US Should Follow EU’s Lead in Swipe Fee Reform

The European Union is leading the way when it comes to reining in excessively inflated credit card “swipe” fees.  In a recent op-ed published in The Hill, Lyle Beckwith, senior vice president of Government Relations with the National Association of Convenience Stores, outlines how European Union regulators and Parliament is successfully transforming these fees and is in the process of securing protection for both their retail economies and consumers.
The U.S. needs to take a page out of their book.
 
For far too long, Visa and MasterCard have centrally fixed the fees that their banks charge, costing people worldwide billions of dollars.  By approving a 0.3-percent cap on the fees and a seven-Euro cents cap on debit card transactions, or 0.2 percent of the transaction value, whichever is lower, the E.U. locked in a rate that is a seventh of what U.S. retailers currently pay their banks.
 
Merchants and consumers in the U.S. pay the highest swipe fees in the world—up to 4 percent per transaction.  So, for every $100 worth of groceries, gasoline, or nights out on the town, merchants are forced to absorb another $4 despite the fact that it only costs the banks mere pennies to process the transaction.
 
Much to the banks’ chagrin, study after study continues to show how debit-card swipe reform here in the U.S. has given a much-needed boost to merchants and consumers.  In fact, noted economist Robert Shapiro estimates that consumers saved nearly $6 billion in the first year of reform and that those savings went on to support over 37,000 jobs.
 
Our counterparts in the EU, Australia and Canada are all finding ways to keep these escalating fees in check.  It’s time for us to follow their lead and pave a path that opens the way to a transparent and competitive market.

Europe Leads by Example in Fight Against Credit-Card Bullies

We Americans are justly proud of our free market economy, and yet it is the European Union that is taking the lead in breaking the grip of two big credit-card companies on the market and protecting consumers from abusive and unfair card payment fees.

Last week European lawmakers voted to impose lower caps on the “swipe” fees merchants pay every time a customer buys with a credit or debit card. The limit of 0.3% for credit and 0.2% for debit purchases will save businesses billions of dollars and allow merchants to pass the savings onto their customers.

Meanwhile, U.S. consumers pay the highest fees in the world. Up to $4 on every $100 charged to a card goes to banks. Swipe fees are so high because they are set in secret by Visa and MasterCard, which control 80% of the card business, leaving no room for negotiation.

Uncompetitive and unjustly high rates hinder our economy. Will the U.S learn from Europe's example and stand up against the bullies who are pocketing what could be consumers’ savings one swipe at a time on everything they buy with a card?

European Retailers Score Big Victory in Swipe Fee Battle

The E.U. continues to set the pace for swipe fee reform as the economic and monetary affairs committee of the European Parliament voted last week to cap the fees at 0.2% and 0.3% for debit cards and credit cards respectively.  The new legislation, which applies to domestic and cross-border payments, was a response to the ongoing impact of the fees on both merchants and consumers as well as the lack of transparency in how such fees are set.

Right now, the average swipe fee ranges from 0.2 percent in Denmark and the Netherlands, to more than one percent in Germany, Hungary and Poland.  The reform measures aims to standardize the governing rules between countries.

The European Commission states that the reduced fees could end up saving retailers six billion euros a year, a savings that could lead to lower consumer prices.

Despite the significant progress being made in Europe, the cost for U.S. consumers to swipe their cards remains exorbitant.  In fact, the fees, which can be as much as four percent of the total cost of the purchase, are eight times higher here than in Europe and other countries.

So, the question remains: what gives?  It’s time for our federal officials to follow the E.U.’s lead.

For more about the European Parliament’s recent vote, see here and here and here.

Image source: The Travelers Blog

The Banking Industry’s Meal Ticket

In her recent article Credit Card Gravy Train Is Crushing Consumers, Ellen Brown provides an excellent analysis of the banking industry’s profitable swipe fee scam and the burdensome cost to both merchants and consumers.

