Repost: National Retail Federation Senior Vice President and General Counsel Mallory Duncan Duncan discusses his October 8, 2009, testimony before the House Financial Services Committee and explains how the credit card industry is in an “arms race” to raise “swipe” fees.
Since 1990, I have owned and operated a photo imaging business in Irvine called 30 Minute Photos Etc. and now ScanMyPhoto.com. Times are tough for a lot of retailers just like they are for a lot of our customers. But it’s not just the economy that make times tough for retailers and our customers. It’s the credit card industry.
The credit card business is designed to do better when Americans are doing worse. Visa, MasterCard and their bank partners are arbitrarily raising interest rates on existing credit and debit card, raising credit card late fees, and even charging interest on credit card debt that is paid on time.
But what actually cost consumers more is the huge, hidden fees on every credit card transaction known as interchange that is passed through to customers in the form of higher prices. Two dollars out of every $100 spent in the U.S. in stores and gas stations goes to pay interchange also known as swipe fees whether the customer uses plastic or not.
But it’s not just credit card hidden fees that are skyrocketing, debit card fees are also rising. As Andrew Martin wrote in “The Card Game – How Visa, Using Card Fees, Dominates a Market” in the New York Times on January 5, 2010, Visa pushed signature debit over PIN debit starting in the early 1990s because they could charge 13 times the fee for signature debit than they could for PIN debit – even though PIN debit is the more secure choice for the customer and less prone to ID theft.
That’s right. Visa decided to push signature debit even though it compromises cardholder security compared to PIN debit just to make more money for its member banks. Visa and MasterCard also have rules that prohibit merchants from telling customers that they are paying inflated fees at point of purchase due to swipe fees. Visa and MasterCard partner banks won’t disclose on their customer’s monthly card statements how much these fees cost them either. And merchants are prohibited from discounting the price for customers who pay by cash, checks, or lower cost debit, such as PIN.
It’s outrageous behavior like this by Visa, MasterCard, and their partner banks that led me to become the lead plaintiff in what may be the largest class-action antitrust litigation in U.S. history, one designed to help rein in the credit card industry.
Interchange fees were designed 40 years ago to cover the costs for manual credit card imprinting (remember carbon copy receipts?). Today, technology and other efficiencies have made credit card swipe fees all but unnecessary. There are no interchange fees when using store gift cards or writing checks – but due to unbridled market power of Visa, MasterCard and their partner banks there are still interchange swipe fees.
Ten years ago, when my company first started using digital scanning, it cost $5 dollars per photo because the process was so expensive. Today I charge 5 cents because the process has never been cheaper. Unlike the credit card industry, I operate in a free market. Even if I tried to charge $5 for digital scanning like ten years ago no one would pay it – they just go down the street to the next guy with a digital scanner.
It has never been cheaper to swipe a credit or debit card. But unlike the market for digital scanning – or for that matter gas, groceries, and all other retail goods and services — there is no competition down the street to lower the cost of card transactions. Visa and MasterCard control 80% of the card market and their respectively card networks set the price. That’s why credit card swipe fees, unlike retail prices, are the same in all fifty states. No wonder the cost of swipe to consumers has tripled since 2001 to $427 per average household.
Every other economically advanced country has either reformed interchange or is in the process of doing so. But largely because of the power of the credit card industry in Congress, Americans pay the highest credit and debit card swipe fees in the world. We pay four times what Australians pay for the exact same set of credit card goods and services. So write your congressperson, write your senator, and tell them that you want them to put out the fire that is burning a hole in your pocket.
CNN national political correspondent Jessica Yellin filed a report on Saturday on Your Bottom Line, hosted by Gerri Willis, examining credit-card interchange fees, “a hidden cost store owners say is crippling business.”
Here is a transcript of the report:
Gerri Willis, host of CNN’s Your Bottom Line: While consumers are outraged about sky-high credit-card fees, businesses across the country are feeling the crunch, too. CNN national political correspondent Jessica Yellin joins us now to break down interchange fees.
Yellin: Gerri, I didn’t know these fees existed until I reported this story. Banks make money every time you or I use a credit card. They charge merchants a fee just for accepting the card and, no surprise, businesses pass that cost on to you and me.
Yellin: It’s a hidden cost store owners say is crippling business; it’s called a swipe fee. Each time a customer uses a Visa or MasterCard, business owners like Keith Lipert have to pay a fee and that’s passed on to consumers. [This item costs] $125?
Keith Lipert, Gallery Owner: That’s $125. So the interchange on $125 would be about $2.
Yellin: The fee can be as much as 3% of your purchase, and it adds up. Lipert says swipe fees cost him as much as rent and health care.
Lipert: As a shopkeeper, I’m getting a service or a convenience for the credit-card companies, and that is fair. My objection is that I’m not allowed to negotiate.
Yellin: Credit-card companies say it’s the cost of processing transactions. What are they really getting for that fee? What’s the service that’s being provided?
Trish Wexler, Electronic Payments Coalition: So they’ll get almost instant payment and guaranteed payment for it. Whereas my card issuer, I won’t pay them for another 30 days, so there’s the float on the funds, which is a big component.
