Credit Card Processing, Legal

Tennessee’s Credit Card Processing Fee Disclosure Law

by Ben Dwyer

Effective March 1, 2016, Tennessee became the first state in the nation to pass a law about processing fee disclosures.

The law (SB0316) requires that merchant service providers not owned by a bank calculate and list the effective rate for credit card processing on each monthly statement. What does this mean for Tennessee businesses and are businesses in other states affected?

Information provided in this article is for reference only. If you need legal advice regarding processor contracts or Tennessee’s law, consult an attorney.

What is an effective rate?

In credit card processing, your effective rate is the sum of all your processing fees divided by your processing volume. It’s expressed as a percentage. For example, if your processing costs for the month were $250 on total credit card sales of $10,000, your effective rate would be 2.5%.

Effective rate is the most accurate measurement for assessing the competitiveness of your current processing solution, so it’s an important number to know.

What’s good about Tennessee’s new law?

On the upside, Tennessee’s law should make it easier for businesses to see exactly how much they’re paying for credit card processing. Where previously a business would need to calculate an effective rate themselves, it will now be presented for them on monthly statements. This could expose processing companies that charge particularly high fees.

What’s bad about the law?

The biggest problem with Tennessee’s law is that processors owned by a bank are exempt. Basically, large processors don’t have to comply with the disclosure, meaning they can continue to mask the true costs of processing. Those processors now have a competitive advantage built into law. As such, it’s more difficult for businesses to accurately compare processing costs between a company that has to disclose the effective rate, and one that doesn’t.

Why don’t bank-owned processors have to disclose the effective rate?


The original proposed bill required all processors to disclose the effective rate. However, the Tennessee Bankers Association successfully lobbied for an exclusion to apply to bank-owned processing companies. This includes the likes of Bank of America Merchant Services (owned by Bank of America), Wells Fargo Merchant Services (owned by Wells Fargo), Chase Paymentech (owned by JP Morgan Chase), and others.

What happens if a processor doesn’t disclose the effective rate?

Digital Transactions reports that in the event that a processing company not owned by a bank doesn’t disclose the effective rate, the only repercussion is that a business may choose to terminate its contract with the processor after giving 30 days’ notice. Be sure you’re familiar with the different aspects of cancelling a merchant account before attempting to use this law as your “out” from an expensive merchant account.

Comparison Pitfalls

While in some ways this law increases transparency, the bank-owned processor exclusion could also open the door for those companies’ sales reps to misrepresent the costs of processing.

Don’t make the mistake of comparing effective rate to generic “rates” that a processor may quote you. The effective rate is the total, all-inclusive cost of processing. Rates that you see quoted on a processor’s website or the answer you’ll be given if you call a processor and ask “what are your rates?” will always be lower than your effective rate. However, that doesn’t mean it will actually be a cheaper processing solution once the other costs are factored in.

When comparing quotes for credit card processing, be sure you’re comparing apples to apples. If you need help with that, give CardFellow’s free quote comparison tool a try. You can request quotes from any processor you’d like, and our software will put all of the quotes in the same format for you so that you can compare offers side by side and see exactly what you’ll pay.

If you’re in Tennessee and want to know if your effective rate is higher than it should be, use the quote comparison tool and give us a call to talk about your current effective rate.

Will this affect businesses outside of Tennessee?

For the moment, no. It’s unknown if other states will follow suit and require processing companies to disclose more information on statements. However, it’s possible to calculate your own effective rate as long as you have a processing statement that includes all of your rates and fees.

Tennessee business owners, what do you think of this new law? Has it affected your decisions about your current processing solution? Leave a comment below!

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