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Swipe Fees

Swipe Fees

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A controversial settlement over credit card swipe fees opposed by NRF and thousands of retailers from across the country remains under appeal more than two-years after it was approved by a federal judge. Nonetheless, NRF continues to keep the swipe fee issue before lawmakers and the public.

At issue is a December 2013 ruling by U.S. District Court Judge John Gleeson, who gave final approval to a settlement of a class action lawsuit over the $30 billion in credit card swipe fees charged by Visa and MasterCard each year. Gleeson dismissed objections from NRF that the settlement was agreed to by fewer than a dozen retailers and would do nothing to bring swipe fees under control as “needless hyperbole.” The ruling came even though the settlement was formally rejected by more than 8,000 merchants including many of the nation’s largest and best-known brands. NRF filed an appeal in January 2014, arguing that the settlement was “an abuse of the class action system” and that small retailers would receive as little as a few hundred dollars with nothing in return. NRF’s brief was filed in June 2014, and the case remains pending before the U.S. Circuit Court of Appeals in New York.

NRF opposes the settlement because it fails to reform the cartel-like system where Visa and MasterCard set a rigid schedule of credit card swipe fees all banks agree to follow while refusing to negotiate with merchants. Instead, the card companies proposed in the settlement that the fees be passed along to consumers in the form of a surcharge. NRF countered that surcharges would only drive up prices for consumers, the opposite of retailers’ goal in filing the lawsuit.

In a separate case, retailers won a major victory when U.S. District Court Judge Richard Leon ruled in July 2013 that a 21-cent cap on debit card swipe fees set by the Federal Reserve was too high because it went beyond the “reasonable” and “proportional” level ordered by Congress. The Fed initially found that it costs banks an average of about 4 cents to process a debit transaction and proposed a cap of no more than 12 cents, but settled on the 21-cent figure under pressure from banks. Leon ordered the Fed to recalculate the cap at a lower level, but the Fed quickly appealed. NRF argued that Leon’s ruling should be upheld, saying banks are still “raking in billions of dollars in unearned profits” at the expense of retailers and their customers. A study found the cap is saving retailers $8.5 billion a year but that $12.5 billion could be saved if it were set at the proper level. The U.S. Circuit Court of Appeals in Washington ruled in favor of the Fed in March 2014, saying the agency had made a “reasonable interpretation” of the law. In August 2014, NRF asked the U.S. Supreme Court to review the case, saying the issue is “of staggering importance.” In January 2015 the court refused to take up the case, a ruling NRF said was “disappointing because it leaves merchants and their customers paying fare more than intended by Congress.”

The 21-cent cap remains in place. But with debit swipe fees reduced by far less than intended by Congress, a 2015 study by the Federal Reserve Bank of Richmond found that the regulations have had a “limited and unequal impact” on merchants’ debit costs. Two-thirds of retailers surveyed had seen no decrease or so little that they didn’t know if they had had a decrease. Thanks to a quirk in the regulations, swipe fees for some small debit card purchases had actually risen.

The Issue

Swipe fees are a percentage of the transaction that banks take from retailers each time a credit card is swiped to pay for a purchase, averaging about 2 percent. Banks also took a percentage of the transaction for debit cards until October 2011, when they were capped at a flat fee of about 21 cents per transaction (down from an average of about 45 cents) under the Dodd-Frank Consumer Protection and Wall Street Reform Act. Before adoption of Dodd-Frank, combined credit card and debit card swipe fees had tripled over the previous decade to reach an estimated $50 billion a year. The exact amount of a swipe fee can range from about 1.5 percent for an ordinary card to 3 percent or more for premium rewards cards, and also varies according to a merchants’ card volume and other factors. The schedule of fees is set centrally by Visa and MasterCard, with all banks that issue the cards agreeing to charge the same fees. Banks do not compete over the fees and refuse to negotiate with retailers no matter how large. NRF has argued before Congress that the practice is a violation of federal antitrust law the same as if retailers were to collude on the price of specific pieces of merchandise.

Why it Matters to Retailers

Many retailers have cited swipe fees as their second or third highest cost behind wages and employee health benefits. With retail industry profits averaging only about 2 percent, there is no room for retailers to absorb the expense, so swipe fees are passed on to customers in the form of higher prices. In addition, card industry contracts and practices long required that merchandise be priced at the credit card price – including the swipe fees – and made it difficult to either show the fees to customers or to offer a cash discount. By NRF estimates, swipe fees cost the average U.S. household close to $400 a year and hurt retail sales because consumers buy less when prices go up.

5 Things to know about swipe fees
National Retail Federation Senior Vice President and General Counsel Mallory Duncan explains how a cap on debit card swipe fees has helped hold down retail prices for shoppers and why proposals to repeal the cap would benefit banks at the expense of consumers.

NRF Advocates for Swipe Fee Reform

NRF has led the retail industry’s fight over swipe fees for a number of years, seeking legislation that would introduce transparency and competition that would bring fees down to a reasonable level. In 2010, NRF succeeded in convincing Congress to address debit card swipe fees in the Dodd-Frank bill, resulting in the 21-cent cap mentioned above. Credit card fees as such were not addressed, but Dodd-Frank barred card companies from interfering in cash discounts and allowed retailers to set a minimum purchase for credit cards.

NRF is still pursuing legislation that would increase transparency by requiring card companies to clearly disclose the fees charged by each type of card and boost competition by ending Visa and MasterCard’s cartel-like practices in setting the fees. NRF chairs the Merchants Payments Coalition, which was formed with other retail trade associations to address the swipe fee issue.

In December 2015, the European Union capped credit card swipe fees at 0.3 percent of each transaction and debit card swipe fees at 0.2 percent. In an op-ed published in The Hill newspaper, NRF called the move “a win all the way around” and urged U.S. policymakers “to follow that example so American merchants and consumers can stop paying the bulk of the world’s swipe fees.”