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Outdated System Guarantees More Data Breaches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.

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