Think you have a love/hate relationship with that piece of plastic in your wallet?
Few industries have benefited as much from the easy extension of credit as America's retailers. At the end of 2009, more than 575 million credit cards were in circulation, and the transaction volume totaled more than $1.5 trillion.
But now those merchants are leading a campaign against the swipe fees collected by the large banks that issue credit and debit cards under the Visa and MasterCard flags, including Wells Fargo and U.S. Bank.
It's unclear whether lower swipe fees will benefit consumers, or simply pad the bottom line of retailers. Even the federal government's own auditor has questioned the notion that reduced swipe fees will lead to lower retail prices.
Still, retailers scored big recently when the Federal Reserve proposed new rules that would slash debit-card transaction fees. Instead of sending an average of 47 cents to banks every time a customer uses a debit card, retailers would have to fork over no more than 12 cents.
If the new rules go into effect next year, debit card revenue at Wells Fargo, U.S. Bank and other banks would shrivel by an estimated $13 billion. TCF Financial has gone so far as to sue the Fed, saying the new rules would cost it $85 million a year in lost revenue.
With a win on the debit card front, merchants are now focusing their efforts on credit card swipe fees, which generate an estimated $50 billion a year for companies that issue the cards.
The largest component of swipe fees are the interchange fees collected by a purchaser's credit card company. How Visa and MasterCard set those fees, as well as some other practices, have come under fire from governments and regulators around the world. The litigation section in Visa's most recent annual report is 12 pages of tiny type. Two cases alone, settled in 2007 and 2008, cost Visa almost $4 billion.
Craig Wildfang, a partner at the Minneapolis law firm Robins, Kaplan, Miller & Ciresi, is one of the lawyers leading what's been called the "Super Bowl of antitrust litigation" -- a case involving more than 50 lawsuits against Visa, MasterCard and the nation's biggest banks over the setting of fees collected by banks and the rules that merchants must abide by in order to participate in the card networks.
"There is no free market in the setting of interchange fees because all the banks charge the same amount, and Visa and MasterCard charge basically the same amount," Wildfang said. Though the case is under protective order, potential damages have been estimated between tens and hundreds of billions of dollars.
Default credit card swipe fees set by Visa and MasterCard are generally higher than debit card fees because credit card purchases are unsecured loans. If the consumer doesn't pay, it's the credit card company -- typically a bank or credit union -- that eats the loss, not the retailer.
Credit card swipe fees can range from less than 2 percent to as much as 5 percent, depending on the type of transaction, the merchant and the type of card. MasterCard's most recent schedule of U.S. interchange fees covers 135 pages.
Some of the highest fees for merchants come with rewards cards, which have proven increasingly popular with consumers. Retailers who want to be part of Visa's or MasterCard's network can't discriminate among cards; they must accept all of them.
Traditions, a St. Paul-based furniture store with three outlets, was one of the first retailers to join the class action against Visa and MasterCard. Co-owner Mike Schumann says he didn't object to swipe fees back in the 1980s, when credit card transactions involved handling a lot more paper. But interchange rates have continued to rise, he said, even as the cost of providing those transactions has declined.
At Traditions, swipe fees can range from 1.3 percent to more than 3.3 percent of every transaction. So, on a $1,000 sale, Traditions might be paid as little as $967 by the customer's credit card company.
Visa and MasterCard say swipe fees are a necessary cost of maintaining a payment network, preventing fraud and minimizing credit risk. In fixating on interchange fees, retailers conveniently downplay the benefits of belonging to a card network, such as getting paid quickly and not having to worry about bounced checks.
In short, says Visa, retailers "want to continue to benefit from the payment network in which they participate without paying their fair share."
Big banks also warn that a reduction in interchange fees could force them to impose annual fees on more credit cards.
But the pressure on the card issuers is growing. In October, Visa and MasterCard settled one case with the Justice Department by agreeing to allow merchants in their networks to, among other things, offer discounts to consumers who pay by cash, check or debit card.
Schumann hopes to one day be able to go a step further, possibly even tacking on a surcharge if, for example, a customer insists on using a rewards card with a higher interchange fee.
"These banks bid against each other for credit card customers by sweetening their rewards programs, and then they raise the interchange fees," Schumann said. "Why should I end up helping pay for someone's frequent flier miles?"
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