Yellin: Estimates show that in 2008 banks collected $38 billion to $46 billion in swipe fees alone. Some in Congress say that’s way too much and a sign that too few banks control the credit-card business.
Rep. Peter Welch (D-Vt.): What we’ve seen, really, is that the financial services industry is starting to make its money not so much by providing reasonable service, but by manipulating price by having a lot of hidden fees, by having a lot of extra transaction costs in running up their profits by doing that in taking advantage of monopoly power.
Yellin: Several bills before Congress would reduce these rates by allowing businesses to negotiate with card companies, but don’t expect those bills to pass any time soon. The industry, which is spending big on lobbyists, insists lowering swipe fees would end up costing consumers in other ways.
Wexler: If interchange rates are forced down below what is sustainable for a card program, then rates are going to have to go up or rewards are going to have to go away. Those are the facts.
Yellin: But Lipert says that Washington should stand up to the banks.
Lipert: We need, as a country, to address this.
Yellin: Now, there’s another reform some in Congress are pushing for now—they want to let retailers charge a lower price if you pay cash. And in a different slightly higher you use your credit card. That way at least only credit-card users are paying these swipe fees, but Gerri, no surprise, so far banks and credit-card companies are fighting that reform, too.
Willis: All right, so obviously we’re seeing yet another fee being passed on to us through retailers. But, what can you do as a consumer?
Yellin: There are two things you can do. If you have to use your credit card, use your debit card, the swipe fee on that is lower than actually using a credit card. And the other is, if you choose a card that doesn’t have as many rewards on it, the swipe fee is lower, the banks are actually charging you for those rewards with that swipe fee.
Willis: All right, and you can always pay cash, there’s always cash. What other reforms might happen?
Yellin: Well, they’re talking about, first of all, disclosing these fees, so that you know what you’re paying. They’re talking about also reducing the cost of…fixing the cost of rewards charges so that you know what you’re paying on rewards cards and they can’t charge you more for that.
But here’s the really important one. There’s a discussion of allowing the Federal Trade Commission to determine if these practices are anti-competitive. That’s because these big banks are getting all together and deciding what the swipe fees should be and some say that’s colluding, that’s monopoly and it should change.
Swipe fees are rising the fastest on gasoline purchases; payouts to the credit card industry have more than doubled since 2004.
Credit card companies and their member banks have increased the amount of swipe fees collected by both increasing rates and encouraging more people to pay by plastic instead of cash.
Many of those unsolicited mailings include so-called “convenience checks”that can be stolen and cashed by someone other than the authorized card holder. Yet the card companies and their banks spend only four percent of the swipe fees they collect on measures to protect consumers from this and other forms of credit card fraud.
Convenience stores across the nation, who are among the hardest hit by unfair swipe fees because of the fees assessed to gasoline sales, have taken action to alert their customers about these fees and are collecting millions of signatures urging Congress to reform the system. In addition, this website you are visiting (fightswipefees.com) makes it easy for consumers to sign an online petition to Congress or even send a letter directly to their representatives urging action to reform unfair swipe fees.
- H.R. 2965, the Credit Card Fair Fee Act and S. 1212, the Credit Card Fair Fee Act. These bills are very similar and each will allow merchants to come together and negotiate with the credit card companies and their banks swipe fee rates and acceptance terms. Similar legislation was passed by the House Judiciary Committee in 2008.
- H.R. 2382, the Credit Card Interchange Fees Act. This bill will repeal some of the rules imposed by credit card companies on merchants that are anti-competitive, empower the Federal Trade Commission to take further action if necessary and will require disclosure of swipe fee rates and rules.
- Government Accountability Office report on Rising Interchange Fees (PDF). This report confirms many of the most harmful aspects of unfair, hidden swipe fees. The report shows that the credit card companies and their issuing banks have been misleading the public about their increasing rates and about the benefits of credit cards to businesses. The report also outlines an unfair, anti-competitive system that hurts Main Street businesses and their customers in order to pad the banks’ bottom lines, with little relation to the actual costs of processing payments.
In addition, several national consumer organizations are urging Congress to take action. These include:
U.S. PIRG (Public Interest Research Group). In testimony before the House Financial Services Committee, Edmund Mierzwinski (PDF), PIRG’s consumer program director, supported legislation to reform unfair swipe fees and said:
Interchange fees are hidden charges paid by all Americans, regardless of whether they use credit, debit, checks or cash. These fees impose the greatest hardship on the most vulnerable consumers – the millions of American consumers without credit cards or banking relationships. These consumers basically subsidize credit and debit card usage by paying inflated prices – prices inflated by the billions of dollars of anticompetitive interchange fees. And unfortunately, those interchange fees continue to accelerate, because there is nothing to restrain Visa and MasterCard from charging consumers and merchants more.
Markets don’t work when there are hidden fees and rules – and no one hides fees and rules better than the credit card companies. Credit card markets lack the information necessary for both consumers and merchants to make informed choices. For merchants, the markets lack adequate information because the associations prevent merchants from accurately informing consumers of the costs of credit card acceptance or attempting to direct them to more efficient and lower priced payment mechanisms. In fact, merchants have no alternative but to accept the card associations’ cards even when the associations significantly increase prices.