Most consumers don’t realize that every time they use their credit card, the retailer is charged an interchange or swipe of about two percent of the total purchase. Banks are able to charge this rate because Visa and MasterCard, the two biggest credit card companies, set the fees essentially in secret and then dictate the terms to merchants, who are left with no choice but to accept them if they want to stay in business. As Brown explains, two percent:

“…may not sound like much. But consider that for balances that are paid off monthly (meaning most of them), the banks make 2% or more on a loan averaging only about 25 days (depending on when in the month the charge was made and when in the grace period it was paid). Two percent interest for 25 days works out to a 33.5% return annually, and that figure may be conservative.”

In other words, the swipe fee results in big profits for the banks but puts a big squeeze on the rest of us from the merchants who are forced to absorb the fees to the consumers who are left paying higher prices to cover that cost.
Interestingly, Brown compares this fee to a private sales tax.

“A 2% merchants’ fee is the financial equivalent of a 2% sales tax—one that now adds up to over $30 billion annually in the US. The effect on trade is worse than either a public sales tax or a financial transaction tax, since these taxes are designed to be spent back into the economy on services and infrastructure. A private merchant’s tax simply removes purchasing power from the economy.”

It’s a sneaky game the banks are playing and it leaves merchants and consumers holding the bag while sapping an already vulnerable economy of the energy it needs.

(photo source: Ripoff Report)

Baseball Takes a Swing at Excessive Swipe Fees

The high cost of credit card swipe fees is getting more attention these days and it’s not just from Main Street retailers. America’s favorite pastime, baseball, has now stepped up to the plate and joined the fight against these skyrocketing fees as the Minnesota Twins just levied an antitrust suit against Visa and MasterCard, accusing them of price-fixing swipe fees and monopolizing the marketplace.

Make no mistake about it, this insidious fee impacts businesses of all shapes and sizes. Any purchase paid for by plastic is subject to a swipe fee of two to four percent of the price of the transaction whether you are buying a ticket to a baseball game or picking up a gallon of milk from the corner grocer.

Take, for instance, the cost of a Super Bowl ticket from earlier this month. The face value of tickets ranged anywhere from $500 to $2,600. Two percent of $2,600 is $50. If that ticket is sold at the average $4,300 resale price through a ticket dealer, the bank will take in another $86. That’s nearly $150 in swipe fees on a single ticket and with 83,300 seats in the MetLife Stadium, the banks and credit card companies brought in millions of dollars for transactions that could have been done profitably for mere pennies. Given this, it’s no small wonder that families in the United States pay an estimated average of almost $500 a year in swipe fees.

For more on the Minnesota Twins’ lawsuit against Visa and MasterCard, see here.

Chip and Pin: Not a Simple Quick Fix

In her article, 'Debit or Credit' Becomes A Point-of-Fail, Kelly Jackson Higgins discusses how recent data breaches have spurred retailers, lawmakers and the banking industry to seriously rethink security options for card payment systems. She includes the following third-party observation:

"Banks have gone out of their way to make us [consumers] feel comfortable. They're just charging the retailers for this, but it's going to hurt the retail industry," says Avivah Litan, distinguished analyst with Gartner. "Maybe banks will now move on chip and PIN" sooner, she says.

While it is true that retailers pay a disproportionate share of fraud costs and the reality of recent data breaches will goad banks and retailers both to make changes, we must be sure that they are the right kind of changes. The move to a computerized chip embedded in the card is not the complete solution to fraud in the United States.

First, merely adopting the chip cards without the requirement of PIN numbers, as the credit card companies had proposed, is a half-measure that will not make customer data and card transactions wholly secure. Yes, the chip is extremely difficult to counterfeit but without the second layer of cardholder authentication offered by the PIN, it does not solve for lost or stolen card fraud or Internet fraud.

Secondly, it’s important to note that the standard called EMV that the major card brands, Visa and MasterCard, are pushing for is actually their proprietary technology and opens the door for them to extend their already-powerful duopoly. Merchants are concerned that adopting EMV will allow the credit card companies to maintain their dominance in this technological arena and as a result prevent a competitive market from forming, perhaps one that moves beyond cards to customers using their mobile devices to make purchases.

No good can come from this kind of non-competitive market. We’ve seen proof of that with the credit-card companies’ exorbitant swipe fees. If the duopoly of MasterCard and Visa stymie competition in technology, too, in the long run it only ends up hurting both consumers and merchants.

