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Swipe Fees

Swipe Fees

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With debit card swipe fee reform protected after banks failed in a hard-fought attempt to have it repealed, retailers’ attention is now turning to credit card swipe fees.

House Financial Services Committee Chairman Jeb Hensarling, R-Texas, spent the first few months of 2017 working to overturn the Federal Reserve’s cap on debit card swipe fees as part of broader legislation to reverse the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

But Hensarling dropped that attempt just before Memorial Day, acknowledging that repeal of swipe fee reform was “the most contentious part” of the Financial Choice Act after a number of fellow House Republicans expressed concern about the provision. He said he would drop repeal in order not to “hinder passage” of the rest of the Dodd-Frank rollback. The Financial Choice Act subsequently passed the House in June but stalled in the Senate. The Senate Banking, Housing and Urban Affairs Committee approved its own bill making changes to Dodd-Frank in December, but the measure does not address swipe fees. Hensarling, who was term-limited as chairman, announced his retirement from Congress in October.

NRF called preservation of swipe fee reform a "major victory" for retailers and their customers. Banks falsely claimed that retailers had pocketed the $8.5 billion in annual savings brought by repeal but NRF showed that the majority had been passed on to consumers.

The NRF campaign to protect swipe fee reform included radio ads that urged House members to not be a “pawn of the banks.” Earlier, NRF brought dozens of retailers to Washington to lobby against repeal when Hensarling held a hearing on the legislation without inviting retailers to testify. NRF submitted a statement for the hearing record and ran digital ads telling Congress repeal of swipe fee reform is “a losing game for consumers” and that Congress should “protect swipe fee reform” instead. NRF also delivered thousands of petitions to Congress addressing consumer benefits of swipe fee reform and the need for competition among banks.

NRF told Congress debit card swipe fee reform has been “ a remarkable success” and published a newspaper op-ed saying repeal would “bring back the monumental unfairness of the rigged, uncompetitive market that existed before debit reform was enacted.”

The win on debit card swipe fees came just after the U.S. Supreme Court ruled in retailers’ favor in a controversial class-action lawsuit, clearing the way for merchants to pursue reform of credit card swipe fees next.

In the lawsuit, the justices refused to reinstate a settlement that would have blocked retailers from challenging Visa and MasterCard’s price-fixing of credit card swipe fees. The $7.25 billion settlement came in a lawsuit brought by a small group of merchants claiming to represent the retail industry. The settlement was approved by a U.S. District Court judge in 2013 even though NRF and most major retailers argued that it would do nothing to stop price-fixing and that the money amounted to pennies on the dollar compared with the amount retailers were overcharged. More importantly, retailers would have been prohibited from ever suing over the issue again, leaving the card companies free to continue the price fixing.

The refusal to hear the lawsuit sent the case back to U.S. District Court, where it is now pending as a new judge and a number of new lawyers work to either go to trial or come up with a new settlement.

In a separate case, the Supreme Court said First Amendment free speech rights must be considered when determining how merchants show customers how swipe fees drive up the price of merchandise. The justices struck down an appellate court ruling in favor of a New York state ban on credit card surcharges and told the appeals court to reconsider the case. The justices said the appeals court incorrectly concluded that the ban regulated only conduct rather than speech.

NRF said after the ruling that most retailers do not want to surcharge customers for using credit cards since that would be the opposite of the industry’s goal of bringing swipe fees under control. But the ruling is important because retailers want to be able to offer cash discounts and retailers who offer discounts have sometimes been accused of violating the surcharge ban in New York and similar laws in nine other states.

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 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 an estimated $50 billion a year.

Credit card swipe fees average around 2 percent but can be as much as 4 percent for some premium rewards cards, and vary 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 and in court 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 and related issues for two decades, 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 price fixing of 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 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 for debit card swipe fees, 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 2013 when U.S. District Court Judge Richard Leon ruled that the cap went beyond the “reasonable” and “proportional” level ordered by Congress. Leon ordered the Fed to recalculate the cap at a lower level, but the Fed quickly appealed. The U.S. Circuit Court of Appeals in Washington ruled in favor of the Fed in 2014, saying the agency had made a “reasonable interpretation” of the law. NRF asked the Supreme Court to review the case, saying the issue was “of staggering importance.” In 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.” Consequently, the 21-cent cap remains in place.