Credit Card Swipe Fees Are a Rip-Off by Banks, Abetted by U.S. Law | Commentary
U.S. merchants who have been fighting in Congress for transparency and competition in the credit card industry are eyeing a European Union proposal that reins in the excessive swipe fees merchants bear every time a customer chooses to pay with plastic.
In the grocery industry, with profit margins of just more than 1 percent, the situation is dire. Swipe fees typically exceed our profit margins. That’s just not sustainable.
In fact, U.S. credit card swipe fees have tripled in the past decade — they are the second-largest expense for merchants after labor and are eight times higher than in Europe. That’s right. It costs eight times more to swipe a card in Boston than it does in Berlin.
The difference is that the European Competition Commission hasn’t allowed the credit card companies to hoodwink them. They have been fighting Visa and MasterCard for years over excessive anti-competitive swipe fees, arguing that the cost to swipe shouldn’t be harmful to consumers and the economy (or larger than the profit margin of merchants), which is exactly the situation in the United States.
The EU proposal calls for a cap on credit card swipe fees of 0.3 percent of the amount charged to a card, far lower than the 2 percent to 4 percent charged in the United States.
This move validates what U.S. merchants here have been saying for years: Visa and MasterCard, which control more than 80 percent of the market, are overcharging merchants for the privilege of using their cards and, as a result, customers are paying more for products and services.
In just the past year, these companies generated more than $50 billion in swipe fees off the backs of merchants and their customers.
In fact, a recent economic report conducted by Robert Shapiro of Sonecon LLC, an economic analysis firm, found recent reforms to debit card swipe fees put nearly $6 billion in the hands of consumers and created more than 37,000 new jobs in 2012 alone. Similar reforms to credit cards would stimulate the economy even more, generating another $31 billion in consumer savings and 154,000 jobs annually.
For retailers and merchants, swipe fees are the fastest-growing expense they face, despite technological improvements that have made it much cheaper for banks to process such transactions. Swipe fees are now higher in the United States than in any industrialized country in the world, even though we have the largest volume of transactions.
What’s most frustrating about this situation is that Visa and MasterCard are exercising their market power to squeeze out any hope for transparency and competition. The fees are fixed in private by the credit card companies and not adequately disclosed to retailers or their customers. And the banks issuing cards under the Visa label, for example, all agree to charge the same fees, eliminating any possibility for competition or negotiation.
There is no way to budget for these fees because they keep going up twice per year by unpredictable margins. And the complexity of the system has exploded. Visa has more than 60 swipe fee categories. MasterCard has more than 240.
This complexity is especially difficult for smaller, independent grocers to understand. Given the remarkably competitive environment we face, the problem of uncontrollable swipe fees can’t be overstated. Grocers can pay as high as 4 percent of a transaction in swipe fees, depending upon the type of credit card used. Often, merchants even lose money, especially on smaller purchases.
While merchants and consumers are willing to pay for the convenience of credit cards, we draw the line at being blatantly ripped off, particularly when our peers around the world are paying much less for the same exact service.
Movement to curtail these unfair fees with debit cards was addressed with the Durbin amendment in 2012, but something must still be done about credit card swipe fees.
Lawmakers need to take action so banks can no longer gouge merchants and consumers by hiking these hidden fees at will. The course needs to be reset with legislation that fundamentally changes the broken marketplace, replacing the banks’ duplicitous price-fixing scheme with competition and transparency, so that consumers save and businesses can reinvest in creating new jobs and help energize our flagging economy.
Peter Larkin is president and CEO of the National Grocers Association.