Credit and debit card interchange “swipe” fee reform has long been a top legislative priority for NATO, which has worked with its partners in the Merchants Payments Coalition to educate lawmakers and regulators in Washington, DC, about the disproportionate nature of the fees and their impact on businesses and consumers.
Banks collect swipe fees (also known as interchange fees) every time a customer uses a credit or debit card to make a purchase. Swipe fees average roughly 2% a transaction—much more than it actually costs to process the transaction. Swipe fees have tripled since 2001 and are around $50 billion each year.
NATO estimates that exhibitors, who are hit at both the ticket booth and concessions stand, pay around $100 million a year in swipe fees.
Debit Card Reform
In January 2015, the Supreme Court declined to hear an appeal of the U.S. Court of Appeals for the District of Columbia Circuit’s decision regarding debit card fees set by the Federal Reserve. This decision meant that the Federal Reserve’s cap of 21 cents per debit card transaction remains in force.
The Fed created this cap following the passage of the Dodd-Frank Wall Street Reform Act, which included an amendment sponsored by Senator Dick Durbin (D-IL) requiring the Federal Reserve to limit debit card fees. The Fed had initially proposed to cap fees at 12 cents per transaction but ultimately voted to cap debit card interchange fees at 21 cents per transaction plus additional charges.
Merchants criticized the Fed’s interpretation of the amendment and sought redress in court. Cinema owners and other merchants scored a significant victory in July 2013 when a Federal District Court ruling found the Federal Reserve Board misinterpreted the intent of Congress when it implemented debit card swipe fee reforms in October 2011. However, that decision was reversed in March 2014 by the U.S. Court of Appeals for the District of Columbia Circuit, which decided in favor of the Fed’s interpretation of the fee cap. With the Supreme Court’s decision not to hear the merchants’ appeal, the Fed’s debit card fee cap of 21 cents is upheld.
Credit Card Reform
Debit card swipe fee reform is the first step in bringing competition to the entire electronic payments market. Because there is not a competitive market for credit card fees; the fees keep going up and despite new technology and the economies of scale that should be driving costs down.
Between two and three dollars out of every $100 that Americans spend when they use a credit card goes to the big banks, Visa and MasterCard even though the Federal Reserve Board has determined it only costs pennies to process credit transactions. This is because the credit card companies collude with their issuing banks to set credit card swipe fees in secret. Banks don’t compete on price, and merchants can’t negotiate the fees. This kind of price-fixing is illegal in other parts of the economy and should be here as well.
NATO is working with its partners in the Merchants Payments Coalition to expand the recent successes on debit card reform to credit cards.
Payment Card Interchange Fee Settlement
On December 13, 2013, the U.S. District Court for the Eastern District of New York approved a Class Settlement among merchants, Visa, MasterCard and other Defendants in a class-action lawsuit claiming that Visa, MasterCard, and several banks conspired to charge merchants excessive interchange fees. Under the settlement, Visa, MasterCard, and the bank defendants will make payments to two funds:
- Cash Fund A $6.05 billion fund that will pay valid claims of merchants that accepted Visa or MasterCard credit or debit cards at any time between January 1, 2004 and November 28, 2012.
- Interchange Fund A fund estimated to be approximately $1.2 billion of interchange fees (about two months’ worth of interchange) attributable to certain merchants that accept Visa or MasterCard credit cards for an eight-month period which began July 29, 2013.
While the settlement changes some Visa and MasterCard rules, NATO opposed final approval because the settlement does not institute solutions to fix fundamental problems with the current interchange fee system. Furthermore, the proposed settlement requires class members to release Visa and MasterCard from liability for any anticompetitive rules in place.
A number of merchants are appealing the December 13 decision of the Court. The settlement will not be finalized until all appeals have been resolved, so those party to the settlement will not be able to submit claim forms until the appeals process is completed. An appeals hearing was held on September 28, 2015, but it is not known when the Court will issue a decision.
For more information, visit www.PaymentCardSettlement.com.
As part of the proposed settlement agreement, Visa and MasterCard have relaxed the surcharging prohibitions on merchants as of January 27, 2013 (debit is not included). Merchants who accept Visa and MasterCard credit cards will be allowed to add a surcharge to the purchase price equal to the cost of processing the transaction subject to a cap of 4 percent. View the Visa rule changes here and the MasterCard rule changes here.
While merchants are allowed to surcharge under terms of the settlement, the National Retail Federation identified the following obstacles that will make it difficult to do so:
- Currently, 10 states (California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas) prohibit surcharging. These states represent more than 40 percent of total card sales across all industries.
- While the surcharge can vary based on the type of card (higher for rewards or premier cards), merchants will have difficulty implementing the rule since they don’t know the fees for specific cards.
- Merchants who surcharges Visa or MasterCard must also surcharge other cards, such as American Express and Discover. American Express rules, however, bar surcharges. As a result, merchants who accept American Express cannot add surcharge any other credit cards. Note, American Express’ operating rules are currently the subject of litigation by the Department of Justice.
- Merchants (1) are required to give Visa and MasterCard notice at least 30 days in advance of beginning to surcharge, (2) must alert consumers of surcharges, and (3) update point of sale systems.
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