EU Court Adviser Puts MasterCard in Its Place

MasterCard is doing everything in its power to fight EU regulator’s 2007 decision to limit the fees European retailers pay for processing credit and debit card transactions. Fortunately, it seems like nobody believes MasterCard’s claim that capping interchange fees is not beneficial to merchants and consumers. Earlier this week an adviser to European Commission said MasterCard’s appeal should be completely dismissed.
 
European retailers stood up against credit card giants: Visa and MasterCard and have been fighting for a fair and competitive payments system. However, MasterCard doesn’t want to let go of huge interchange fee profits. Limiting swipe fees to 0.2 percent for debit and 0.3 percent for credit translates to €6 billion a year in savings for retailers and consumers in Europe.
 
Bloomberg quoted the CEO of Europe’s biggest home improvement retailers, Kingfisher Plc:

“Stimulating competition in the payment services market and ensuring fair interchange fees will create capital to enable a range of investments to be made.”

In U.S. transaction fee rates are even more overblown. They are 7 or 8 times higher! This reduces retailers profits significantly and forces them to either raise prices, which hurts consumers and limits their spending or prevents merchants from hiring new employees.
 
The EU court should make a decision within next 6 months and it usually agrees with the advisers’ opinions. In this case, the advice is spot-on.

Outdated System Guarantees More Data Breaches

As the extent of the Target data breach continues to trickle out and new revelations of similar violations at other major retailers come to light, one thing is crystal clear: the antiquated U.S. payment system is broken and needs a major upgrade.

Credit cards remain one of the most fraud prone payment options in our wallets today.  Why is this?  It’s essentially because there is no financial incentive for the banks to improve a system that relies on 40-year old technology.  Take for instance, the two largest credit card brands, Visa and MasterCard.  They control 80% of the marketplace and as a result get to call all the shots when it comes to how consumers’ account information is protected and who pays for the fraud.  Given that they pulled in $7.7 billion in combined after-tax profits in 2013 and rarely end up absorbing the losses from fraud, they are just not motivated to take on the costly expense to update the system.

It’s ironic that the United States lags so far behind the rest of the industrialized world given that we have long led the way when it comes to technological innovation.  Nevertheless, we are one of only a few developed countries that still rely on a magnetic stripe to hold all the pertinent financial information needed to make a purchase by credit or debit card.  This makes us a magnet for fraud.

Right now, the banks are content to sit back, enjoy their excessive profits and address the fraud after it has already happened.  But data breaches, both large and small, will continue to occur and consumers and merchants will continue to pay the price until the banks make the proper investment and take a more pro-active role in preventing the fraud from occurring in the first place.

For a detailed analysis, see David Dayen’s article, “Your Credit Card Has a Dangerous Flaw That the Banks Refuse to Fix,” in The New Republic here.

Create Jobs By Ending The Great Swipe Fee Rip-Off

Below is an oped by Doug Kantor, counsel for the Merchants Payments Coalition, that RealClearPolitics.com recently published. You can find it here.

Even though the monthly jobs report went unreported due to the government shutdown, recent ones from the U.S. Department of Labor have been sending a clear message: If we want to quicken the pace of the economy recovery we must do more than what we are doing.

A recent study found that over 154,000 jobs could be created annually if debit card swipe fees were limited to 12 cents a transaction (as originally proposed by the Federal Reserve) and credit card swipe fees were limited to 24 cents -- amounts that still allow credit card companies and the banks that issue the cards to realize a healthy profit, given the low cost to process card transactions.

Banks make money on debit cards even without swipe fees because it’s the cheapest way for the banks to give customers access to their money. But banks are charging anywhere from two to four percent of the total bill for credit cards and 24 cents a swipe for debit cards. That amounted to about $50 billion for the banks in 2012 or over $400 for every American family.

Visa and MasterCard have a virtual lock on the marketplace, controlling 80 percent of all card transactions. They set the fees the banks charge so that the banks don’t compete on price. That has made swipe fees the fastest-growing expense that merchants face.

Noted economist Dr. Robert J. Shapiro recently demonstrated the benefits of reforms.

Shapiro’s comprehensive study showed that the reduction in debit swipe fees under the Federal Reserve’s regulation generated almost $6 billion in lower prices for consumers and $2.6 billion in merchant savings in 2012 and those savings supported 37,501 new jobs.

