Will Merchants and Consumers Get Relief From Soaring Credit Card Fees?

Kathy and Warren Miller run a mom-and-pop grocery store in tiny Elmore, Vt. (pictured at left), and soaring credit card fees are strangling it.

In congressional testimony on Thursday, she said they make only two cents whenever a customer pays for a 99 cent bag of potato chips with a credit card. On a 35 cent pack of gum, they lose money. The culprit? So-called interchange, or swipe, fees, which banks and Visa and MasterCard charge to merchants to handle credit and debit card transactions. These rates have tripled in the last decade, with American consumers last year paying the card association giants a total of roughly $48 billion in swipe fees. Visa and MasterCard set the fees on behalf of their respective member banks.

Miller, who spoke on behalf of lobbying groups representing the food and grocery industries, said the credit card giants use their market dominance to impose onerous rules on merchants. These include barring stores from specifying a minimum purchase amount to pay with a credit or debit card, and marketing cards as free to cardholders while passing along costs to merchants in the form of higher interchange rates.

These fees are set by Visa and MasterCard, and all the banks who issue their cards charge the same rates even though we would expect them to compete for our business. These fees and rules of card acceptance are not negotiable, leaving a retailer in a take-it-or-leave-it situation. . . . The rules of competition don’t seem to apply to Visa and MasterCard and to the banks that issue cards. One reason is that MasterCard and Visa have undisputed market power, with over 85 percent of the card marketplace. To the extent they compete with each other, it is a perverse competition.

Consumer advocates argue, persuasively, that such practices punish all consumers, even those who don’t use credit cards. That’s because swipe fees are passed on in the overall cost of goods. Meanwhile, Visa and MasterCard use their lock on the card market to bully merchants into complying with association rules, threatening exorbitant fines and even prohibiting store owners from informing consumers about card payment costs (click on chart to expand).

These problems are a direct result of increasing financial industry concentration, coupled with years of lax antitrust enforcement. Congress is now considering legislation to curb such abuses. But whether these measures have enough support on Capitol Hill is anyone’s guess.

The main risk is that proposed financial reform, including plans for a Consumer Financial Protection Agency, is bogging down amid fierce financial industry opposition. On the Hill, that often leads to horse-trading. Barney Frank, chairman of the House Financial Services Committee, has not historically made swipe fees a legislative priority. That could suggest the Massachusetts Democrat is less interested in easing the rates than in using the issue as a bludgeon to soften banks’ resistance to the CFPA and other elements of financial reform.

The interchange fight also amounts to a duel between two powerful industries — banks and retailers. That has a way of sending lawmakers running for the aisles. If so, the Millers, and the 850 residents of Elmore, may be out of luck.