Credit card swipe fees become First Amendment issue

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Rianna Middleton

When a customer uses a credit card, retailers must pay what is known as a swipe fee. According to the National Retail Federation, swipe fees are a portion of the amount owed for a transaction that retailers must pay to a bank or credit card lender. To compensate for the cost of swipe fees, many retailers use surcharges. According to Visa Inc., a surcharge is a fee added to a customer’s total if they use a credit card. In New York, surcharges are illegal.

New York retailers challenged this on the basis that it infringes on retailers’ First Amendment rights. The U.S. Supreme Court case is Expressions Hair Design v. Schneiderman. On March 29, the court held that the law tells retailers how they can communicate their prices to their customers, not just prices themselves. Chief Justice John Roberts said the law, known as the New York General Business Law Section 518, regulates business’ speech. The law’s constitutionality will be further scrutinized in the U.S. Court of Appeals, according to the Supreme Court.

Kevin Saunders, a professor of law and the Charles Clarke Chair in Constitutional Law at Michigan State University, said the case gets into the ambiguous area of what is and what is not commercial speech.

“Business’ right to free speech is a complicated issue,” Saunders said. “Commercial speech doesn’t get as much protection as other kinds of speech. Classic commercial speech is offering a good or service at a price, so the usual advertisement in a newspaper, for example.”

According to Saunders, the speech involved may be more than commercial speech.

“Businesses want to let their customers know what’s happening, not what their prices are, but why they are paying a little more than they thought they were going to pay,” Saunders said.

Saunders said, at the very least, the protection given to commercial speech ought to protect the business’ speech because it is not misleading or false.

According to the National Conference of State Legislatures, 11 states prohibit retailers from charging their credit card-using customers surcharge fees. Currently, surcharge fees are legal in Michigan. According to the National Retail Federation, credit card swipe fees are about 1.5 to 3 percent, depending on the card.

Saunders said it is unclear what the state’s motive is for banning surcharges.

“Why would the state want to keep the customer base ignorant about what is happening with their money?” Saunders said.

Patricia Huddleston, a professor of advertising and public relations at Michigan State University, said state laws prohibiting surcharges present a free-speech issue.

“If they were able to communicate that to consumers, that would give consumers a choice of whether or not to use cash or a credit card,” Huddleston. “The consumer would be protected in that situation.”

Erica Tobe, extension specialist for the Michigan State University extension program, said a lot of her work focuses on educating consumers about the costs involved with using credit cards.

“I think that anytime you can provide consumers with additional information so they can make best decision possible, that’s a good thing,” Tobe said.

According to Huddleston, the idea behind states banning surcharge fees is to protect consumers.

“When you look at a price in the store on a product or on a shelf, that’s the price you expect to pay,” Huddleston said. “While most consumers are aware of sales tax, when you get up to cash register, you don’t expect to pay a fee on top of that to use your credit card.”

Tom Scott, senior vice president of communications and marketing at the Michigan Retailers Association, said card associations have a motive to make surcharges illegal.

“Card associations have opposed surcharges because a surcharge is an extra charge that might encourage people to use a different form of payment,” Scott said. “They make money when people use credit cards.”

Carl Snyder, assistant manager of the East Lansing location of the Michigan-based outdoor apparel chain Moosejaw, said surcharges can frustrate consumers.

According to Scott, retailers are normally extremely transparent about their prices.

“As a practical matter and to any reasonable person, it just doesn’t make sense to not allow retailers to communicate their prices and costs,” Scott said.

Daniel Bock, fixed-term faculty of finance at Michigan State University, said the retailer’s opposition to the law doesn’t necessarily come from a profit motive.

“At the end of the day, retailers have to pay these credit card fees and they have to pass this down to customers,” Bock said. “The only question is if the customers that pay with cash are also going to have to pay for this.”

According to Saunders, the free speech argument is the best way for the retailers to win.

“They want to be able to tell their customers that it isn’t our fault that you’re paying more,” Saunders said. “There may very well be a profit motive, but there’s a profit motive behind a lot of speech.”

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