Shapiro went on to demonstrate ways in which swipe fees continue to hamper overall economic growth and harm small businesses across the country.  He found:

- Savings and job gains would have been substantially larger if debit swipe fees had been cut to 12 cents as originally recommended by the Federal Reserve Board. If that cut had been implemented, an additional $2.79 billion would have been generated in consumer savings, $1.2 billion more in merchant savings and an additional 17,824 jobs would have been created.

- If swipe fees for all credit card transactions had been held to the same level as debit fees in 2012, consumers would have saved an additional $15.4 billion and merchants would have saved another $6.9 billion, which could have supported 98,600 additional jobs per year.

- With both debit and credit reform fully in place, consumers and merchants could have realized total annual savings of $34.9 billion, supporting a total of 153,976 additional jobs every year.

Federal regulators, the White House and Congress should be looking for ways to spur the economy, create jobs, and lighten the burden on small businesses. Swipe fee reform has already shown more success doing that and what’s been done to date is just a small taste of what should happen. With transparent and competitively set fees, the gains would be much greater.

Doug Kantor, Counsel, Merchants Payments Coalition

Sounding a False Alarm: The Big Banks & Free Checking

Memo to banks: Do you have free checking or not?

Big banks have proclaimed rather loudly that they are being forced to do away with free checking allegedly because of lost revenue from debit card reform.  But guess what?  They did a survey and found plenty of free checking, and their own lobbyist, Nessa Feddis of the American Bankers Association, even said as much in a recent article:  “… most people still pay nothing for the great service banks provide across multiple convenient channels.”

A 2010 survey conducted by the ABA, for example, shows that 53% of respondents did not pay anything for their checking account. Three years later, the same survey found that 55% of bank depositors do not pay for checking, which suggests that free checking has actually increased during the post reform era.  

What’s more, additional studies released by moneyrates.com and bankrate.com show that the monthly service charges banks bill consumers are not even related to debit card swipe fees.  Take, for instance, the fees banks levy on customers for checking accounts.  Following debit reform in October 2011, these fees at the large banks went down and then rose slightly later.  Fees today are about the same as they were before reform, demonstrating that the ebb and flow of the fees does not correlate with swipe fee changes but rather shows the independent market dynamics of consumer checking fees.

Long before the Durbin Amendment was enacted, debit card swipe fees were skyrocketing.  In the last decade alone, they have tripled but there has been no corollary decrease in the fees banks impose on their customers.  And as banks would cry us a river about how the lower cap fees are hurting their bottom line, we only need to look at the numbers again to see that their argument doesn’t hold any water.  No bank that was impacted by the Durbin Amendment is currently facing anemic profit margins.  In fact, it’s quite the opposite. Wells Fargo and other banks have recently reported huge earnings.  And, MasterCard itself just posted a significant growth in profits during the second quarter, reporting that they are up 21% from a year ago.

The banks’ phony argument about free checking accounts is just another attempt to distract federal regulators and Congress from the real problem, which is their abuse of Main Street businesses and consumers in the debit and credit card marketplace.  Debit reform was needed and now we need credit swipe fee reform or else consumers and merchants will continue to be squeezed while the banks rein in sizeable profits at our expense.

U.S. Military Feels an $86 Million Pinch from Rising Credit Card Swipe Fees

The crippling impact of swipe fees on credit cards has extended beyond the civilian marketplace and has infiltrated the U.S. military, further proving the need for legislative reform to rein in these exorbitant costs.

Swipe fees are the charges credit card companies set and banks levy on merchants for accepting their credit cards.  According to recent documents, the processing expenses at the Army & Air Force Exchange topped out last year at $86 million, critical profits that the military wants to funnel back into its own community to bolster its quality-of-life fund.

The predicament the military finds itself in shines the spotlight yet again on the broken system in which the swipe fees for credit cards are determined.  The costly and deceptive practice is nothing short of price-fixing.  Here’s why:

Visa and MasterCard control 80% of the credit card market.  Given their widespread presence, they have been able to manipulate the system so that the banks that issue their cards agree to charge the same swipe fees in concert with Visa and Mastercard even though they set their own prices on every other fee and rate.  All of this is secretly done behind closed doors, preventing merchants from being able to shop around and get better deals.  This kind of collusion is illegal in other parts of our economy and it should be here as well.

