Point/Counterpoint: Are Credit Card Swipe Fees Fair?

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Every time you pull out the plastic at a store, the merchant pays a fee to a credit card processor. The merchants say the fees are too high. The banks say they're fair. In a new feature, two of our writers debate the issue and you decide the winner.

Editor’s note: This is the first in a series of posts examining consumer issues from differing points of view. This post concerns the hotly contested fees merchants are charged to process credit card transactions. Check out both sides, then pick the winner or add your opinion to the Money Talks Facebook page.

Point: Merchant swipe fees are fair
– Staff Writer Jason Steele

It’s terrible that that 2 to 3 percent of every dollar charged to your credit card goes to credit card processors rather than small businesses you are paying. Or is it?

For a long time, retailers have been complaining that these processing charges, known as swipe fees, are unfair. Every time Congress considers a financial reform bill, retailers lobby to regulate the fees they pay to the processing networks such as Visa and MasterCard. The merchant lobby came close to its goal recently when it was able to convince legislators to include debit card fee regulations in the Dodd-Frank financial reform bill.

As merchants plot their next move to impose swipe-fee reform on credit card products, they have the audacity to portray their motives as being in the best interest of the consumer. In fact, swipe fees represent a fair value for the services that the credit card processors provide – which results in a huge win for consumers. Here’s why…

  1. Swipe fees are optional. Retailers pretend as if, like taxes, they’re forced to accept swipe fees. But they aren’t. From small street vendors to large home-improvement contractors, many businesses choose to avoid swipe fees simply by not accepting credit cards. These are market forces at work, employing the same principles that allow retailers to charge whatever prices their customers will pay.
  2. The benefits from accepting credit cards are worth the fees. While some companies don’t accept credit cards, most do because the fees are a justifiable expense. For one thing, businesses know that customers will spend more freely when they have a convenient method of payment and finance. Also, by accepting credit cards, companies forgo the time, risk, and expense of handling and depositing cash, checks, and other forms of payment. For example, most airlines have gone to cashless cabins for in-flight purchases.
  3. Swipe fees enable reward cards. There are reward cards that return as much as 2 percent cash back on all purchases. Those rewards don’t come from your bank’s generosity – they’re essentially a kickback of these fees to consumers. This fact became abundantly clear when, as a result of debit card fee reform, banks eliminated virtually all debit card rewards.
  4. Retailers won’t lower prices if credit card fees are reduced. The price you pay for goods and services is determined by supply and demand – it’s almost never a direct reflection of the retailer’s costs. A miniscule savings may be realized in the price of extremely competitive, low-margin products. But that will be vastly outweighed by the elimination of credit card rewards. In fact, retailers can already offer discounts for cash or debit cards, but few do.

While there is a pretty strong case for credit card swipe fees, there are still valid arguments for some common-sense swipe fee reforms to allow the market to work more efficiently. Such reforms could cut the price retailers pay (especially for smaller purchases) without draconian price controls. The next time you hear merchants complaining about the unfair fees they must pay to those greedy credit card companies, just remember that much of those fees goes to reward credit card holders – and that no one forced them to accept credit cards in the first place.

Counterpoint: Merchant swipe fees aren’t fair
– Stacy Johnson

If the U.S. banking lobby – one of our nation’s most powerful – has its way, it’ll maintain an interchange fee system that unduly enriches banks at the expense of small businesses and consumers.

If you’re wondering whether, as Jason suggests above, swipe fees represent a fair cost for the services provided by credit card processors, wonder no more: They don’t. At least, not when you consider the radically lower cost for these services in other Western countries.

The United States has the world’s largest economy. Shouldn’t economies of scale suggest that it have the lowest percentage fees in the world? Instead it has by far the world’s highest.  The current average U.S. interchange fee is roughly 2 percent: more than double the rate in the UK, Germany, France, and a host of other countries, and four times the government-mandated rate in Australia.

So if the rates here are “fair,” payment processors in Australia must be going bankrupt, right? Nope. Here’s a cut-and-paste from a 2005 report [PDF] issued by the Federal Reserve Bank of Kansas City.

Despite credit card interchange rates declining from .95 percent to around .50 percent in Australia, credit card spending continues to increase, four-party networks continue to thrive, and banks continue to earn profits in their card services divisions…

As for Jason’s other arguments…

  1. Swipe fees are optional. Sure they’re optional – if you don’t mind going out of business.  Imagine if Home Depot decides to forgo the fees by refusing credit or debit cards. Think Lowe’s might have a competitive advantage? And as for “market forces at work,” that’s a ludicrous argument, because while Home Depot has to compete on price with dozens of other home improvement stores, there are two primary processors of plastic: Visa and MasterCard. That’s not a free market, it’s an oligopoly: “a market form in which a market or industry is dominated by a small number of sellers.” Oligopolists set prices, and without government intervention, merchants, and ultimately consumers, are forced to pay them.
  2. The benefits from accepting credit cards are worth the fees. Jason says companies pay the fees because they’re a justifiable expense. I say they pay because they’re a necessary expense.  I agree that merchants benefit by offering the convenience of plastic, but that’s no justification for the high cost relative to other countries.
  3. Swipe fees enable reward cards. This should have been written “high swipe fees enable reward cards.” Banks charge merchants higher fees for cards that offer extra rewards. Result? As this Christian Science Monitor article put it, “All those rewards that credit-card companies dole out to their best customers have to be paid by someone. When those fees go up, then merchants raise prices for everyone – people who use rewards credit cards and those who don’t.”
  4. Retailers won’t lower prices if credit card fees are reduced. On this point, I agree with Jason. I’m highly skeptical that should swipe fees be reduced those savings would flow through to consumers. But let’s also remember that giant merchants – the Wal-Marts and Home Depots of the world – have already negotiated lower interchange fees with card processors. It’s the little guy that’s paying the max. So assuming that consumers won’t benefit, who would you like to see make a little more – the corner grocery, or Visa?

OK, if you’ve gotten this far, now it’s time for you to decide who’s right. If you were in Congress and heard both these arguments, would you regulate interchange fees or leave them alone?  Cast your vote right now on our Facebook page.

Stacy Johnson

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