It seems like we’re having a bit of a tough time making sense out of cents. Swipe fees – charges equal to 1.5–3% of any given purchase that are assessed to merchants by banks when customers pay with plastic – are wreaking havoc yet again.
First there was the protracted squabble over a proposed cap on such fees for transactions involving debit cards. That culminated in the Federal Reserve placing limits on what major banks could charge, the banks losing $8.4 billion in annual revenue as a result (which they’re making up by raising fees and slashing customer benefits), and a whole lot of waiting for any sign of benefit to consumers. Oh yeah, it’s also causing some to predict the replacement of the debit card by the prepaid card in the hierarchy of payments.
Now, despite this less-than-stellar record, we’re diving into the swipe fee swamp yet again – this time with credit cards. A settlement was recently reached in a class-action lawsuit brought by a sizable contingent of merchants against Visa, MasterCard, and a host of major banks over allegations that the defendants engaged in anticompetitive pricing practices over the years. If it garners the requisite approval, this settlement would not only score the merchants a $7.3 billion payday and an eight-month reduction in credit card swipe fees that will save them an additional $1.25 billion, but it will also give individual businesses the freedom to negotiate their own swipe fees and, for the first time ever, assess surcharges to those who use credit cards.
The obvious question is whether the latest attempt at satisfying a swipe fee dispute will actually help consumers or fall flat like its debit card predecessor?
Even though merchants won’t actually be allowed to start charging the plastic-wielding citizenry until December at the earliest, provided the deal is approved before then, early returns aren’t promising. Many merchants, big and small, have said that they will not be taking advantage of the opportunity if and when it should arise. Their reasons are varied, but at the heart of the matter is a desire not to alienate customers during uncertain economic times.
Others are hoping they won’t have to assess surcharges to benefit, that the threat alone will do the trick. They think that the freedom to assess surcharges will provide the merchants with some bargaining power over the credit card companies when it comes time to negotiate swipe fees. But how much better of a deal do small independent merchants really expect to strike than what the largest national retailers have received over the years?
What’s more, the way the deal is structured makes it difficult for any merchant who accepts American Express cards – about half of all those that accept Visa/MasterCard – to benefit. You see, if a merchant is going to apply a surcharge to a Visa or MasterCard credit card, the settlement dictates that they also do so to American Express credit cards. However, Amex has its own rule stipulating that all forms of plastic must be treated the same, which would necessitate merchants charging extra for debit card payments as well. Yet merchants want to encourage debit card use because of the low swipe fees associated with those transactions. This all simply means that if a merchant accepts Amex, the benefit of surcharge freedom is lost on them (at least until American Express gets sued over that rule).
When you further consider that 10 states, representing roughly 40% of the country’s population, have laws against credit card surcharges, it’s clear just how ineffective this aspect of the settlement will be for merchants.
Ultimately, what’s clear is the fact that if a truly competitive payments landscape is what we’re after, all of the loopholes and limitations need to go. No more price controls or providing a hollow ability to apply surcharges and discounts. Merchants simply need the ability to assess surcharges and discounts as they see fit based on payment method and card network. We’re obviously on the right track, seeing as the most recent swipe fee deal was struck in the courts, enabling companies to reach a mutual agreement, rather than having price controls pushed on them by the government, but there is clearly still work to be done.