The fall out from this corrupt scheme has resulted in consumers paying more for goods and services regardless of whether they are paying with cash or by check or credit card while businesses, particularly small ones, are unable to grow and many struggle to even stay open.

For decades, merchants have been carrying the heavy burden of swipe fees, paying up to 4 percent of each sale back to the credit card company to ostensibly cover the cost of processing the transaction.  Business owners have had little to no recourse to avoid the fees, which have become a significant operating expense rivaling salaries and employee benefits.  The fees in 2011, for instance, rose to $30 billion for credit cards and $20 billion for debit cards.  Keep in mind that the actual cost to process a credit card transaction is approximately 4 cents, no matter the total amount of the transaction.

Credit card swipe fees have more than tripled in the last decade even in the face of new technology and have driven up prices for the average household by more than $250 per year.  Moreover, swipe fees in the U.S. are higher than any other country in the industrialized world, about eight times higher than in the European Union, and there is nothing currently on the books to stop them from rising or bring relief to consumers and Main Street businesses.

The military’s frustrating experience with escalating credit card swipe fees is just another chapter in this long battle to level the playing field and bring transparency and competition to the marketplace.  But until lawmakers close the opaque loophole that the banks are unfairly profiting from, nothing is going to change.  And in the absence of any meaningful reform, consumers and merchants of all stripes will continue to feel the pinch and pay the price.

Visa Lowers Swipe Fees in Europe But Stiffs US Merchants & Consumers

Billions of dollars are paid each year in swipe fees, and merchants accepting credit cards and paying the fees are not the only victims. We all cover the cost of credit card fees in the form of higher prices. There’s no competition in the U.S. swipe fees market, and all banks agree to charge the same amounts dictated by credit card companies. Nobody is stopping Visa or MasterCard from this price-fixing, which results in fees that are outrageously and unjustifiably high.

Now we learn that Visa Europe has proposed lowering swipe fees in Europe by 40% to 60%. This significant reduction would bring Visa’s fees down to only 0.3 percent of every purchase and would be very beneficial to European merchants and consumers.

So, why should U.S. merchants and consumers pay up to 4 percent of a purchase to swipe credit cards? What's different from U.S. purchases and Europe purchases?

Nothing.

Fees in U.S are eight times higher than existing European rates. Americans pay the highest fees in the world but while other countries took measures to limit the fees, in U.S. a credit card swipe fee reform is still desperately needed.

In the latest press release by the Merchants Payments Coalition, Dough Kantor, group’s counsel, says:

“European regulators are holding Visa’s feet to the fire for their outrageous swipe fees – even though the fees in Europe are a tiny fraction of what they are in the United States. There is no reason for rates to be as high as they are. This should be a wake-up call that credit card swipe fee reform is long overdue here.”

You can read the entire release here.

Banks Mark Up Swipe Fees By 500%. Why? Because the Fed Won't Stop Them

In a recent report, the Federal Reserve found that it costs banks and credit card companies about 5 cents to process a debit card transaction. With all of our technological advances, that amount sounds reasonable, and debit card reform, as legislated in the Durbin Amendment, said banks should charge a "reasonable" fee for swiping their cards. Only problem is they don't charge 5 cents. They charge 24 cents, and the Fed is doing nothing about it.

It is a 500% markup! Unthinkable in any other marketplace.
 
The Durbin Amendment required the Federal Reserve to limit swipe-fees on debit cards that banks charge merchants and make sure the fees are relative to the actual cost of processing those transactions. New rules capped interchange fees charged by big banks at 24 cents, excluding institutions with less than $10 billion in assets. This reduction, however, remains grossly out of sync with the costs to swipe a card. The banks continue to profit unfairly from the swipe fee paid for by not just merchants but consumers in the form of higher prices.

Read the Merchants Payments Coalition’s press release on Federal Reserve’s newest report here.

