States Tackle Payment Fraud and Transaction Fees

The Shifting Landscape of Payment Regulation

In today's economy, plastic cards and digital payments are nearly ubiquitous. From buying groceries to paying bills, consumers and businesses rely heavily on these convenient transaction methods. However, this convenience comes with complexities and risks, namely the persistent threat of financial fraud and the often-contentious issue of transaction processing fees. Recognizing these challenges, state legislatures across the country have recently taken up a wave of bills aimed at regulating financial transactions. Emerging legislative trends reveal a dual focus: first, strengthening measures against payment card and gift card fraud, and second, revisiting the rules around who bears the cost of processing these transactions.

Cracking Down on Card Fraud: A Multi-State Effort

The fight against financial fraud, particularly involving credit, debit, and gift cards, is a significant driver of recent legislative action. With criminals constantly devising new ways to exploit payment systems, states are updating their laws to close loopholes and enhance penalties. Gift card fraud, in particular, has become a major concern, with losses estimated in the billions annually. Scammers often trick victims into purchasing gift cards and revealing the codes, making the funds difficult to trace and recover.

Several states are introducing legislation to specifically target these schemes. For instance, Florida is considering measures (FL H 1007, FL S 1198) that establish criminal penalties for various prohibited acts related to gift cards, including fraudulent use of redemption information, with enhanced penalties for repeat offenses or high-value fraud. Similarly, Georgia's House Bill 447 (GA HB 447) aims to define and penalize the specific crimes of gift card theft, forgery, and fraud. New Hampshire is also looking at establishing crimes related to fraudulent gift card use (NH SB 258).

Beyond gift cards, legislatures are also addressing broader payment card fraud. Texas has been particularly active, with bills like Texas House Bill 272 (TX HB 272) focusing on the prosecution of fraudulent use or possession of credit or debit card information. Other Texas bills (TX HB 3014, TX SB 1809) specifically target fraudulent activities involving gift cards, including tampering with packaging or data.

Some states are linking payment fraud to broader criminal activity. Connecticut Senate Bill 1321 (CT SB 01321), for example, addresses gift card crimes alongside organized retail theft, recognizing that stolen goods are often converted into cash through fraudulent gift card activities. This approach highlights the interconnectedness of different forms of financial crime.

To bolster enforcement, some states are investing in specialized infrastructure. Texas is advancing legislation (TX HB 201, TX SB 1499, TX HB 3109) related to the creation and operation of a Financial Crimes Intelligence Center, designed to improve coordination and investigation capabilities for complex financial crimes, including payment fraud. Missouri is also targeting institutional fraud with bills like Missouri Senate Bill 98 (MO SB 98) and House Bill 707 (MO HB 707) establishing offenses related to financial institution accounts fraud.

The Debate Over Transaction Fees: Surcharges and Interchange

Parallel to the anti-fraud measures, another significant policy debate is unfolding regarding the cost of processing electronic payments. At the heart of this are interchange fees – charges typically paid by a merchant's bank to a cardholder's bank for each transaction – and the ability of merchants to pass these costs onto consumers via surcharges.

Historically, credit card network rules and some state laws prohibited merchants from adding a surcharge to credit card transactions. However, facing rising processing costs, merchant groups have lobbied for the right to implement surcharges, arguing it allows them to offer lower prices to cash-paying customers and makes transaction costs more transparent. Consumer groups often counter that surcharges can be confusing, disproportionately affect lower-income individuals less likely to have access to fee-free payment options, and represent hidden price increases.

Recent legislation reflects this tension. Several states are considering bills that would explicitly permit merchants to impose surcharges on credit card transactions, often repealing previous bans. Maine, for example, has bills (ME LD 151) aiming to allow businesses to surcharge both credit and debit card transactions. Oklahoma's Senate Bill 677 (OK SB 677) seeks to repeal its state prohibition on surcharges. Illinois Senate Bill 1798 (IL SB 1798) goes further by proposing the repeal of the entire Interchange Fee Prohibition Act in that state.

Some proposals are more targeted. Another Maine bill (ME LD 1031) specifically addresses allowing time-share associations to charge credit card surcharges. Texas Senate Bill 2026 (TX SB 2026) relates to the charging of 'swipe fees' (another term for interchange or processing fees) and authorizes civil penalties for violations, suggesting a regulatory rather than purely permissive approach.

Other states are approaching fees through the tax code. Washington's House Bill 2020 (WA HB 2020) proposes a business and occupation tax deduction related to payment card processing activities, potentially offsetting costs for merchants. Conversely, California Assembly Bill 1065 (CA AB 1065), titled the "Consumer Inflation Reduction and Tax Fairness Act," suggests a more consumer-protective stance, potentially limiting certain fees, although the specifics require detailed examination.

Even gift cards are subject to fee regulation. Virginia Senate Bill 1371 (VA SB 1371) focuses on consumer protection by prohibiting dormancy fees, inactivity charges, or service fees on gift certificates unless specific conditions are met, and mandates a minimum five-year expiration period.

