Ten states, including Texas, limit the language that merchants can use to describe how they handle “swipe fees” for credit cards. The U.S. Supreme Court might soon change that. The court announced in late September it would hear a challenge from a New York retailer to a law that bars stores from telling consumers they are imposing surcharges on credit card purchases. Instead, retailers must tell customers they are getting discounts if they pay with cash or debit cards.
Credit card networks such as Visa and MasterCard charge merchants a “swipe fee” of about 2 percent of the purchase price whenever a customer uses a charge card. The non-surcharge law prevents merchants from adding that fee to the price of goods or services. To recoup the money, merchants have upped their prices across the board, offering discounts for cash purchases.
Texas merchants have battled unsuccessfully against a similar state law called a non-surcharge law. The name is misnomer because it does not prevent retailers from charging more for credit sales to make up for the swipe fee. It legislates the language used, which is the basis for the Supreme Court’s consideration.
Merchants in the various states have challenged the laws, arguing they unconstitutionally restrict commercial speech. Merchants also argue that they have a right to inform consumers of the true costs associated with credit card transactions.
As non-surcharge laws now stand, merchants have five options, or alternate wording, they can use to regain their losses in credit card transactions:
• charge all customers a uniform price;
• charge all customers a uniform “convenience fee;”
• provide all customers the option to pay by credit card without adding a fee;
• use a third-party payment processor;
• or provide all cash customers a “discount” in price.
What the law actually prevents is complete disclosure. Merchants are not allowed to tell consumers they are being charged higher prices when they purchase by credit. The merchant must disguise the fact that its credit prices are subject to a surcharge for swipe fees by presenting it as if its cash prices are instead a “discount.”
Attorneys for the New York merchants argue that “surcharges actually make consumers more informed rather than less by truthfully and effectively conveying the true costs of using credit cards.”
A retail merchant who violates the law is subject to a civil penalty of $500 for each transaction. The law is enforced by the Texas Office of Consumer Credit.
Earlier this year, the Texas law was upheld by the Fifth Circuit in the case of Rowell v. Pettijohn. Similar cases in other courts have resulted in different rulings. Non-surcharge laws have been upheld in New York and Texas but were struck down in Florida and California.
The U.S. Supreme Court is expected to resolve those differences now that it has agreed to review the Second Circuit’s decision to uphold the challenged New York law. Arguments will be heard next year with a ruling expected by the end of June.