Retailers won a major victory in late July when U.S. District Court Judge Richard Leon ruled 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.
Leon insisted that the Fed revise the cap to a lower figure in “months, not years” and questioned whether banks should reimburse retailers for overcharges that occurred because the cap was too high. The Fed, however, moved quickly to appeal the ruling to the U.S. Circuit Court of Appeals, a move that could delay resolution for a year or more.
NRF, one of the lead plaintiffs in the lawsuit that led to the ruling, criticized the Fed for “giving in to the banks” and taking “a position that will drag this out while retailers and their customers continue to pay billions of dollars in inflated fees that harm the U.S. economy.”
In addition, a new study says debit swipe reform saved retailers $8.5 billion in 2012 and that $5.9 billion of that savings was passed along to consumers. But the savings could have totaled $12.5 billion if the Fed had set the cap at the proper level, the study says.
In the meantime, retailers are waiting for a ruling from U.S. District Court Judge John Gleeson on whether he will give final approval to a proposed $7.25 billion settlement of a separate lawsuit over the $30 billion in credit card swipe fees charged by Visa and MasterCard each year. NRF and a broad cross-section of retailers have opted out of the settlement and filed a brief saying it “gives the credit card networks carte blanche to set and manipulate interchange rates” while giving retailers nothing in return. At a September 12 hearing, NRF asked Gleeson to “right or reject” the settlement, saying it should be rewritten to do more to bring the fees under control.
The proposed credit card settlement does little to address high fees charged in the past and nothing to prevent them from rising in the future. The $7.25 billion figure represents less than three months’ worth of swipe fee collections, and the antitrust settlement fails to reform the cartel-like system where Visa and MasterCard set a rigid schedule of swipe fees all banks agree to follow while refusing to negotiate with merchants. The proposal does nothing to disclose the hidden fees or otherwise create transparency that would encourage competition. And retailers would face a long-term ban on future lawsuits over swipe fees, effectively allowing card industry practices to continue unchallenged.
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 salaries 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 have required that merchandise be priced at the credit card price—including the swipe fees—and have 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 about $400 a year 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 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.