The U.S. Supreme Court has agreed to hear a case that will determine whether merchants should be allowed to charge their customers fees, whenever they pay using a credit card. Their decision could potentially affect a total of 10 states where merchants are currently explicitly prohibited from imposing such fees. The case has been scheduled to stand before the court at some point in early 2017.
Expressions Hair Design, a salon located in Upstate New York, and four other businesses filed the petition. The hair salon used to have a sign in their establishment informing customers that they would be charged a fee for paying with a credit card. This is something that is currently prohibited by New York State law. While no surcharges are allowed, merchants may instead offer discounts to those who pay with cash. Many have argued that this system is essentially two sides of the same coin. The attorneys for Expressions Hair Design claim that forcing their client to communicate the cost of card payments in only one specific way is a violation of their first amendment rights.
Currently a total of nine other states have similar laws to New York -- California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Oklahoma and Texas.
Some merchants and trade organizations claim that interchange fees are at the root of problem. These are charges the retailers must pay to credit card companies anytime they accept cards as a form of payment. Surcharges are a way to pass these interchange fees off to consumers.
The United States has one of the highest credit card interchange rates in the world, averaging around 1.73%. Unlike other parts of the world, interchange fees in the United States are not regulated -- at least not on the merchant-processor side of things. The EU Parliament, for example, has recently capped fees its member states to just 0.3%. Expression Hair Design and other businesses want to pass a part of this cost off to consumers through surcharges. They claim this is a way to inform their customers of the effect credit card payments can have on their bottom line.
| Region | Are surcharges allowed by law? | Average Interchange Fee on Credit Card Transactions |
|---|---|---|
| United States | Varies by state | 1.73% |
| Canada | Yes, but networks generally prohibit them in contracts | 1.78% |
| European Union | Yes | 0.3% |
| Australia and New Zeland | Yes | 0.5% |
Attorneys for New York State argue that this is not a matter of expression, but rather one of price regulation – something that has long been within the jurisdiction of state governments. Earlier this year, attorneys for the defense released a statement where they cited decisions reached by circuit courts on similar cases that happened on the state-level over the last few years. In these, the justices ruled that making surcharges illegal is a way to stop bait-and-switch tactics that hurt consumer. With a surcharge, a consumer may see one price advertised and find themselves having to pay an additional “surprise fee” upon checkout.
Interchange fees have been behind highly publicized merchant-processor relations in recent years. One of the most prominent ones was the American Express/Costco divorce. Amex has famously charged retailers higher-than-average fees, explaining that their cardholders tend to be high-spenders who are far more desirable as customers. Costco decided to end their nearly 16-year-old relationship citing cost-concerns as an influencing factor. Now, the wholesaler will pay nearly zero for accepting credit cards through Visa.
Interchange fees are also at the center of another ongoing legal battle between large retailers and the world’s biggest credit card processors, Visa and Mastercard. Wal-Mart, Target and other high profile retailers have alleged that the processors have engaged in illegal price fixing to artificially inflate the cost of processing payments.
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