Retailers battling over swipe fees: Who pays the price?

By Michelle Latham

With tight profit margins and savvy consumers who want the best deals possible, retailers constantly fightto keep their bottom line from collapsing. In a world where every cent counts and no one wants to pass the buck to customers, retailers and banks battle over the cost of swipe fees. In 2011, retailers won a partial victory when Congress enacted legislation to limit the amount banks could charge retailers when customers swiped debit cards. Now, retailers are looking for a win in the credit card arena.

The cost of credit card processing

Credit card swiping was more expensive for retailers than debit card activity even before Congress set limits on the latter. One reason is due to the types of cards consumers are more likely to use. Cards with airline miles or cash back rewards cost the credit card company money. The price of those rewards has to be found somewhere, and one area is swipe fees, which are generally higher than with non-reward cards. Since customers are likely to use reward cards more than non-reward cards, retailers are racking up part of the cost of card benefits.

Why retailers want to push back
 
Retailers with merchant services accounts are tired of footing the bill for extra customer service measures on the part of the bank. There are many retailers who believe the bank is better able to absorb the cost of credit card processing, especially since the card is a product of the bank, not the retailer. On the surface, this argument makes logical sense. Printed money ultimately comes from the bank, as well, but retailers are not paying fees every time someone pays in cash. Another reason some believe banks should take the hit is a feeling that financial entities do not need the millions of dollars in revenue generated by these fees.

Of course, the banks feel differently about it. When Congress threatened debit card fees in 2011, the banks stated that lost profits would need to be recouped elsewhere. In most cases, those profits were made up by increasing interest rates for customers, adding or increasing annual fees, and cutting back on free or low-cost service items like free checking and online banking.

Even though no one wants to pass costs to the customer in an open forum, it is the end-user who ends up footing the final bill. Retailers can markup goods to help cover costs and banks can charge service fees and raise interest. The question for consumers is whether they want their favorite store pushed out of business due to unfair merchant services fees. The answer is probably no.

The battle over credit card fees seems to be one that cannot end with a win-win proposition. Retailers will continue to fight in order to save their businesses. If history is any indication, they may be successful with legislation to limit fees, but will Congress also enact legislation to help protect the cardholder from financial reprisal associated with a retailer victory? It is a question for which consumers, retailers, and banks share an equal interest.

About the Author

Michelle Latham is a Credit Specialist at Switch Commerce, a merchant services provider based out of Irving, Texas.

Is the "Debit Card Rule" a good Idea?

In December of 2010 The Federal Reserve Board issued a press release that proposed balancing the cost of debit card transactions paid by retailers with costs required of card issuers. This is evident in the following excerpt from that press release:

 "The proposed new Regulation II, Debit-Card Interchange Fees and Routing, would establish standards for determining whether a debit card interchange fee received by a card issuer is reasonable and proportional to the cost incurred by the issuer for the transaction."

In response to this proposed rule, the Electronic Payment Coalition initiated a campaign to delay the implementation of this rule. The reasoning of the coalition is costs would be incurred by small financial institutions and debit card users to their disadvantage. This is because a bank or credit union may be considered a card issuer according to Bankers Online in reference to the Truth in Lending Act.

A question to ask when considering this issue is whether or not the motive of the rule is to establish a fairer or more balanced cost structure, or whether it is motivated by the intention to simply benefit retailers with lower costs.

Since the Federal Reserve Board is an economic regulator, the economic affect of this rule should be considered. If costs go up for small financial institutions and debit card users via higher fees, that could impact consumer spending. Moreover, if those financial institutions are required to initiate checking account and other fees to pay for debit card transactions costs, they may have less to spend in the economy. 

Lower consumer spending also impacts retailers so the reasoning for the rule may be circular.  In light of this it would seem the economic impact of the rule should be studied carefully,