Can Friday the 13th Really Bode Well?

Emily Maltby ‘s Wall Street Journal entry reminds you not to be shocked if your favorite retailer, doctor or restaurant soon asks you to pay an extra 2.5% or 3%, just for using a credit card.

Merchants settled litigation against Visa Inc. and MasterCardInc. and others on Friday, July 13th. As part of that settlement, the credit-card issuers agreed to abolish the no-surcharge rule, allowing merchants to be able to tack on extra fees when shoppers pay with credit.

Up to now, merchants have had to pay swipe fees which are invisible to consumers every time they swipe a credit card for payment. This means that accepting credit cards increases the cost of doing business for retailers, doctors and other firms.  In fact, after labor costs, swipe fees are among the biggest costs of running a typical retail business.

In my prior articles, I found that the real beneficiaries of the settlement will be large merchants like Walmart who have the price advantage and market dominance to take on surcharges with impunity, while the losers will be the small merchants who do not.

Here’s a deeper look at the settlement, and what it may mean for you and your favorite store:

Q: Are debit cards included?

A: No. The settlement covers credit cards only. Fees that merchants pay for debit-card acceptance have already been cut in half as a result of a provision in the Dodd-Frank financial overhaul law that took effect last year.

Q: Why are there swipe fees? 

A: Many consumers don’t realize that merchants pay a fee when they swipe a credit card. Known as interchange fees, or “swipe” fees, they cover the expense of the processing the card, the risk of fraud and the float, or the cost of providing funds while payment is pending.

Q: How much are the swipe fees?

A: They vary based on a variety of factors such as the type of merchant and the type of card. Cards that have premium benefits for the cardholder tend to be the most expensive to the merchant. Swipe fees generally range from about 1.5% to 3% of a transaction. They’ve generally been rising, as issuers introduce more elaborate marketing and points programs for card users.

Q: When will merchants be able to impose surcharges?

A: Not until the settlement gets approval in U.S. District Court. That might not happen until at least the end of this year, or even later.

Q: Can merchants set the surcharges at any amount they want?

A: No. The settlement includes restrictions on how much they can charge. There’s a cap. The restrictions are based on a complicated calculation but, essentially, they can’t charge more than their costs, generally 1% to 3% of the purchase.

Q: Are there any other restrictions?

A: If a business plans to impose checkout fees, it will have to abide by some restrictions in the settlement, including posting notices of the surcharges at her store’s entrances and at its cash registers, and including the cost on customer receipts.

Businesses won’t be allowed to impose surcharges selectively—for example, on sodas, but not on sandwiches, or add a surcharge of any amount she pleases.

Q: Does the settlement apply to all merchants?

A: No. Ten states including New York, California and Texas have laws prohibiting merchant surcharges. The settlement stipulates that merchants must still abide by state laws.

Q: Can merchants continue to set different prices for cash and credit?

A: While Visa and MasterCard have long prohibited surcharges, they have allowed merchants to offer discounts to cash-paying customers. In some regions of the country, gas stations have made it common practice to list the price of fuel and then offer a discount if the customer pays with cash. But most retailers haven’t gone that route for other merchandise because it’s too complicated to adjust pricing for the range of items they carry.

Q: Will there also be surcharges on other credit cards like American Express and Discover?

A: Yes. In fact, American Express Co. and Discover Financial Services already permit swipe fee surcharges, as long as merchants impose surcharges on payments with other rival cards.

Q: What are the potential pitfalls for small businesses of surcharging customers?

A: While most merchants say they generally would welcome the opportunity to expose the cost of swipe fees to the public, many don’t want to run the risk of alienating credit-card users.   According to one business owner, adding surcharges to a previously quoted price is bad form: “You lose your relationship and credibility.” Business owners who want to encourage plastic payments because they are safer and easier to control than cash will not be inclined to charge a checkout fee.

The technological hurdles of ringing up sales at different prices, and the impact of customers becoming aware of additional charges when they reach register could slow down check out-time, causing them to defect to other competitors.

Checkout fees also could prove challenging for chains that have locations in multiple states since 10 states, including California, New York, Florida and Texas have laws prohibiting such surcharges.

For these reasons, some of the small businesses listed as plaintiffs in the litigation against Visa and MasterCard said they themselves weren’t likely to implement surcharges at their own businesses.

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Q: What are the potential benefits for small business owners?

A: The top benefit of the settlement, small-business owners say, isn’t that the ability to charge customers more, but to negotiate fees with the credit-card networks and banks. The mere power to impose surcharges gives them new leverage, potentially making it easier to negotiate lower fees for themselves. ays Craig Wildfang, a lead counsel in the lawsuit and partner at Robins, Kaplan, Miller & Ciresi LLP, in Minneapolis:

Even if only a few merchants surcharge, everyone will benefit. It will have a downward pressure on merchant fees.

