Bill takes swipe at interchange fees

Local retailers might soon get help reining in the mounting costs of accepting credit and debit cards – otherwise known as “swipe fees” – that can nibble away frustratingly at profit.
The U.S. Senate last month approved an amendment to the financial reform bill that would authorize the Federal Reserve to set limits on debit card fees collected from merchants by banks.
The amendment would also allow merchants to set minimum and maximum purchase amounts for credit card transactions. Additionally, the measure would make it easier for retailers to offer discounts for customers using cash, check and debit card purchases or certain credit cards.
The 64-33 Senate vote will likely be welcome news to many small businesses that generally pay between 1 and 3 percent of each transaction in what is technically known as an interchange fee for processing.
Those fees can add up. The National Retail Federation estimates that businesses dished out $48 billion in 2008 to cash-issuing banks. And although estimates are not finalized, the NRF says that figure likely topped $50 billion last year.
“There’s a lot of money at stake,” said J. Craig Shearman, NRF’s vice president of government affairs.
You don’t have to tell Karen Holmes what’s at stake.
Holmes keeps a close eye on expenses at her yarn shop, Fresh Purls, located on Hope Street in Providence. She frequently reminds her employees that everything costs money – the electricity, the heat, even the paper and ink in the print. And so does accepting credit and debit cards. In one recent month, the store paid $263 in interchange fees.
“Anything that can save small businesses money and make it easier for use is fine with me,” Holmes said recently of the Senate amendment.
Of course, not everyone is pleased with the new addition to the financial reform bill, which was sponsored by Senate Majority Whip Richard Durbin, D-Ill.
The American Bankers Association, for one, expressed disappointment last month, saying the measure would allow the government to take a price-fixing role, but it won’t allow the Federal Reserve – in determining “reasonable” limits on debit card swipe fees – to consider costs to card issuers such as account-management expenses and fraud protection. “The amendment completely upends the existing payment system and retailers who benefit greatly from the system will pay almost nothing for the costs of maintaining and improving it,” said Edward L. Yingling, ABA president and CEO. “Retailers benefit greatly from debit and credit cards in increased consumer spending, lower personnel costs and protection against fraud.”
Still, the swipe fees are somewhat of a sore point for many retailers and others who see them as a blatant revenue generator for the card issuers.
“The fee is almost entirely a profit maker,” said Taylor West, spokeswoman for the Merchants Payments Coalition. “It’s all about padding the bottom line.”
Interchange fees have existed for years, but in recent times the rate structures have grown more complicated, leaving many merchants confused about why they pay what they do.
Rates can vary depending on various criteria, from what credit and debit cards the consumer is using to whether cards are swiped or manually keyed in. In a November 2009 report on interchange fees, the U.S. Government Accountability Office found that Visa and MasterCard – the two brands that control the majority of the credit card market – have 60 and 243 different rate categories respectively, up from four categories each in 1991.
That may explain why John Elkhay is so confused.
The CEO of the restaurant company Chow Fun Food Group, Elkhay says his five restaurants – including Rick’s Roadhouse, Cafe Noir and Luxe Burger Bar – are supposed to have a 1.75 percent interchange rate with Visa and MasterCard and a 2.75 percent rate with American Express, through a processing company. And that doesn’t include a 13-cent fee for every electronic transaction that goes to the processor. But, Elkhay added, the credit card companies have lists of exemptions to the negotiated interchange rates, including various high-rewards cards. So with more than 60 percent of his restaurants’ $7 million in annual sales done through credit and debit card transactions, he and his bookkeeper aren’t sure what percentages Chow Fun Food Group is actually paying.
The system is mostly a mystery to consumers, too, many of whom aren’t aware that using their credit or debit cards can eat into a merchant’s bottom line. Credit companies, which set the rates for the card-issuing banks and processing companies, aren’t required to disclose those rates to consumers.
But according to the GAO report, a typical transaction could go like this: A customer makes a $100 purchase on a credit card, and the merchant submits transaction data for authorization to the merchant’s processing company, which then passes the request to the consumer’s card issuer, such as Bank of America. If that card issuer approves the transaction, it sends $98.30 back to the merchant’s processor, keeping the remaining $1.70 as the interchange fee. After slicing off a 50-cent transaction fee, the processor sends $97.80 back to the merchant for a $100 purchase.
Debit cards work in a similar fashion, except the swipe fees are somewhat lower because the transaction takes money directly from the cardholder’s account.
Swipe fees have become more of an issue because transactions involving credit and debit cards have been on a steady climb for years. The GAO said there were more than 28 billion credit card transactions in 2007, up from about 12 million in 1993.
These fees are particularly costly for merchants selling small-ticket items that already have paper-thin profit margins, according to West. If a customer buys a candy bar with a credit card at a convenience store, “the store owner may be better off just giving it away,” said West. The GAO said the interchange rates have risen over the years, too – the maximum rate for Visa has gone from 1.91 percent in 1991 to 2.95 percent in 2009, while MasterCard’s maximum rate has grown from 2.08 percent to 3.25 percent in the same period.
Sherman argued that interchange fees are more than just a merchant’s problem. In many cases, retailers are passing the charges along to the consumer, he noted.
But the GAO warned that taking action to control interchange rates wouldn’t necessarily guarantee that the savings would be passed to the consumer.
Nevertheless, the financial reform package is moving forward with the Senate amendment. Legislators are attempting to reconcile the Senate package with the House’s, which doesn’t contain a section on interchange rates.
Merchant advocacy groups expect the bill to reach President Barack Obama’s desk by next month. Still, Electronic Payments Coalition, a group representing card issuers, warns on its website that the amendment may lead to higher debit card fees for consumers and reduce rewards, and allow merchants to discriminate against certain cardholders. The coalition didn’t immediately return a call last week seeking comment.
The coalition’s website said the use of credit and debit cards can boost sales for many businesses.
That’s something that Holmes, the owner of Fresh Purls, agreed with.
About 90 percent of her sales are transacted with credit or debit cards. “I don’t know how you get through life without Visa and MasterCard,” she said.
And, she said, Fresh Purls likely won’t offer separate prices for people paying with cash or credit cards, and she won’t institute minimum purchases for credit card transactions.
“I’d feel like I might lose a customer, that they might feel slighted,” she said. •