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Swipe Fees

Swipe Fees

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A controversial credit card swipe fee settlement opposed by NRF and thousands of retailers from across the country has been thrown out by a federal appeals court nearly three years after it was approved by a lower court judge. NRF welcomed the appellate court’s ruling and said “now it’s time to seek real reform” either in court or in Congress.

At issue was a $7.25 billion settlement of a class action antitrust lawsuit over the $30 billion in credit card swipe fees charged by Visa and MasterCard each year. U.S. District Court Judge John Gleeson approved the settlement in December 2013, dismissing as “needless hyperbole” objections from NRF that it was agreed to by fewer than a dozen retailers and would do nothing to bring swipe fees under control. Gleeson’s 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 deal 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.

In June 2016, the U.S. Circuit Court of Appeals in New York ruled in favor of NRF and retailers who opposed the settlement, saying the case was improperly certified as a class action, that the settlement was “unreasonable and inadequate,” and that merchants were “inadequately represented.” The case was sent back to District Court, giving retailers the chance to decide whether to seek a better settlement, go to trial or pursue other alternatives.

NRF opposed the settlement because it failed to reform the cartel-like system where Visa and MasterCard set a rigid schedule of credit card swipe fees all banks that issue their cards 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 were never sought by retailers and would only drive up prices for consumers, the opposite of retailers’ goal in filing the lawsuit.

Separately from the fight over credit card swipe fees, House Financial Services Committee Chairman Jeb Hensarling, R-Texas, is currently pushing legislation that would repeal the Federal Reserve cap on debit card swipe fees that took effect in 2011. NRF has urged lawmakers to reject the election-year proposal, saying it “is a vote for higher consumer prices and isn’t likely to win many votes in November.” NRF says swipe fees could double or more if Hensarling is successful, and that the $6 billion a year consumers have saved would go back into the pockets of the nation’s largest banks. While Hensarling’s legislation is part of a broader push to ease federal banking regulations, the cap would also be repealed under standalone legislation introduced by fellow committee member Randy Neugebauer, also R-Texas. NRF opposes that bill as well.

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 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 credit card 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 hundreds of dollars a year in higher prices 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, both in court and in Congress.

On Capitol Hill, NRF has sought 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 current 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.

While Congress has yet to address credit card swipe fees, NRF in 2010 convinced Congress to act on debit card swipe fees in the Dodd-Frank bill, resulting in the 21-cent cap mentioned above. Although focused on debit cards, Dodd-Frank also barred card companies from interfering in cash discounts and allowed retailers to set a minimum purchase for credit cards.

While the 21-cent cap was a significant reduction from the previous 45-cent average, it was still far higher than Congress intended, and NRF went all the way to the U.S. Supreme Court in an attempt to force the Federal Reserve to set a lower cap.

NRF and its members won a major victory in July 2013 when U.S. District Court Judge Richard Leon ruled that the cap was, in fact, 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 21 cents 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 were 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 Supreme Court to review the case, saying the issue was “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 far less than intended by Congress, a 2015 study by the Federal Reserve Bank of Richmond found 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 have actually risen.

In its meetings with policymakers, NRF has pointed out that U.S. swipe fees are far higher than those in other parts of the world. 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. officials “to follow that example so American merchants and consumers can stop paying the bulk of the world’s swipe fees.”