Over the last 5 years, credit card transaction fees have steadily risen. Companies with tight margins, such as restaurants, salons, and discount stores are seeing their profits shrink.
For every purchase made with a credit card, merchants must pay a credit card transaction fee of up to 4%. So, say a company sells a $100 bottle of wine. $4 is the potential fee for that sale paid to credit card companies.
With the introduction of rewards cards (cash back, miles, etc) steeper and steeper processing fees have hampered company profits like never before. Consumers love their rewards cards, not realizing what a burden those extra processing fees are on merchants since it typically costs more to process them.
Transaction Fee Creep
The trend toward rising transactions fees became a real sore spot for many merchants who are finding it harder and harder to compete with large eCommerce companies like Amazon or WalMart.
70% of merchants say they are paying much more than they planned in credit card processing fees.
Margins are getting tighter and small companies are suffering.
Up until 2017, merchants were banned from recovering their credit card transaction fees by either surcharging or giving a discount for cash purchases. Surcharging is when a merchant passes credit card processing fees on to the customer.
The Fight to Legally Surcharge
In 2004, a group of merchants desperate for the right to boost their margins by surcharging started a class action suit against MasterCard and Visa, which was settled in 2017 in favor of the merchants. Shortly after that, the floodgates opened when the United States District Court, Eastern District of New York, decided in a case called In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, MDL 1720 (MKB) (JO) in favor of the merchants’ rights to surcharge.
The lawsuit claimed that merchants paid excessive fees to accept Visa and MasterCard cards because Visa and MasterCard, individually, and together with their respective member banks, violated the antitrust laws. The final settlement is projected to be somewhere between $5.4 billion and $6.2 billion paid to merchants.
Surcharging Became Legal In New York… Sort Of.
In businesses like hair salons, margins could be as low as 9 or 10 percent, and paying 3-4% in transaction fees reduces those margins by a third.
In 2013 a beauty shop owner named Linda Fiacco (Read: The Surcharge Heard Around The World) and several other small businesses whose margins were being reduced substantially by transaction fees filed a lawsuit against the State of New York in a modern-day David-and-Goliath story (Expressions Hair Design v. Schneiderman).
Unlike other cases banning surcharging, this case challenged a state law that didn’t exactly ban surcharging, but used First Amendment grounds instead of anti-trust to discourage businesses from surcharging. At the time, New York law actually permitted discounts for cash. However, communicating to customers how much it cost merchants to accept credit cards would subject the merchants to criminal penalties.
In other words,
“You can do this, but you can’t inform consumers about it. That’s the illegal part.”
Which Linda and her lawyer argued was a first amendment issue. Essentially the law stated companies in New York were not allowed to be transparent with customers about pricing.
Expressions Hair Design v. Schneiderman
According to an article on Digital Transactions (an industry site), the federal district court held for the merchants, but the state appealed and won in the Second U.S. Circuit Court of Appeals in Manhattan, which said the law regulated economic conduct, not speech. Then the case went to the U.S. Supreme Court, which heard arguments in January 2017.
The Supreme Court said the law did regulate speech and sent the case back to the Second Circuit, which in turn asked the New York (state) Court of Appeals to answer this question: “Does a merchant comply with New York’s General Business Law § 518 so long as the merchant posts the total-dollars-and-cents price charged to credit card users?”
Surcharging Becomes Legal
Years of rising transaction fees and restraint of trade practices on the part of MasterCard and Visa, combined with the growth of payment by credit cards for online purchases had finally forced merchants to do something in order to survive.
This was a huge win for merchants all over the United States. Like dominoes, surcharge bans at state levels began to fall, first in Florida, then in Texas and California, and now in New York.
As of April 2019, only six states continue to ban surcharging. Experts in payment processing expect those last few states to change their laws as the practice of surcharging catches on.
Now, New York merchants are legally allowed to pass on their credit card fees to customers, and the fall of the ban in such a key state means that most experts think surcharging will be available in all 50 states before the end of this year.