Senators Object to High Credit Card Fees Charged to Merchants

9 June, 2010

Banks are still under pressure from Capitol Hill when it comes to charging high fees on credit cards, but this time it is not about fees and rates that you pay as a cardholder. Now the attention has shifted to dealing with the way credit card merchants – those retailers who accept plastic as payment from customers like you – are being treated by the credit card companies.

Each time a merchant at a store, restaurant, hotel, or other business swipes your card they gets charged a merchant fee. This fee, credit card companies say, helps to pay for the most of providing and maintaining the sophisticated system and technological infrastructure that has to be in place in order for us to do tens of millions of credit card transaction per day at card terminals around the globe. But many merchants – especially those who are small business owners based in the USA – say that they are paying way too much to the card companies. These merchant fees typically average around 2.5 percent per transaction, although in some cases merchants may pay three or four percent. So that means that if you swipe your card, for example, and buy something for $100 the merchant has to pay two, three, or even four dollars out of that sale to cover the credit card merchant fee. If a store does a million dollars per year in credit card transaction, they wind up paying somewhere in the neighborhood of $25,000 just in merchant credit card fees.

But now, as small businesses suffer through a tough economic slump in the wake of one of the worst recessions in world history, many in Congress think it is time to cap those merchant fees.

The United States Senate just approved a measure that was sponsored by Senator Richard J. Durbin of Illinois that would set price caps on merchant fees while letting stores give customers discounts for paying with cash or using cards that charge lower merchant fees.

The bill passed by a rather wide bipartisan margin despite the fact that it is very controversial and is vehemently opposed by banks and credit card companies. The bill goes further by putting regulation of so-called “swipe fees” for debit cards under the control of the Federal Reserve.

In a statement to reporters Senator Durbin defended his bill, saying “Small businesses and their customers will be able to keep more of their own money. Making sure small businesses can grow and prosper is vital to putting our country back on solid economic footing.”

Banks are still reeling from recently enacted regulatory reform of the financial industry that put limits on how they can charge you for fees, penalties, and interest rates, so this new legislation has them up in arms. They have been depending more heavily on swipe fees as a source of revenue to help them bolster profits in the wake of the credit card reforms put into place earlier this year.

So in response to Senator Durbin’s bill they are threatening that this kind of change will ultimately hurt cardholders. The CEO for the American Bankers Association, for example, told the media that “In order for banks to cover their basic costs, it will have to be charged back to the consumer.”

But retailer merchants disagree with that prediction, and they say that because of the current swipe fees they are forced to pay that consumers are already paying too much. That’s because retailers have to factor in those swipe fees when they price their merchandise or services. Many small business organizations say that lowering the swipe fees will be good for consumers because it will remove those added costs and take pressure off retailers when it comes to pricing goods and services.

The National Association of Convenience Stores, for instance, reported that its members paid $7.4 billion in swipe fees in 2009, making merchant credit card costs the second-largest expense in that industry expense next to wages and salaries for labor.

A spokesperson for the National Retail Federation praised the passage of the bill through the senate, saying that it will help to “reverse the hijacking of the U.S. payment system.”

Next the bill will go to the House of Representatives for a vote, so stay tuned to see what happens in the coming weeks and months. If the legislation passes it would represent a landmark decision that would potentially put billions of dollars into the coffers of small businesses. That would hopefully get passed along to consumers while helping to strengthen the overall economy, although credit card companies warn that it could have the opposite effect.

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