Don’t Ask, Don’t Tell: The Credit Card Surcharge Case
You go to the store. You use your credit or debit card to pay for something. That’s usually the end of the story for the customer, and you’re charged whatever price has been agreed upon by you and the merchant.
Ah, but the story doesn’t end there for the merchant.
Say you bought something for $100 using a credit or debit card. That’s not the amount of money the merchant receives. Instead, they suffer the financial death of a thousand pecks, thanks to their credit or debit card processing services. They must bear the burden of deductions from the total price for an alphabet soup of interchange fees, which include license rates, support fees, border fees, processing fees, ACQ support fees, non-validation fees, the processor’s markup and on and on.
All of those financial bites nibble away at the merchant’s profit margins on your transaction. Thus, many outlets offer a cash discount to customers, hoping to avoid the deductions that can range from one to three percent of the total transaction. On a $100 purchase, three percent is $3.00. If you do that for 50 customers per day, that’s $150 from the merchant’s bottom line. In an era where brick and mortar stores are struggling, that’s a significant amount of money that simply vanishes into the ether.
Many states have allowed credit card surcharges on purchases since the 1980s, when antitrust settlements with MasterCard and Visa removed the previous no-surcharge rules from merchant contracts. The ongoing battle over fees and surcharges has been thrashed about in the courts ever since.
There’s a valid business logic behind this profit-sucking by the processors. The interchange rate is established by the card brands (Visa, MasterCard, etc.) and are imposed to reimburse banks for the lost interest in the time it takes the cardholder to repay a debt.
We’ll let Visa explain: “The primary role of interchange is to create an equitable balance of incentives between a cardholder’s financial institution – which issues Visa cards to consumers – and a retailer’s financial institution that enrolls retailers and processes Visa transactions for them.”
Merchants offer credit cards as a convenience to the consumer. Many people no longer carry much cash, so it’s essential for a business to offer charge-it or debit services. Rare is the store that won’t allow a charge, but the bite of processing fees is painful. That’s why you see many small merchants with low profit-margin offerings posting signs that state you must spend a minimum in order to charge purchases. Those missing nickels of profit add up.
But one New York state beauty salon is striking back at the empire, and they have a unique argument. They are embroiled in a legal battle over whether they have the right to tell their customers they are charging an extra fee if a customer paid via credit or debit card instead of cash. Free speech, they claim.
The case, Expressions Hair Design v. Schneiderman (the New York state attorney general) is expected to be heard by the U.S. Supreme Court early in 2017. Other states have ongoing cases on this issue as well, and if the Appeals courts split in their decisions on whether it’s permitted, then it’s on to the Supreme Court to settle the matter for all.
Many merchants add fees quietly, building the extra costs into the final price in an effort to recoup a bit of the bite taken out by the fees imposed. That is legal.
But here’s the catch, and it’s the reason the Expressions case may wind up in our ultimate U.S. court. There are laws against telling a customer about this surcharge if it’s overtly posted by the merchant in an effort to spur cash transactions. In other words, it’s okay to charge more as long as it’s done in secret.
THE SALON SIGN
The problem that led to the lawsuit began because the Expressions beauty salon was upfront about what they were doing. They posted a sign warning customers of their credit or debit surcharge and urging them to use cash.
When told that they violated the law, they claimed that by being forced to take down their warning sign, their right of free speech was being stifled. They and other merchants who have joined the Expressions suit are claiming it’s wrong that they simply are not allowed to explain to customers how credit card fees affect their bottom line.
A brief filed in New York to support Expressions claims the no-surcharge law prohibits merchants from effectively communicating the cost of credit to consumers. This, the brief states, “furthers the credit card industry’s goal of keeping consumers in the dark about how much they pay for credit” purchases.
It’s an interesting argument. Why should merchants state that they offer a discount for cash purchases, but get in trouble for telling the customer about any credit surcharge applied to a purchase?
Deepak Gupta, the attorney for Expressions, called the laws a way to regulate speech in favor of credit card companies. Under the laws, “You can say the glass is half full, but you can’t say it’s half empty.”
Interesting trivia: Gupta’s mother gets her hair done at Expressions. So you might say he’s hair-splitting on the free speech issue. (Hey, stop hitting me!)
New York state Attorney General Eric Schneiderman countered Gupta’s argument, claiming that the current law “stops businesses from adding fees,” making it a consumer protection issue. It’s an odd position, since the law as written does not stop anyone from paying extra for using a credit card. It’s merely noting that you can’t tell them that you’re adding more money to the transaction.
The thorny issue over whether a sign in your business is free speech, or whether it’s advertising and thus regulated, will be an interesting Supreme Court test. Of course, since there’s only eight Justices right now, it may very well end up as a 4-4 tie, leaving the challenge for another day.
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