New Yorkers May Soon Begin Paying Credit Card Surcharges

The U.S. Supreme Court struck down a decision by New York's Second Circuit Court of Appeals that prevented New York merchants from assessing credit card surcharges on customer transactions. The decision forces the New York judges to review the case again, taking into consideration the opinions of the Supreme Court justices. New York is currently one of 10 U.S. states to ban credit card surcharges. The Supreme Court’s decision could mean New Yorkers who pay by credit may soon find themselves paying 2%-3% more for their goods and services.

The legislation in question, New York General Business Law Section 518 (§518), states “No seller in any sales transaction may impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check, or similar means.” The law did not, however, prohibit providing discounts to consumers who paid by cash. In a previous ruling that favored merchants, the New York Districts Court stated that the law was “drawing a difference […] based on words and labels, rather than economic realities.” It is for these reasons merchants in New York argued that the regulation was placing arbitrary restrictions on the way they can communicate the price of goods or services to their customers, thus violating their First Amendment right to free speech. The Supreme Court favored this interpretation partly because §518 does not clearly define what constitutes a surcharge.

Credit card surcharges are a way for merchants to pass along the fees they must pay to credit card companies for accepting card payments. Up until 2013, most credit card processing contracts retailers signed with banks stipulated that surcharges were not allowed. However, this practice fell out of favor when it was challenged in court. Since then, state-level legislation has been the only thing preventing merchants in some parts of the country from imposing surcharges.

Currently, the following ten states contain surcharge restrictions: New York, California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Oklahoma and Texas.

Earlier this week, the Supreme Court also declined to revive a $7.6 billion antitrust settlement between Visa Inc., Mastercard Inc. and large retailers. The settlement aimed to end a decade-long legal battle over price-fixing allegations related to credit card fees – the same fees merchants seek to pass of to consumers in the form of surcharges. Large retailers, including Target, Starbucks, Macy’s and Home Depot, allege the credit card networks violate antitrust regulations inflating the cost of accepting credit cards to merchants. New York business owners arguing in favor of credit card surcharges contend that these surcharges allow them to surface banks' high fees for the public.

While surcharges mean consumers pay more at the counter, the interchange fees paid by merchants fuel the competitive credit card rewards market that exists in the United States today. The 2%-3% of each card transaction that merchants give up to the bank partially goes back into the lucrative incentive programs. Reward credit cards generally return, on average, about 1% to 1.5% back to consumers in the form of points, cash back, and miles.

Some opponents of credit card surcharges argue that a lack of regulation will lead to fewer consumers choosing credit cards. If a significant portion of the population will choose to pay with cash, just to avoid surcharges, there will be less funds available for those rewards programs.

The United States is currently one of the few nations worldwide to allow networks to charge merchants interchange fees of this magnitude. In Europe, for example, fees are capped at around 0.3% ever since the EU Parliament passed legislation addressing concerns from merchants about their fairness. Similar sentiments are echoed today by retails in New York and across the nation.