Federal judges made rulings in two major cases involving credit and debit card swipe fees in the past year. But with billions of dollars at stake, both decisions are under appeal and retailers are once again waiting for courts to resolve the years-long dispute.
In July, retailers won a major victory 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 ordered the Fed to recalculate the cap at a lower level, but the Fed quickly appealed, meaning a final decision won’t come until sometime this year. NRF argued at a January hearing that Leon’s ruling should be upheld, saying banks are 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.
In December, U.S. District Court Judge John Gleeson gave final approval to a settlement of a separate lawsuit over the $30 billion in credit card swipe fees charged by Visa and MasterCard each year. Gleeson dismissed objections from NRF and other groups that the settlement was agreed to by only a handful of retailers and would do nothing to bring swipe fees under control as “needless hyperbole.” NRF filed an appeal in January, arguing that the settlement 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.
NRF opposes the settlement because it 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 card companies proposed in the settlement that the fees be passed along to consumers in the form of a surcharge instead. But NRF countered that surcharges would only drive up prices for consumers, the opposite of retailers’ goal in filing the lawsuit.
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.