Impacts Across the Board: Stakeholders and Demographics

These legislative efforts have wide-ranging implications for various stakeholders.

• Consumers: Stand to benefit from enhanced protection against fraud. However, the authorization of surcharges could lead to higher effective prices for those paying with credit cards. Transparency in how these fees are disclosed will be crucial. Gift card users may see benefits from standardized expiration dates and fee limitations, as proposed in Virginia.
• Retail Businesses: May see reduced operating costs if allowed to surcharge credit card transactions, potentially enabling them to offer lower base prices or improve margins. However, they face compliance costs, potential customer dissatisfaction with surcharges, and the ongoing burden of preventing fraud at the point of sale. Enhanced fraud penalties could deter criminals but also require staff training and vigilance.
• Financial Institutions & Payment Processors: Face a shifting regulatory landscape regarding interchange fees and surcharges. They will need to collaborate more closely with law enforcement under new anti-fraud initiatives and potentially adapt systems to accommodate varying state surcharge rules. The establishment of state-level financial crime centers (like in Texas) necessitates inter-agency data sharing and coordination.
• Law Enforcement Agencies: Gain new tools and potentially enhanced penalties to prosecute financial crimes. However, they face the challenge of investigating increasingly sophisticated digital fraud schemes and require resources and training to utilize new intelligence centers effectively.

Beyond these primary stakeholders, the demographic impacts warrant careful consideration. While stronger fraud protections benefit everyone, particularly vulnerable groups like Older Adults (Seniors) and individuals with Developmental Disabilities who are often targeted by scammers, the allowance of surcharges could disproportionately affect lower-income households, including many Black/African American and Latinx communities, as well as Immigrant Communities, who may have less access to diverse payment methods or rely more on credit for essential purchases. The potential for over-policing in fraud enforcement also raises equity concerns, requiring careful implementation to avoid bias against unbanked or underbanked populations. Mitigation strategies like clear fee transparency, multilingual consumer education materials, and ensuring accessible payment systems (including ADA-compliant POS terminals) are vital.

Geographic Variations and Implementation Hurdles

While the trends of combating fraud and debating fees are widespread, states are adopting distinct approaches. Texas stands out with its comprehensive strategy combining enhanced criminal penalties for fraud (TX HB 272, TX SB 1809) with significant investment in a dedicated Financial Crimes Intelligence Center (TX HB 201, TX SB 1499). Connecticut explicitly links gift card fraud to organized retail theft (CT SB 01321). Virginia, in contrast, approaches gift card regulation primarily through a consumer protection lens, focusing on fees and expiration dates (VA SB 1371). Surcharge legislation also varies, with some states like Maine and Oklahoma considering broad permissions (ME LD 151, OK SB 677) while others focus on specific sectors (ME LD 1031) or embed fee discussions within tax policy (WA HB 2020, CA AB 1065).

Implementing these policies presents challenges. For surcharge laws, ensuring merchant compliance with disclosure rules and potential caps requires robust oversight. Point-of-sale (POS) systems may need costly upgrades. Anti-fraud measures demand effective coordination between financial institutions, retailers, and law enforcement, which can be hampered by data silos and jurisdictional issues. The successful operation of new intelligence centers depends on adequate funding (estimated $2-5M annually in Texas) and participation. Detecting sophisticated gift card laundering or digital skimming techniques requires continuous technological adaptation by enforcement agencies.

Legal risks also loom. Surcharge laws frequently face challenges under the Commerce Clause or potential preemption by federal laws like the Truth in Lending Act. Fraud statutes must be carefully drafted to avoid vagueness claims. There's also the risk of social and political backlash – consumers may resist surcharges perceived as penalties for using cards, and debates pit powerful banking and retail lobbies against each other.

Looking Ahead: The Future of Payment Regulation

The current wave of legislation suggests that regulating financial transactions will remain a key policy area. Several factors will likely shape its future trajectory. The ongoing technological evolution in payments – including the rise of instant payment systems like FedNow – will inevitably create new avenues for fraud, requiring constant legislative updates. The persistent tension between merchants seeking to reduce processing costs and financial institutions defending interchange fee structures will continue to fuel debate, potentially leading to calls for federal intervention to create uniform standards.

Consumer protection advocacy may lead to counter-movements demanding greater transparency and restrictions on surcharges, especially if inflation remains a concern. The success (or failure) of integrated enforcement models like the one proposed in Texas could influence whether other states adopt similar comprehensive approaches. High-profile fraud cases or significant shifts in the economy could also accelerate legislative action.

Ultimately, states are grappling with the dual needs of fostering secure, efficient payment systems while ensuring fair cost allocation and robust consumer protection. The diverse approaches seen across the 13 states active in this area reflect the complexity of balancing these competing interests in an increasingly digital financial world.