Photo (cc) by 401(K) 2012
When businesses compete, consumers often win. But in the latest case of banks vs. business, consumers using credit cards may be the losers.
Visa, MasterCard, and major banks including JPMorgan Chase and Bank of America just reached a $7.25 billion settlement with about 7 million merchants that sued over “swipe fees.” Those fees, usually between 1.5 and 3 percent of a purchase, are what businesses have to fork over to credit card companies for the privilege of accepting credit card payments. The settlement sends $6 billion to merchants, then delivers $1.2 billion in savings via lower swipe fees over the next eight months.
The settlement also allows merchants to pass along swipe fees to consumers – something that had been prohibited by Visa and MasterCard.
What it means to Visa and MasterCard
While $7 billion might sound like a cold slap in the face to industry giants Visa and MasterCard, this settlement is more like a slap on the wrist. Both stocks rallied on the settlement because Wall Street analysts were worried the outcome would be worse. This article at CNN/Money quotes Visa CEO Joseph Saunders from a statement: “We are comfortable with the terms, which we do not anticipate will impact our current guidance.” Translation? Visa had already put money aside in case they lost, so even though their share of the settlement is more than $4 billion, it won’t put a serious dent in their earnings.
What it means to you
This settlement has yet to be approved by a federal judge, and that might not happen until the end of the year or after. If approved, it’s possible that paying with plastic could mean a surcharge at the register. As part of the agreement, retailers could add a “checkout fee” to credit card transactions, subject to caps, as long as it’s disclosed. Since Discover and American Express already allow retailers to add these fees, that means paying with any popular plastic could make purchases more expensive.
While that outcome is possible, it’s not likely. Ten states have laws against passing interchange fees on to consumers: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas. In other states, competition, as well as the prospect of lost business, will probably curb the practice. More likely? Merchants might offer discounts for paying with cash.
The change won’t affect debit cards, because the government forced banks to lower the swipe fees on those cards last year, basically cutting them in half.
Rewards less rewarding?
While major retailers are unlikely to start charging fees to those choosing credit cards, swipe fees will likely become more visible and more susceptible to competition, putting downward pressure on pricing. Banks and credit card companies have already agreed to lower swipe fees by $1.2 billion over the next eight months: Further price competition could lower them more in the future, saving retailers additional billions.
But don’t expect those savings to flow through to you. As noted above, debit card fees have already been slashed, and despite claims from retailers they’d lower prices if debit card fees were reduced, there’s little evidence that’s been the case.
What did happen when debit card interchange fees were lowered, however, is reward programs took a hit. If this settlement leads to lower swipe fees on credit cards, the same could eventually happen. If banks make less money on credit cards, they have less to fund reward programs.