Swipe Fees

credit card swipe to pay for a coffee shop purchase

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With debit card swipe fee reform protected after banks failed in an attempt to have it repealed by Congress, retailers’ attention has now turned back to a courtroom battle over credit card swipe fees.

In September, lawyers unveiled a proposed new version of a controversial class action settlement over Visa and MasterCard’s alleged price-fixing of credit card fees that the Supreme Court refused to reinstate last year after it was rejected by the retail industry.

Under the proposal, merchants would now be paid only $6.2 billion, a reduction from the $7.25 billion originally proposed and a fraction of the nearly $250 billion in fees charged during the period covered by the suit. And negotiations are continuing on whether to change the way Visa and MasterCard set the complex matrix of swipe fees followed by virtually all banks that issue their cards, a practice retailers contend is a price-fixing arrangement that violates federal antitrust law.

NRF is closely watching the next phase of the settlement negotiations but said "significant changes" in the way swipe fees are set are "integral to helping merchants." The monetary settlement alone is inadequate without "ending the practices that lead to these anticompetitive fees," NRF said.

The settlement proposal comes in a lawsuit filed in 2005 by a group of small retailers without the involvement of NRF or most major retailers. The original settlement was approved by a U.S. District Court judge in 2013 but rejected by a broad cross section of the retail industry because of its failure to adequately address growing swipe fees. NRF and retailer companies appealed the approval, which was overturned in 2016 by the 2nd U.S. Circuit Court of Appeals. Last year, the Supreme Court let the appellate ruling stand, sending the case back to trial court for further attempts to reach a resolution.

In a separate case, the Supreme Court said this spring that 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 

credit card swipe at a retailer

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. Banks also took a percentage of the transaction for debit cards until October 2011, when debit card swipe was 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.

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. Applied to millions of transactions each day, they total approximately $80 billion a year nationwide.

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.

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.

In 2010, Congress passed reform sought by NRF resulting in the debit card swipe fee cap described above. But banks unsuccessfully tried to have the cap repealed in 2017, when they sought and eventually won a rollback of other Dodd-Frank provisions.

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.” NRF brought dozens of retailers to Washington to lobby against repeal, told Congress swipe fee reform should be preserved, and ran digital ads opposing repeal. NRF also delivered thousands of petitions to Congress addressing consumer benefits of swipe fee reform and the need for competition among banks.

On credit cards, 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 the 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.