Visa and MasterCard’s Secret Price-Fixing Keeps Swipe Fees Unreasonably High

Last year merchants paid $30 billion in swipe fees. That money could have gone back to the customers in form of lower prices if it weren't for credit card companies and banks that work together to set swipe fees in secret and make them unjustly high. Visa and MasterCard control the market and have all the power to dictate the prices the banks charge retailers when customers use their credit cards. The fee system is complicated and confusing. Merchants have no way of telling how much they will be charged in swipe fees until they get the bill. Visa and MasterCard have up to 240 different types of charges.

“Visa and MasterCard have a stranglehold on the market. They set the fees in secret and banks all charge the same thing rather than competing on price. If they price-fixed consumer fees they would probably go to jail, but because the fee is charged to businesses and hidden they have managed to get away with it.” said Doug Kantor,  a counsel to Merchants Payments Coalition in MPC latest press release on price fixing and hidden fees.

For more facts on price-fixing read this fact sheet by Merchants Payments Coalition.

Why Visa/MC Settlement Didn’t Fix Swipe Fee Problem

There’s no need for consumers to worry about swipe fees being pushed onto them by retailers just because Visa/MasterCard antitrust settlement allows merchants to do so in some states, says consumer advocate Ed Mierzwinski at the U.S. Public Interest Research Group in an article. He says the “checkout fee” or surcharge would be a sure way for business owners to lose customers, and they definitely don’t want this to happen.

The settlement has not fixed the broken swipe fee market, Mierzwinski argues. Merchants don’t think it’s fair to punish their customers for using a credit card and they will continue footing extremely high credit card fee bills.

Mierzwinski explains that the $6 billion payout in the settlement is a drop in the bucket compared to the amount retailers pay in swipe fees, especially since the settlement does not prevent Visa and MasterCard from raising the fees.

Moreover, it took away merchants’ right to ever sue the credit card companies over the fees or any payment technologies, even those that are not being used yet, no matter how unjust or illegal they might be. This gives Visa and MasterCard even more power in a market they already control.

Read this article by Ed Mierzwinski, Consumer Program Director at the U.S. Public Interest Research Group to find out more about why the settlement did not fix the swipe fee problem.

Small Banks Benefitted, Not Harmed, By Durbin Amendment

Visa and MasterCard Under FTC Probe

In a recent report, the Federal Trade Commission has taken a close look into debit card transactions and found that small banks have not been hurt by the Durbin Amendment that lowered swipe fees charged by card companies and banks with assets above $10 billion. The report also announced that the FTC is investigating Visa and MasterCard for practices that might have prevented merchants from using lower cost processors of debit card transactions -- in violation of the Durbin Amendment.

From the report:

“…(I)nterchange fees paid to exempt issuers are higher than those paid to non-exempt issuers. A recent report by the General Accountability Office also concluded that ‘community banks and credit unions have not, on average, experienced a significant decline in their debit interchange fees…. This is consistent with early reports that the payment card networks had adopted a two-tier fee structure for exempt and non-exempt issuers.”

Doug Kantor, counsel to the Merchants Payments Coalition said:

“The FTC report confirms what merchants have been saying all along, that after the reforms small banks and credit union would not only not be harmed by debit but also would benefit from reform, along with consumers, merchants and the overall economy,”

For more information read Merchants Payments Coalition press release here and FTC report here.

Facts About The Broken Credit Card Swipe Fee System

Current swipe fee system is not working and it needs improvement, clarity and government oversight. Right now it is completely controlled by Visa, MasterCard and major banks that charge merchants unjustifiably high transaction fees that significantly reduce business owners’ profit margins. Retailers can’t opt-out or comparison-shop. U.S. card fee system lacks transparency, competition and is almost impossible for merchants to decipher.

Facts:

• In the U.S., banks take between 2 and 3 percent of every credit card purchase.
• The average profit margin for U.S. merchants is 1-3 percent. That means the swipe fees going to the banks equal or exceed the business owner’s profit on each transaction.
• Right now, many small business owners don’t even know the cost of each transaction because the system dictated by the credit card companies and the banks keeps fees hidden and remarkably complex.
• Currently, Visa has over 70 swipe fee categories while MasterCard has over 240 different categories.

