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Credit cards are convenient. But using them is expensive. The problem is that most consumers don’t know just how expensive it is. That might change in some states after the U.S. Supreme Court weighs in on a case currently pending before it.

The case—Expressions Hair Design v. Schneiderman, 15-1391—involves a challenge to a New York law that prohibits merchants from truthfully informing customers of the cost of using a credit card.

U.S. PIRG Education Fund filed an amicus brief—or “friend of the court” brief—in support of small merchants in their fight against New York’s “no surcharge” law because the law benefits credit card companies at the expense of consumers.  The case is now fully briefed and oral argument is scheduled for January 10, 2017.  This is the second amicus brief that U.S. PIRG Education Fund has filed with the U.S. Supreme Court this term.

Here's a summary of the economic and legal issues in the case:

The cost of using a credit card comes in the form of a “swipe fee,” which is the fee that a card issuer, such as Visa or MasterCard, charges a merchant when a customer pays with a credit card.  Swipe fees in the United States are some of the highest in the world and are typically between 2% and 3% of the transaction.  Although this might not seem like a lot of money, swipe fees add up.  Each year, card issuers rake in more than $50 billion in swipe fees.  The problem is that this cost gets passed on to consumers in the form of ever-increasing prices for basic goods and services but most consumers don’t know it.

New York’s “no surcharge” law, which was pushed through the state legislature by the big credit card companies, prohibits merchants from “impos[ing] a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check, or similar means.”  As it has been enforced, the law prohibits merchants from accurately telling customers that it “costs more” to pay with a credit or debit card.  While the law allows merchants to tell customers that it “costs less” to pay with cash (cash discounts are expressly permitted by the federal Truth in Lending Act), this framing is less effective at influencing consumer behavior because people tend to strongly prefer avoiding losses as opposed to acquiring gains—a well-documented concept in behavioral economics known as “loss aversion.”  If merchants were allowed to reveal to customers the true cost of using a credit card, customers would prefer to pay with cash or check and the credit card companies would be forced to lower their swipe fees in order to compete with these lower cost payment alternatives.  Further, merchants have alleged that Visa and MasterCard rules allow the firms to challenge “legal” discounts for cash as “illegal” surcharges.

For decades, the U.S. Supreme Court has interpreted the First Amendment to protect a consumer’s right to receive accurate and truthful commercial information.  Such information is necessary because it allows consumers to make informed and rational purchasing decisions in the marketplace.  A violation of the First Amendment occurs where, as here, a powerful industry pushes the government to pass a law that criminalizes this free flow of information to consumers.

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