Consumers likely don’t think twice about swiping their credit cards through a retail outlet scanner, but they should. As it turns out, “swipe” fees are one of the most lucrative fees for banks and card issuers— and one of the most costly for consumers.
For the record, credit card swipe fees, paid by both merchants and consumers, rack up $48 billion in fees annually, according to the National Retail Foundation.
The NRF paints the card swipe fee as harmful to consumers and retailers, and wants Washington to do something about it in the upcoming financial reform bill.
Says the NRF’s Senior Vice President and General Counsel, Mallory Duncan: “These fees drive up prices for the average family by hundreds of dollars every year and depress the ability of main street merchants to thrive and grow ... Financial services reform isn’t complete without swipe fee reform.”
Swipe fees — otherwise known as interchange fees — are fees charged by card issuers every time a card is swiped in a retail transaction. The NRF reports that the average fee is 2% of the transaction amount and that the $48 billion figure has tripled since 2001, when swipe fees accounted for only $16 billion. The foundation also says that the average U.S. household spent $427 in “higher prices” in 2008, compared to $159 in 2001.
While the CARD Act of 2009 did include a provision to study interchange fees, it didn’t take any direct action against swipe fees. But that could be changing.
On May 6, Senate Majority Whip Richard Durbin (D-Ill.) introduced a bill to require major card carriers like Visa (Stock Quote: V) and MasterCard (Stock Quote: MA) to negotiate card swipe fees with retailers, rather than impose fixed fees on them. The bill also includes a provision that would allow retailers to give discounts to consumers who use cash or a debit card to make a purchase — thus taking the swipe fee out of the equation.
"We're not saying there should not be an interchange fee," Durbin said in a Senate speech May 6. "We are saying it should be reasonable."
For their part, credit card issuers, including banks and credit unions, say that swipe fees are needed to cover transaction costs, particularly losses suffered from card customers who don’t pay their bills. Smaller banks don’t like the proposed rules because it would put them at a disadvantage against larger banks (most small banks and credit unions issue debit cards, which actually cost retailers more in fees).
But credit reform advocates aren’t buying that argument. In a March report from Consumers for Competitive Choice, study authors Dr. Robert Shapiro and economist Jiwon Velucci say that less than 20% of swipe fees go to the actual transaction and processing costs of credit card companies.
What now? We can expect the usual lobbying tug of war between the credit card industry and consumer groups, with the outcome uncertain. But now that swipe fees are on Washington’s radar in a major way, financial institutions are once again on the defensive for high credit card fees.
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