Swipe fees are out of control and constantly growing, even though with today’s technology the actual cost of processing credit card transactions should be minimal and U.S. has the highest fees in the world hurting both merchants and consumers.

Facts:

• Today, hidden swipe fees are costing average consumers hundreds of dollars a year – no matter how they pay for their purchases.
• U.S. swipe fees are 7 or 8 times higher than the standard European rate on each transaction
• Hidden swipe fees cost Americans more than all credit card annual fees, cash advance fees, over-the-limit fees, and late fees combined
• Hidden swipe fees cost Americans more than all credit card annual fees, cash advance fees, over-the-limit fees, and late fees combined

For more facts about swipe fees read:

• The Facts About Debit Reform
• The Facts About Credit Card Swipe Fees
• “Swipe Fee” Reform – International Lessons

Time for Congress to Put an End to Visa-MasterCard Price-Fixing

While business owners are struggling to keep operating costs and prices down, credit card companies and big banks charge them swipe fees that are extremely high and unreasonable if we consider how little it actually costs the banks to process credit card transactions.

Bill Leichsenring, the owner of two restaurants in Iowa, describes how much credit card fees hurt his businesses and calls on Congress to act and bring transparency and competitive pricing to the swipe fee system.

“We need transparency and competition. We need the ability to negotiate to reduce our operating costs so we can hold down prices.

I believe in free markets and don’t usually advocate government interference. But in cases like this, where the market is clearly broken, Congress needs to step in.

Members of Congress should determine why U.S. card swipe fees are so much higher — including the ratio of what is charged businesses vs. actual costs — and set about demanding competitive market pricing for swipe fees instead of the price-fixing we have today.”

Read Leichsenring’s article here.

The Market Power of Visa and MasterCard

New York Times Economix blogger Nancy Folbre who earlier this month wrote about unfairness of swipe fees has taken a closer look at how extremely complicated the fee system is for merchants to maneuver and how business owners are left with no choice but to pay exceedingly high fees:

“This market structure is hard to discern, because cards themselves are issued by different banks, with different terms — and they come in many different colors. Among issuers, the top 10 credit-card-issuing banks accounted for more than 90 percent of outstanding credit card debt in 2009.”  

“Both the payment networks and the card issuers operate in a “two-sided” market — selling their services both to consumers and to merchants. Consumers can engage in at least some comparison shopping — considering both terms of service and interest rates charged by different providers.”  

“Small businesses, however, have long been limited in their ability to steer customers toward credit cards that charge lower fees, partly as a result of payment-network rules and partly because they fear inconveniencing their customers and reducing sales.” 

“Payment networks and card issuers know how to exploit that fear, and they have a common interest in extracting as much revenue as possible from the merchants who rely on their services. Their market power puts them in a strong position to do so.”

 To read the entire blog, see here.

Credit Card Industry Buries Merchants In Paper, Killing Their Bottom Line

This article in a trade publication for tire dealers demonstrates how the credit card industry buries merchants in paper about the various swipe fee options merchants pay to banks and credit card companies when customers use their debit and credit cards. By the time merchants read all the fine print, they are never sure if they have the best deal or the worst deal. All they do know is the fees -- worth $50 billion a year in revenue to the card industry -- is killing their bottom line. Here are just a few excerpts from the article.

Read the entire article here:

To Fee or Not To Fee
Modern Tire Dealer

.... Unraveling the mystery of credit card fees ... it’s important to make sure every tire and service shop understands the credit card jargon: Discount rate — price paid by business to process payment transactions. Usually consists of a combination of items:

1. Interchange rates — rates are determined by card associations, i.e. VISA, Mastercard, and paid to the issuing bank, and are usually a percentage plus a transaction amount.
2. Assessments — fees determined and paid to the card associations (approximately 11 basis points).
3. Mark-ups — profit add-ons by your merchant services bank.
4. Other fees — authorization request fees:

• monthly statement fees,
• monthly minimum fees,
• batch fees,
• customer service fees,
• annual merchant fees, and
• chargeback fees.

