Swipe Fee Fight Goes On As Retailers Appeal Credit Card Settlement

The next chapter in the eight-year battle between the retail industry and Visa and MasterCard is set to unfold as the National Retail Federation (NRF) recently filed an appeal to the controversial antitrust lawsuit settlement covering credit card swipe fees.  At the heart of the appeal is the fact that the deal simply won’t prevent these fees from continuing to rise at exponential rates in the future.

In December, a federal judge approved the proposed $5.7 billion settlement between retailers and the credit card giants.  Merchants had brought the suit against Visa and MasterCard to fight the soaring cost of swipe fees, which drains $50 billion a year from the bottom line of retailers and consumers.  Given that the major credit card companies together control 80 percent of the market, they continue to set these fees in a manner that amounts to price-fixing.  Merchants, at no point, have ever been given an opportunity to negotiate these fees.

So, what is gained by the settlement?  From the merchants perspective, not very much.  Even with this settlement in place, the problems retailers face, which triggered the litigation to begin with, will remain.  The decision offers nothing in terms of reforming the system or curbing the escalating costs of the fees, which have tripled in the past decade alone.  In fact, the $5.7 billion settlement is a mere drop in the proverbial bucket for Visa and MasterCard as it represents less than three months of their swipe fee profits.

As Mallory Duncan, NRF’s Senior Vice President and General Counsel says,

“The only people pleased with this settlement are Visa and MasterCard, because it means they can continue collecting tens of billions of dollars in hidden fees, the class action lawyers who stand to collect half a billion dollars in fees without fixing the problem, and a lower court, which has cleared a time-consuming case off its docket, but has done a serious disservice to merchants and the public in the process.”

To read more, see here.

New Surcharge Rule Does Not Ease Swipe Fee Pain

This week, American Express reached a settlement agreement with businesses that will allow merchants to surcharge customers who pay with the company’s cards.  While American Express is touting this as a “win” for merchants since it gives them the ability to lower their costs by adding a “checkout” fee, the settlement actually does precious little to address the root of the problem: the skyrocketing cost of the swipe fees themselves.

Right now, swipe fees cost merchants and consumers upwards of $50 billion a year.  This new settlement does nothing to rein them in and doesn’t begin to address the secrecy in which they are set.  Moreover, merchants will not be eager to tack on this fee and create a two-tier payment system in which customers paying by credit will be charged more than those paying with cash.  The potential consumer backlash could drive customers away and as merchants scramble for business in this fragile economic environment, it’s hard to fathom that they would take such a big risk.

This settlement does not do anything to fix a payments market that is fundamentally broken.  All it does is ensure that the status quo will remain in tact and merchants and consumers will continue to feel the pinch.

Below is a statement by the Merchants Payments Coalition in response to American Express' announcement.

“This agreement is a tragic mistake that will hurt merchants and their customers,” MPC Chairman and National Retail Federation Senior Vice President and General Counsel Mallory Duncan said.  “The settlement does nothing to lower credit card swipe fees while making sure the fees will continue to be hidden from consumers and that the big credit card companies can continue to fix prices without competition.  The result is that swipe fees will continue to be the fastest-growing expense for merchants and that consumers will keep paying overinflated fees without even knowing it.”

To read more about the settlement, read here.

Game. Set. Match. New Study Shows Swipe Fee Reform Didn’t Kill Free Checking

Ever since the idea of debit swipe fee reform came to the fore, the banking industry has been peddling doomsday scenarios about how lower caps would negatively impact consumers.  It would, they argued; mark the end of free checking accounts.  But a new comprehensive report just released by the Kansas City Federal Reserve has punctured that claim, exposing it as nothing more than a bogus and idle threat.

According to the report, which looked at checking fees before and after debit reforms were put in place, free checking actually became more available post-regulation.  In fact, the share of small banks offering free checking rose from 37 percent to 44 percent from 2011 to 2012.

