Swipe Fees

‘Swipe’ or ‘Interchange’ fees are a creation of the credit/debit card companies which cost consumers and businesses two percent of a transaction’s value, whenever a purchase is made.  

US merchants pay nearly $40 billion in annual swipe fees—more than three times Hollywood’s total annual box-office receipts.

Swipe fees subsidize credit cards’ generous rewards programs—which can include cash-back offers as well as airline and hotel rewards—to further the use of credit. Nearly half of credit-card interchange fees are likely used to pay for rewards programs.

US ‘swipe fees’ are two- to three times higher than comparable fees in other similarly-situated nations.  American ‘swipe fees’ are recognized to be unreasonable and disproportionate, because they greatly exceed the actual cost of the services provided.  Furthermore, due to laws in our nation’s ten largest states (where 40 percent of Americans reside), swipe fees cannot be lawfully revealed to consumers (who lose $400-$500/year to these fees); while in other jurisdictions, the terms of card issuers’ onerous contracts are seen by consumer advocates and others to obfuscate the real costs of these fees. The effect of simultaneously compelling and masking swipe fees is to surreptitiously lather additional costs upon virtually everything one purchases including gasoline and thus the impact to Tesoro.

Appeals Court Overturns $7.25B Swipe Fee Settlement

In June 2016, a long-running challenge to a $7.25 billion settlement between merchants and Visa and MasterCard over credit card transaction fees was rejected and panned by a federal appeals court. The 2nd US Circuit Court of Appeals concluded that the 12 million merchants in an antitrust class action were inadequately represented by lawyers that offered their clients little or nothing, and no opportunity to opt out.

Merchants and trade groups in 2005 challenged the structure and imposition of swipe fees and asserted that credit card networks were colluding in violation of antitrust laws.

The federal appellate court found that the class’s settlement negotiations were flawed because the merchants’ lawyers conflicting interests “sapped class counsel of the incentive to zealously represent” some merchants. Retailers and consumers hailed this development.

America’s Swipe Fees Are Much Higher than Europe’s

In December 2016, a new European Union antitrust rule will enhance competition and ban the type of price-fixing that is commonly utilized by US credit card companies. Under the EU’s rules, credit and debit card swipe fees will be capped at 0.3 and 0.2 percent, respectively. These caps are dramatically less than costs borne by US consumers. “This legislation is good for consumers, good for business, and good for Europe,” said EU commissioner Margrethe Vestager, who added “It will lead to lower prices and visibility of costs for consumers.”

Over the past 15 years, swipe fees have become the fastest-growing expense for most US merchants ranking only behind payroll and healthcare costs. Today, Americans pay more in swipe fees than the rest of the world combined. 

2010 Swipe Fees Reforms

Swipe fees last came to a head in Congress in 2010, during consideration of the Dodd-Frank financial services bill. An amendment, offered by Senator Richard Durbin (D-IL), directed the Federal Reserve (the Fed) to assure that large banks (with assets in excess of $10 billion) debit card swipe fees were “reasonable and proportional to the costs incurred by issuers for electronic debit transactions.” The Durbin amendment overwhelming passed on a 64-33 bipartisan vote and became law.

The Fed subsequently allowed large banks to levy a 21 cent fee, plus a percentage of the sale and a penny for fraud, on every debit card transaction. The Fed previously estimated the cost of authorizing, clearing and settling a transaction to be 4.4 cents. Due to the aforementioned $10 billion threshold, virtually all (98+ percent of) banks and credit unions are unaffected by the Fed’s rule. Exempt institutions can charge more for debit card swipe fees than market leaders Visa and MasterCard.

Even after accommodating for fraud and loss prevention, and rewards programs costs, the average transaction cost in 2013 was 14 cents. However, swipe fees average 23 cents on that year’s nearly 54 billion US debit transactions. As egregious as such higher fees are, they are markedly less than what Visa and MasterCard would likely demand in the absence of the Durbin amendment.

Cause for Concern

Legislation recently introduced in the US House known as the Financial CHOICE Act includes language regarding fees the nation’s largest banks charge merchants on debit card transactions. Close observers sense the language which is being marketed by some as a consumer protection measure, could nonetheless effectively undercut the Durbin amendment.
While any dilution of the Durbin amendment would help big banks and credit unions, it would indisputably harm local merchants and consumers. Tesoro strongly opposes any weakening of the Durbin amendment and is closely monitoring the path of the House legislation.

 For more information visit The Association for Convenience & Fuel Retailing.