Tennessee Fee-Disclosure Law Forces Non-Bank Processors To Pull Out the Calculators

A new Tennessee law governing merchants’ payment card contracts could create headaches for non-bank entities such as independent sales organizations and payment facilitators, merchant-acquiring industry sources say.

The law will require processors on a monthly basis to list all fees assessed since the last statement. That’s certainly not unusual in merchant processing, but the law also includes a unique disclosure provision that becomes effective March 1 and applies only to non-banks. Each month non-bank processors are to add up the aggregate fees and divide them by charge volume to arrive at an “aggregate fee percentage.”

Tennessee is the only state with such a requirement, according to industry sources. The bill that became the disclosure law originally called for all acquirers to make and disclose the calculation, but the Tennessee Bankers Association reportedly lobbied to exclude bank-owned acquirers. So, for example, if a merchant’s contract is with a bank acquirer such as Chase Paymentech, a subsidiary of JPMorgan Chase & Co., the percentage disclosure doesn’t apply, says acquiring industry attorney Holli Targan, a partner at Jaffe Raitt Heuer & Weiss in Southfield, Mich.

“If the agreement between the merchant is only with the bank, this would not have to be disclosed,” she says. “Conversely, if it’s an ISO…it would have to be disclosed.”

To comply, processors will have to carry out new operational tasks. How extensive those will be is unknown. A so-called fiscal note filed with the bill says “it is assumed that payment card processing companies can provide any of the required statements to merchants in conjunction with delivery of monthly billing statements. Any increase in business expenses for such processing companies is assumed to be not significant.”

That might not be the case, according to Scott Talbott, senior vice president of government affairs at the Electronic Transactions Association, a Washington, D.C.-based acquirer trade group.

“One of the advantages of being a national acquirer is economies of scale,” says Talbott. “Singling one state out for special treatment, you undermine those economies, put pressure on processing costs.”

The calculation could have other downsides, too. It requires processors to add up various charges—network fees, acquirer and issuer fees, and interchange that all come from different companies, and thus could make comparing charges from other processors more difficult for merchants, according to Talbott. “Due to the multitude of payment service providers involved in any transaction, the comparability contemplated under the law may not be achievable,” he says.

The law’s chief sponsor was state Sen. Jack Johnson, R-Franklin, a former banker who runs a Nashville-area retail business with his wife. He filed his little-noticed bill, SB 316, in February 2015 and by the end of April it had passed the legislature and received the governor’s signature. Digital Transactions News’ attempts to reach Johnson for comment were unsuccessful.

The ETA lobbied to get some provisions modified. For example, the original bill set a $2,000 civil penalty per violation. Under the amended version that became law, the penalty for failure to make the calculation is only that the merchant, after giving 30 days notice, can exit its current contract with the acquirer no matter how much time it has left.

Even that provision, however, opens the door for abuse by merchants who simply want to get out of their processing contracts early and use the lack of an aggregate fee calculation as an excuse to switch, says Talbott.

Targan, who wrote about the law on her blog earlier this month, says the measure is an example of the heightened scrutiny of payment card issues by lawmakers and regulators. “It’s sort of indicative that payments is now no longer under the radar screen,” she says.

Talbott adds that with the law, the Tennessee government has inserted itself into contracts between businesses. “You have the government setting the terms of a commercial contract,” he says.