NRF Testifies that Credit Card Companies are in an ‘Arms Race’ to Increase ‘Swipe Fees’ Paid by Merchants and Consumers (NRF via BW)October 8, 2009
WASHINGTON–(BUSINESS WIRE)–The National Retail Federation today warned Congress that credit card companies are in an “arms race” to increase the $48 billion in “swipe” fees paid by merchants and their customers each year, and urged passage of legislation that would put rules governing the fees under the jurisdiction of the Federal Trade Commission.
“There is an arms race to create cards with higher fees and more bells and whistles,” NRF Senior Vice President and General Counsel Mallory Duncan said. “The market checks that would normally exist to curb this escalation in fees are diminished because the card companies know that every merchant is required to take these expensive new cards or lose their ability to accept any cards. The Welch-Shuster bill would allow the most expensive cards to be refused, and while we expect that few merchants would actually refuse cards if this were passed, it would make the card companies think before they reflexively introduce cards with higher fees.”
“Most consumers don’t know it, but every time they swipe a rewards card with its miles and concierge services, they are driving up the price of everything they buy even higher,” Duncan said. “This particularly hurts less-privileged Americans who don’t have rewards cards or can’t get cards at all because Visa and MasterCard rules effectively require that everyone pay the credit card price even if they are paying with cash, check, debit card or even food stamps.”
“There is no regulator that reviews whether credit card company rules are unfair, deceptive or anticompetitive,” Duncan said. “This legislation would deal with this absence of oversight by directing the Federal Trade Commission to review card company rules and prohibit practices that meet that description. That is the minimum level of protection that this market needs to begin to function properly.”
Duncan testified before the House Financial Services Committee today during a hearing on H.R. 2382, the Credit Card Interchange Act of 2009, sponsored by Representative Peter Welch, D-Vt., and co-sponsored by Representative Bill Shuster, R-Pa. The bill would require credit card companies to disclose interchange rates, terms and conditions, and give the Federal Trade Commission authority to review interchange and prohibit any practices that violate consumer protection or anti-competition laws. Merchants would be allowed to give cash discounts and set minimum credit card purchase amounts, and could choose which credit cards to accept.
Interchange is a fee averaging 2 percent that Visa and MasterCard banks charge merchants each time one of their credit cards is swiped to pay for a purchase. But Duncan explained to the committee that the rate can range from as low as about 1.5 percent for an ordinary card to 3 percent or more for “gold” and “platinum” cards that offer rewards like travel miles or concierge services. In recent years, card companies have created an escalating series of rewards cards – each carrying more rewards but also higher fees – and “upgraded” millions of consumers. The higher-fee cards can’t be turned down by merchants because of Visa and MasterCard’s “Honor All Cards” rule. The practice, along with marketing that has pushed the use of plastic and introduced cards into new areas like taxis, has helped triple interchange revenue from the $16 billion collected when NRF began tracking the fees in 2001 to the $48 billion collected last year.
Visa and MasterCard rules effectively force merchants to pass the fees on to consumers by requiring them to be included in the advertised price of merchandise and making cash discounts difficult. The result is that the average household paid an estimated $427 in higher prices last year, up from $159 in 2001.
Merchants have long sought to offer cash discounts, but Duncan said an amendment to this spring’s credit card reform bill that would have blocked credit card companies from interfering with that ability was met with “howls of protest’ from the card industry and was not included in the final measure.
The National Retail Federation is the world’s largest retail trade association, with membership that comprises all retail formats and channels of distribution including department, specialty, discount, catalog, Internet, independent stores, chain restaurants, drug stores and grocery stores as well as the industry’s key trading partners of retail goods and services. NRF represents an industry with more than 1.6 million U.S. retail establishments, more than 24 million employees – about one in five American workers – and 2008 sales of $4.6 trillion. As the industry umbrella group, NRF also represents more than 100 state, national and international retail associations. www.nrf.com.
As reported earlier, beginning next week, rates charged by Visa and MasterCard and its member banks will again change. [ScanMYPhotos.com] received out letter of rate changes two weeks ago.
Two times each year, we receive the same formatted letter and confusing pricing matrixes that explain rates for accepting credit and debit cards are again changing. This time, it comes as U.S. Senator Chris Dodd proposes a significant change to these unfair fees. Any rate reduction must be met with recognizing the years of illegal profiteering from price-fixing by MasterCard, Visa and its member banks and issue refund for those overcharges -amount is in the hundreds of billions.
From The Hartford Courant (8/24). Click here to read more.
U.S. Sen. Christopher Dodd is coming out swinging again at banking fees, saying he will push for more changes in credit card fees — this time those paid by merchants — even as he seeks to limit bank income from overdraft charges.
Dodd said Wednesday that he will propose legislation to “substantially modify” the fees that merchants pay so they can accept major credit cards and have those transactions processed through banks. Dodd, architect of credit card reform signed into law in May, previously indicated that he next intended to take aim at “interchange” or “swipe” fees.
“Every state you go to, you hear it from retailers,” Dodd said. “The fees are excessive.”