NOTE: These may vary as to how they’re labeled on monthly statements. If it seems like there is an endless list of fees, this is just the tip of the iceberg. There are also a variety of methods in which merchant service programs are marketed by service processors. Here are some examples of merchant service programs which are offered to dealers:

• Interchange plus — the interchange rate plus a bank markup.
• Fixed rate plus — a minimum interchange rate, plus excess of interchange in excess of minimum.
• Tiered pricing — transactions put into tiers based upon transaction types.
• Bill backs – a variation of interchange plus.

The next issue is making sure that your transactions are charged the lowest possible rate available per the program that you are with. David Eckroth, controller for Northwest Tire Inc., Bismarck, N.D., spoke to his 20 Group dealers recently on the topic of credit card fees: “Managing processing costs is critical in keeping the fees as low as possible. One way to do this is to avoid downgrades, or transactions which do not meet the card association requirements to qualify for lowest interchange rates. The main reasons for downgrades are: key entering rather than swiping; not using AVS (Address Verification Service) on key-entered transactions; not settling transactions daily; and not answering questions for input items such as sales taxes.”

Managing card disputes 

Sometimes the bank will “chargeback” a transaction (cost of goods plus fee) when the customer disputes a charge. When this happens, the amount is sometimes automatically deducted from your checking or savings account along with any chargeback fee.

While this doesn’t happen often in tire and service transactions, it can happen and dealers should be aware of this potential action from an unhappy customer.

A cardholder can initiate a chargeback within 120 days of the delivery date of the products and/or services. A card issuing bank also can initiate a chargeback within seven to 75 days.

Some chargebacks can be reversed and resolved in your favor without the loss of the sale. It’s important that the dealer provide all of the information regarding the transaction, such as proof of delivery, signed receipt, invoice, etc. Document how this information is provided through the Electronic Integrated Dispute System (eIDS) within 14 days of the chargeback issuance date.

Preventing credit card disputes 

Of course the best way to avoid card disputes is to satisfy customers even if they end up with a higher ticket than anticipated. Eckroth provided a guide on how to prevent card disputes before they end up being a problem.

Eckroth also suggests that at least once a year you should request a review from your credit card merchant services processor.

Ask to review the makeup of cards accepted, a review of the history of any downgrades, and have them provide a detailed cost analysis of all transaction fees.

How to reduce credit fees

Hank Feldman, president of Performance Plus Tire and Automotive in Long Beach, Calif., recently won second place in his 20 Group’s Best Idea Contest for giving his group a simple three-step approach to reducing fees. If dealers follow these steps, they will secure the most competitive fees, he says:

1. Quote: Get quotes at least twice a year; they can be done over the phone; use only direct processors; and send two months of statements for review.
2. Negotiate: Always ask for the interchange rate plus the lowest possible markup; always ask for the lowest possible per-transaction fee; ask for same-day credit at the bank (24 hours); ask for free equipment; and offer your existing provider the opportunity to match rates.
3. Monitor: Request monitoring of transactions to ensure your account is set up correctly, avoiding increased interchange rates; get verifiable references; and ask for a dedicated account representative.

... Take these steps to prevent credit card disputes Provide a superior customer experience Card not present at point-of-sale

1. Indicate business name and customer service phone number on cardholder statements.
2. Email order, shipment and credit confirmations.
3. Provide accessible live customer service agents.
4. Clearly indicate your return and shipping policy and request that shoppers “click and accept” the policies before the transaction can be completed.

Manage fraud at the time the transaction is processed Card present at point-of-sale

1. Always obtain an authorization for the full amount, at the time of the purchase and via your terminal.
2. Always swipe the card (do not key enter), review customer signature and verify the card number.
3. Refuse a card which is declined for authorization.

Card not present at point-of-sale

1. Use Address Verification Service (AVS) and CVV2, CVC2 and CID (three-digit code) verification. These are security features for credit card transactions on the Internet and over the phone. CVV and CID represent Card Verification Value (varying with the card issuers).
2. Obtain signed proof of delivery.

Manage chargebacks and retrieval requests Both card present and card not present at the merchant’s point-of-sale

1. Review chargebacks and retrieval requests regularly.
2. Respond promptly to retrieval requests.
3. Research and manage your chargeback and retrieval requests on ClientLine.
4. Gain efficiencies by resolving disputes online, with Electronic Integrated Dispute System (known as eIDS).
5. Use the online Resolve Chargeback Tool.