What’s even more compelling is that the study proves what many advocates of swipe fee reform have been claiming from the very beginning:  competition in the marketplace benefits consumers.  As the report notes, “free checking has expanded most in cities and regions where banks are engaged in vigorous competition: banks in such markets may offer free checking to attract customers from other banks or to ensure retention of their own established customers.” 

So, despite what the big banks would have us believe, it turns out that government intervention did not wreck havoc and bring things to a grinding halt.  It did just the opposite.

           

It’s time now to use this evidence as the basis for curbing the escalating costs of credit card swipe fees, which have tripled in the last decade for no discernable reason since advances in technology should have driven down the processing costs to banks.  No good can come from continuing to allow Visa and MasterCard to control 80% of the market.  This status quo stymies competition in the marketplace, which only ends up hurting both consumers and merchants.

There’s little doubt that the banks and credit card companies will continue to use consumers as their straw man in order to protect the windfall of profit they rein in from swipe fees.  But the facts, as seen in the Kansas City Fed’s report, have exposed their line of reasoning as nothing more than a pack of lies.  They should not fool us any longer.

To learn more about the Kansas City Federal Reserve’s study, read here.       

The Fed Needs a Do-Over

Last week, merchants continued their fight for lower swipe fees when they filed a brief in support of U.S. District Court Judge Richard Leon’s July 2013 decision to reject the Federal Reserve’s implementation of swipe fee regulation.  (see the Wall Street Journal’s article Retailers Make Case for Lower Debit Fees).

While Judge Leon’s ruling marked a victory for small businesses and consumers across the country, the Fed, with ample support from the banking industry, chose to appeal the decision, setting the stage for both sides to argue their case before a three-judge panel in January. 

But in the midst of all this legal wrangling, it’s important to take stock of the facts lest we miss what is really at stake here.

As it stands now, credit and debit card swipe fees are a cash cow for the banks.  They charge anywhere from 2 to 4 percent of the total bill for credit cards and 24 cents a swipe for debit cards, raking in nearly $50 billion a year off of the fees alone.  This in turn trickles down into raising prices for consumers and squeezing merchants’ bottom lines. 

That’s a tough pill to swallow when you realize that the cost to process these transactions is small, only a few cents per swipe.

To make matters worse, when it comes to credit cards, Visa and MasterCard control 80% of the market and have manipulated the system so that all of the banks that issue their cards agree to charge the same fees.  There’s no room for competition and merchants cannot negotiate on the price.

The end result has been that swipe fees are the fastest-growing expense for merchants despite the fact that technological advances have actually made it less expensive to process the transactions.

The Durbin Amendment represented the first step to rectifying this inequity as it called for debit fees to be reasonable and proportional to what it costs banks to actually process those transactions.  And while the banks lobbied hard against such caps, it should be noted that this regulatory shift ended up benefiting retailers both large and small and gave a much-needed boost to the country’s economic recovery.

Take, for instance, the findings in a new comprehensive report by noted economist Robert J. Shapiro.  It found that in 2012 alone, reducing the swipe fees for merchants actually put $5.8 billion back into the hands of consumers through lower prices, which led to sufficient increased spending to support 37,501 new jobs.  Savings and job gains would have been substantially larger—to the tune of an additional $2.79 billion in consumer savings and 17,824 jobs—if the fees had been cut to 12 cents per debit card transaction (as originally recommend by the Fed) and 24 cents for credit cards.  

Even at the lower caps, banks have enjoyed a perfectly robust profit margin.

Let’s be clear: merchants don’t mind paying for the processing service.  But there comes a point when enough is enough.  Currently, the banks are rigging the system by creating an environment where merchants are forced to pay inflated, price-fixed costs within a structure that is not competitive or transparent. 

Judge Leon laid the groundwork to righting this wrong.  It’s time for the Fed to take a do-over.  They need to end the unconscionable price gouging and give relief to merchants and their customers once and for all.

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.