The ‘gag rule’ that keeps you in the dark on credit-card costs
The owner of a neighborhood beauty salon outside Binghamton argued at the US Supreme Court on Tuesday for the right to tell her customers the truth about paying by credit card: There’s a swipe charge.
Credit-card companies charge merchants a fee for each transaction paid with plastic. Shops pass that fee along to the customer. Credit-card companies don’t want consumers to know it.
On the other side, New York Attorney General Eric Schneiderman is battling to defend a state law that benefits credit-card companies. In New York, cash discounts are legal, but credit card surcharges aren’t.
Nine other states have laws like this, including Connecticut, Florida, Texas and California. It’s a huge favor to the credit-card industry — and it comes at the expense of all consumers. The owners of Expressions Hair Design and four other small-business owners in New York claim the law violates their First Amendment right to free speech. That’s what the Supremes will decide. The outcome of this case will affect one-quarter of all shoppers in the nation.
Here, New Yorkers need to ask why their attorney general is siding with the credit-card industry against local businesses and shoppers in the case, Expressions Hair Design vs. Schneiderman.
Arguing for the business owners is Deepak Gupta, a consumer-rights lawyer whose mother gets her hair done at Expressions. Gupta says the fact that shops can charge less in cash payments than for credit payments is semantics. If a hairdo costs $30 in cash or $32 if paying by credit card, does the customer incur a $2 surcharge or get a $2 cash discount?
But credit-card companies know that customers react positively to discounts and negatively to surcharges, so they’ve lobbied aggressively for state laws against credit-card surcharges. When New York lawmakers accommodated them in 1984, enacting the law now being challenged, a memo justifying the state’s support for it declared “surcharges, even if only psychologically, impose penalties on purchasers” — which is exactly what credit-card companies want to avoid.
Whose side is the Legislature on? American Express, Capital One, Visa and other credit-card companies donate tens of thousands of dollars every year to state politicians and their PACs, including to Schneiderman.
All New Yorkers, not just those who use plastic, are paying the price. The law intimidates merchants with stiff penalties: a $500 fine or a year in jail.
The state has periodically enforced the law aggressively. Staff from the attorney general’s office posed as customers and called up merchants asking for quotes for heating oil and other products. Companies were warned not to suggest that it costs more to pay by credit card.
With intimidation like that, no wonder merchants silently pass along the cost to all their customers. Nationwide, that’s a whopping $50 billion a year in transaction fees.
You can bet the fees would be lower if customers knew the truth.
Stop & Shop, Walgreen’s, Kroger and other giant merchants are siding with Expressions, telling the court the key issue for merchants of all sizes is the freedom to “provide truthful information to their customers at the point of sale about the real cost of paying by credit card.”
When merchants in Florida challenged a law similar to New York’s, the federal appeals court ruled in their favor, deciding that “banning merchants from uttering the word surcharge” criminalizes “speech that is neither false nor misleading.”
Schneiderman disagrees. He says New York is regulating conduct, not speech, and is protecting customers from being blindsided by surcharges at the cash register. That’s hard to believe, when gas station owners have been prosecuted for saying it would cost “five cents extra” to pay with a credit card.
Even after the Supremes heard arguments Tuesday and debated among themselves over how to price a pastrami sandwich, it’s unclear how the court will vote. But New York’s lawmakers should move quickly to repeal this anti-consumer legislation so merchants can level with customers about the cost of credit.
Betsy McCaughey is a senior fellow at the London Center for Policy Research.