New credit card laws help merchants, but what about customers?

It's not unusual to walk into a mom-and-pop store and see a hand-lettered sign telling customers they have to spend $5, $10 or $15 if they want to use their credit card. This practice, along with having credit card customers pay more than those paying by cash or check, was long forbidden by the agreements merchants had with the credit card processors. ("Processors" refers to Visa, MasterCard and the like, as opposed to the banks that issue the cards.)

As this 2008 article in Consumerist pointed out, merchants weren't permitted to do either of these things, though many did. Interestingly, though, these rules only came from the card processors. They weren't legislated by Congress or the Federal Reserve or any other governing body.

"Generally, this is industry imposed, and it's for the purpose of making sure retailers don't discriminate against credit cards," says Lauren Bowne, staff attorney for Consumers Union.

Now that status quo has changed. The financial reform legislation that just passed in Congress (and that you've been reading so much about on WalletPop) included provisions, effective immediately, that give merchants more autonomy. "What they were trying to do [with the new legislation] was give the merchants more wiggle room in adhering to network payment laws," says Linda Sherry, director of national priorities for Consumer Action.

What's Changed
One provision now lets merchants institute up to a $10 minimum for credit card transactions. It doesn't require them to; it just says that Visa and other processors can't make any rules prohibiting stores from implementing minimums. Debit card purchases, however, are exempt from minimum requirements; regulators did this because a number of government benefits are now distributed via debit cards, so requiring minimums for debit cards would hurt those (generally disadvantaged) consumers.

The law also addresses an issue that before had only been handled by a patchwork of state laws: namely, charging cash-paying customers less than those using their card. Prior to the law's implementation, consumers would probably only have noticed this difference at places such as gas stations in states that permitted the two-tiered pricing system. Some had laws that let cash customers get a "discount," although credit card users couldn't be slapped with a "surcharge."

While this may sound like splitting hairs, it was an important legal distinction. In the eyes of the law, offering an incentive for using cash is okay, but penalizing someone for using a card isn't. Now the financial reform bill bars processors from prohibiting merchants from offering a cash discount (surcharges are still a no-no). In other words, this decision now rests in the hands of merchants rather than card processors.

There's been plenty of debate about whether these new laws will help or hurt consumers. They'll obviously help merchants, who pay very steep fees for the privilege of being able to offer customers the convenience of paying with a credit card. "Merchants have been in a war with credit card companies for years," says Ed Mierzwinski, consumer program director at U.S. Public Interest Research Group.

"Merchants were angry that they couldn't negotiate how much they paid for interchange," Mierzwinski says, referring to the fee processors charge merchants. Some experts believe that stores offering people a discount for paying cash will help consumers, since they can save a few bucks if they keep the plastic in their pocket.

"The fees get expensive and cash customers end up subsidizing credit customers," says Chi Chi Wu, staff attorney at the National Consumer Law Center. "For consumers who use cash, it may be a good thing."

Other advocates, such as Consumer Action's Sherry, worry that the money stores save by not paying the processors won't get passed on to customers. "We have to let the market see how this is going to work out," Sherry says.

One rule the new laws don't touch pertains to showing an additional piece of ID (such as a driver's license) when using your credit card. Technically, merchants' agreements with processors don't allow them to ask you for ID, as long as your card is signed. (If it's not signed, all bets are off; they can ask you to sign it in front of them and then show your ID so the clerk can compare the two signatures.)

Merchants sometimes want to check ID to make sure the holder of the card is the rightful owner, since they can wind up holding the bag if a charge turns out to be fraudulent. And at least some consumer advocates think that checking ID is a pro-consumer move, since it could keep someone from going on a spending spree with an ill-gotten card.

"It definitely seems like something that's there for the consumer's protection whereas these other things are just kind of business issues," says Consumer Union's Lauren Bowne. "This is trying to prevent ID theft to make sure the right person is using the card."

In this case, though, the rules are still on the processors' side: If you refuse to show ID and the store declines to serve you, you can complain to the processor, even if the clerk says it's store policy to show ID. (The processors' policies trump the store's in this case.)
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