Retailers have long grumbled about the 1 percent to 5 percent out of every credit card purchase they have to pay banks to process the transaction, also known as "swipe fees." But soon they may have a powerful new weapon to encourage customers to pay with lower-cost methods such as debit cards or cash: a credit card surcharge.
Under an agreement announced Friday, MasterCard, Visa and 13 of the nation's largest banks will pay retailers $7.25 billion to settle a class-action lawsuit alleging they conspired to keep swipe fees for retailers high. That's big money, to be sure, but the biggest news for consumers is that the settlement requires Visa and MasterCard to modify several long-standing rules, including one prohibiting merchants from charging a surcharge to pay with a credit card.
From the press release issued by the retailers' law firm, Robins, Kaplan, Miller and Ciresi.
The modification of these network rules will provide additional value to merchants of many billions of dollars by enabling merchants to provide greater transparency to consumers regarding the cost of using various types of payment methods, and permitting merchants to negotiate collectively over interchange fees and other aspects of their relationships with Visa and MasterCard. It is expected that the reforms required by the settlement will enable merchants to put pressure on Visa and MasterCard to limit or reduce interchange fees, among other things.
"The reforms achieved by this case and in this settlement will help shift the competitive balance from one formerly dominated by the banks which controlled the card networks to the side of merchants and consumers," states K. Craig Wildfang, who led the case for the Class Plaintiffs as co-lead counsel and partner at Robins, Kaplan, Miller and Ciresi L.L.P. "Over time, the reforms induced by this case and in this settlement should help reduce card-acceptance costs to merchants, which in turn, will result in lower prices for all consumers."
Unfortunately for consumers, the "greater transparency" means a fee, noted on the receipt, up to a "maximum surcharge cap" that will be negotiated regularly between the merchants and the processing networks.
It's hard to imagine large national retailers such as Wal-Mart or Target will impose a credit card surcharge on cardholders. To my knowledge, none of them have taken advantage of previous revisions of the rules that allow things like minimum purchase amounts for card users and cash discounts.
But it's very possible that smaller businesses such as gas stations and convenience stores, some of whom have taken advantage of previous rule changes to encourage the use of cash, will start adding a surcharge.
And while Wildfang and retail industry trade groups predict the change will ultimately result in lower retail prices for consumers, that's far from clear. During the fight over the debit-card swipe-fee cap contained in Dodd-Frank, the retail industry made similar predictions. But nearly a year later, it's hard to get good data on what effect, if any, lower debit swipe fees have had on retail prices. Results of research on what direction prices have moved since then have tended to vary depending on who funded the study.
However, it's almost certain that if retailers end up paying less to process credit cards, credit card rewards programs will suffer. Banks use a portion of their swipe fee revenue to fund the programs, and if it declines in a big way, they'll likely become much less generous with rewards. After swipe-fee caps on debit cards were put in place, it became much harder to find debit card rewards programs, and most that remained offered limited benefits.
What do you think? Should credit card users pay a fee for the privilege?
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