges at 2%, of the value of a transaction, or a merchant’s cost to process the transaction. CardX has already tallied wins in Kansas and Oklahoma too. Next up: Massachusetts and Connecticut.  

The Colorado legislation, which required merchants to provide notice to customers when the surcharge is in effect, passed the state’s two chambers with 85-percent-plus bipartisan majorities. Ahead of the votes, American Express lobbied hard against the bill.

"American Express applauds the effort in (the Senate bill) to require disclosure to consumers when a surcharge is imposed by a seller or lessor,” the card network company said in a June 11 letter to Colorado Gov. Jared Polis before the legislation passed this month. “Yet we observe serious deficiencies and potential consequences with respect to these disclosure provisions – to the point this bill may create consumer confusion and invite deception."

American Express railed against it after enactment too. A merchant “would be permitted — if not incented — to engage a service provider whose primary or sole business is to enable surcharge fees,” American Express Spokesman Jacob Wilson said by email when asked to comment on the new law. He went on to say that a “service provider would have no incentive to limit the fee it charges” because that fee could be passed on to consumers who elect to pay by credit.

The CardX campaign

While he never mentioned CardX by name, his reference to surcharge service providers would seem to take direct aim at CardX, which stands to gain from merchants’ use of its software to process credit card surcharges at the point-of-sale, and in online transactions. 

CardX, founded in 2013 and led by two Harvard University-educated lawyers, has spearheaded the campaign against credit surcharge bans from coast to coast. Two months before CardX CEO Jonathan Razi testified in support of the Colorado bill in May, his company’s lawsuit won a federal court ruling in Kansas that jettisoned that state’s ban. 

Razi and CardX Chief Operating Officer Michael Tomko contend the bans restrict a merchants’ constitutional rights to impose the ban on whom they choose. It’s an argument that also carried the day in Oklahoma, where a ban was tossed in 2019 after Razi nudged legislators to bark about it to the state’s attorney general.

"Our engagement with state lawmakers is not about generating new business development opportunities, but is rather about representing the perspective of our many existing clients," Tomko said by email. "The fewer state-level carveouts and exceptions they have to maintain due to antiquated, unconstitutional laws, the simpler their cardholder communication, IT, operations, and accounting experience can be."

The Kansas court victory influenced events in Colorado. “We were of the mind that ‘we’re going to get sued and not only are we going to get sued, we’re going to lose,’” said Colorado Rep. Colin Larson, a sponsor of his state’s legislation. In an interview this month after the passage, Larson said American Express was the only card company to lobby him as the bill made its way toward passage. American Express "tried to fight it and that doesn't surprise me because they are some of the most expensive credit cards for merchants,” Larson said.

Merchants have long complained about the burden of fees they're charged by credit card companies and other processors. A surcharge can help them recover some of those costs from their customers. While there is a hard-won federal cap on debit card fees there is no such restriction on credit fees.

If merchants choose to slap a surcharge on credit card transactions, that means consumers may choose not to use their credit cards, especially ones that trigger a heftier surcharge. Fewer credit card transactions means less fees and revenue for the card companies.

How AmEx fees compare to rivals'

American Express credit fees, as a percent of purchase volume, were only slightly higher than those of its larger rivals Visa and Mastercard, according to 2019 data in a report from industry research organization Nilson Report last year, with AmEx at 2.27% of purchase volume and the other two at 2.25%.

Wilson said it's an “outdated misperception” that his company’s fees are higher. “On average, there is little difference in the cost to accept Amex over the other credit cards in the U.S.” To explain his company’s drive to stop the Colorado law and battle surcharges generally, he added: “We don’t believe surcharging is a good customer experience,” he said. It can “make customers feel financially penalized for their method of payment. It can also result in a loss of customer goodwill and ultimately lost sales for merchants that decide to surcharge.”

A spokesman for industry behemoth Visa declined to comment on the new Colorado law, as did one for Discover Financial. A Mastercard spokesman didn’t respond to a request for comment.

Now taking center stage in the fight over the surcharge bans are Massachusetts and Connecticut, the only two remaining states with bans, according to CardX.

“We've been actively engaging with lawmakers in both states and assessing options,” CardX's Tomko said last week by email. “Colorado creates a compelling template for Connecticut and Massachusetts to consider, but it's not yet clear whether their unconstitutional restrictions will be addressed through the legislature (like in Colorado) or through executive or judicial options (like in Oklahoma and Kansas respectively).” 

As CardX sharpens its strategy for Massachusetts and Connecticut, American Express is regrouping. “I can’t speak to any specific plans,” said Melanie Backs, another spokesperson for American Express said by email this week. “We will continue to work with public policy makers and advocates to discuss the impact of surcharging for both consumers and business owners.”