Merchants accept Supreme Court stipulation on New York surcharging

The number of states not allowing surcharging on credit card purchases continues to dwindle, as New York now gives merchants the option to charge fees as long as they make the costs clear to consumers.

The move stems from a case, Expressions Hair Design v. Schneiderman, which moved through the New York court system the past six years all the way to the U.S. Supreme Court, where merchant plaintiffs and the state of New York filed motions on Tuesday to dismiss the merchants' challenge.

That agreement opens the door for merchants to surcharge, with the stipulation that they clearly show in dollars and cents what the costs will be, rather than forcing consumers to tabulate the percentage increase themselves.

In initial hearings for the case a year ago, the Supreme Court was clearly divided on whether state bans on credit card surcharges were legal. Much of that debate centered on a free speech stipulation, essentially saying merchants should not be told how to describe a two-price system to customers choosing a payment method.

But ultimately, the court said a merchant complies with New York's law as long as it posts the total dollars and cents charged to credit card users. In seeking supplement briefs this week, the court instead was informed by merchants' attorney Deepak Gupta of Washington, D.C., that there was no reason to pursue the case further.

"With today's resolution, we expect the New York law will survive, but in a far narrower form — and 'no surcharge' will simply mean 'no surprise,' " Jonathan Razi, CEO of CardX, said after the case's dismissal. "Now, New York merchants are allowed to pass on their credit card fees so long as they make the required consumer disclosure."

CardX, a Chicago-based payment company that automates compliance with rules for credit card surcharging, was the only payments company to file a brief in the case, describing how surcharging affects a market when done at scale. Razi argued in the past that surcharging results in more transparency and lowering of merchant costs.

The opening of surcharging in New York follows similar approvals in California, Florida and Texas, leaving only six states that have surcharging bans.

After card networks lifted their bans on surcharging in 2012 as a carrot in an initial compromise to settle a decade-long antitrust lawsuit challenging interchange fees, the concept was met with mixed emotions by merchants. For the most part, merchants acknowledged many states also had bans, but they also were watching how a shift to interchange caps and merchant surcharging would work in Australia at that time.

In the same manner as Australia overcame some early consumer backlash, surcharging has settled in there as the tool it was meant to be — an option for merchants to lower costs and an option for consumers to avoid card fees if they are so inclined.

"We're hearing from a number of enterprise merchants that they're seeking to address the rising costs of rewards cards while also maintaining a uniform pricing strategy nationwide," Razi said. "Once this pricing model reaches all 50 states, it will trigger a seismic shift."

That shift will move America's payments landscape further toward Australia's, Razi added. In Australia, 42 percent of all merchants, and a full 60 percent of large merchants, pass on the credit card fee, Razi said.

The New York case began in 2013 as the Expressions Hair Design salon chain led a group of merchants in challenging the state law on the free speech grounds. The merchants, as in other cases across the U.S., charged they could not clearly communicate to customers how much it costs to accept credit cards without facing a criminal penalty. From there, it has bounced back between the U.S. Supreme Court and New York's Second Circuit and the state's Court of Appeals.

"The disclosures are actually good for consumers, but it will be interesting to see how it plays out, as it is maybe more likely for a smaller merchant to surcharge than it would be for a larger retailer," said Brian Riley, director of card services for Mercator Advisory Group.

Ultimately, the merchants were looking for a "legal win" against card fees and they are getting that in the form of the surcharging option, Riley said. "It's been so ambiguous for a long time."

But the New York clarification and other surcharge victories are not the type that merchants can point to with a major level of excitement, Riley added. "It's probably much ado about nothing; it's really not that much of a difference" in costs to consumers, he said.