One option some are considering is to add a surcharge on purchases of less than $10, to show customers the cost of using plastic. One businessowner states: “We have people that will pay for a $1.50 soda on a credit card. In those circumstances, we are losing money—or making so little, it wasn’t worth selling it in the first place.”

Some consumer-behavior experts say that the merchants who find it easiest to adopt checkout fees will be specialists and boutiques offering hard-to-find goods or services.

What About Debit Card Fees?

Q: What interchange charges are imposed on merchants for debit card purchases?

Interchange fees are borne by retailers each time customers swipe their debit cards to make purchases, and are passed along as part of the price consumers pay for goods and services. The fees set by Visa and MasterCard generate an estimated $1.8 billion a month in revenues for banks.

In 2011, merchants paid interchange fees of about 1 to 2% of each transaction – or about 44 cents on the average purchase. This has now been capped at 21 cents.

Q: Are Debit Card fees rising?

A: Yes. Both credit and debit interchange fees have been rising, as the Federal Reserve acknowledges.  The banks’ claim that “merchant fee rates are not going up” is misleading—you have to read carefully to find that “merchant” fees don’t refer to either debit interchange fees or credit interchange fees alone, but blended together.

Q: So how much are they rising?

A: Fee rates have stayed fairly level for transactions in which debit cards are used like credit cards—where you sign for a transaction rather than enter your PIN, called signature debit. the fees for this transaction rose in the early 2000s and dipped briefly in 2003 when Visa and MasterCard settled an antitrust lawsuit with the Justice Department on interchange fees. Rates are slightly higher now than they were in 1996.

But debit fees for transactions where you enter your PIN number have risen much more. Those fees have increased dramatically from the mid-90s until about 2005, after which they rose more incrementally.  A 2009 Fed paper shows PIN and signature debit transactions both growing, with PIN transactions accounting for just over a third of debit transactions in 2007.

Interchange Fees for a $50 Transaction at a Small Retailer

Source: Kansas City Federal Reserve

Source: Kansas City Federal Reserve

Q: Why are merchants making a fuss about Debit fees?

A: Merchants are upset because of the debit interchange rate increases. And as debit cards grow in popularity, increased debit use compounded with rising rates means they’re giving up more in fees to banks, cutting into their profit margins and/or forcing them to raise prices.

Proponents of interchange regulation find that these fees are discriminatory. A spokesman for the National Association of Convenience Stores told the Washington Post that  “The smallest retailers pay the highest fees.”

Q: What’s the case for regulation?

A: Experts such as Adam Levitin of Georgetown Law have noted that interchange rates in the United States are “much, much higher than anywhere else in the developed world.”

As Bloomberg has reported, the Fed’s plan would bring U.S. debit interchange rates closer to the rates in other countries, including Australia and members of the European Union. In Europe, both MasterCard and Visa agreed to cap debit interchange fees at 0.2% —almost six times less than the average rate in the United States.

Q:  How are Debit fees capped under new legislation?

The fight over the fee pitted banks and credit unions against retailers in a political battle that raged for months

Banks and conservative and libertarian groups—flooded the Fed with letters and lobbied lawmakers to pass legislation that would delay the rules for further study. As Simon Johnson, former chief economist at the International Monetary Fund, noted, that doesn’t bode well for the future of such regulation: “In Washington, the best way to kill something is to study it further,” he wrote on the Times’ Economix blog.

Yet merchants and banks also lobbied fiercely about the proposed regulation, and retailers who favor the interchange cap have flown to Washington to meet with lawmakers, according to the New York Times.

The compromise:  Rules finalized in July, 2011 by the Federal Reserve Board cap debit card swipe fees paid by merchants and retailers to large banks at 21 cents, vs. the 2011 average of 44 cents. However, this is a higher cap than the 12 cents originally proposed.

Frank Keating, president of the American Bankers Association trade group said in a statemen:

The Fed has taken a significant step in reducing the harm that could have resulted from the proposed rule. Even so, he added, the cap will take 45% of the revenue banks now receive from swipe fees, which will force them to charge higher fees for basic banking services.

Retailers, however, were again not pleased. Matthew Shay, president of the National Retail Federation, said in a statement:

We are extremely disappointed that the Federal Reserve chose to be influenced by special interests.

The Fed also pushed back the start of the debit card limits to Oct. 1, 2011, giving banks and credit unions three additional months to implement the new debit card rules.

Small banks exempted: Banks with less than $10 billion in assets are exempt from the debit card swipe fee limits and can still charge higher interchange fees for use of their cards. However, merchants may not accept cards that carry these higher swipe fees and the exemption may not help small banks after all. However, Debbie Matz, chairman of the National Credit Union Administration, applauded the Fed for taking small financial institutions’ concerns into consideration:

NCUA had strong concerns about the initial interchange fee proposal. The final regulation adopted today, however, addresses concerns raised by NCUA during the rulemaking process … The higher interchange fee amounts included in today’s rule are a step in the right direction.”