Swipe-Fee Battle Moves to States as U.S. Banks Fight Surcharges
Banks and payment networks are pressing state lawmakers to bar retailers from charging customers more to pay with credit cards than with debit cards or cash.
The laws’ supporters say they are trying to protect consumers from unfair costs when they make purchases with credit cards. Utah has already passed a law banning such surcharges, and New Jersey may follow suit. In all, about 20 state legislatures are weighing legislation related to payment cards, according to the American Bankers Association.
The move for state laws is an extension of a decade-long fight between retailers including Home Depot Inc. (HD), Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT) and members of the payments industry, including JPMorgan Chase & Co. (JPM), the biggest U.S. credit-card lender, and Visa Inc. (V) and Mastercard Inc. (MA), the largest networks, over “swipe” fees for debit and credit cards. Because retailers generally have to pay more to banks when their customers use credit cards than when they buy with debit cards, the banks are trying to prevent stores from steering buyers to debit transactions.
At stake is an estimated $40 billion that banks take in each year from credit-card swipe fees, according to Madeline Aufseeser, a senior analyst with Boston-based consultancy Aite Group LLC.
Banking groups say the push for state laws isn’t a coordinated campaign by the industry. Instead, Trish Wexler, a spokeswoman for the Electronic Payments Coalition, a trade group for card issuers and networks, describes it as an “organic” process of bills arising in states at the same time.
State lawmakers are responding to a class-action settlement that went into effect in January that gives retailers more flexibility to impose surcharges for using different types of cards, Wexler said in an interview before she left her position at the coalition on June 27.
“Legislators heard about it from consumers, read about the settlement, and pushed it,” she said.
Retailers won an earlier round of the battle with card issuers when the 2010 Dodd-Frank law put a cap on debit-card fees. The Federal Reserve set that cap at about 24 cents, costing banks and processors $8 billion per year, Aufseeser estimated.
Card companies successfully fought off limits on credit-card fees, in part by arguing that they take on credit risk when issuing them.
Issuers earn 1 to 3 percent of the purchase price when a customer uses a credit card, depending on agreements with retailers. Issuers channel some of those proceeds back to customers in the form of reward programs and other incentives.
Consumer groups, such as U.S. Public Interest Research Group, an umbrella organization of state-level consumer advocates, side with the retailers in opposing the state laws. They argue that consumers and retailers should have more choice, and note that merchants who minimize payment costs can pass the savings on to consumers.
“The banks are clearly hard at work trying to deny the merchants the leverage to keep swipe fees from rising or reduce them,” Ed Mierzwinski, director of the group’s consumer program in Washington, said in an interview.
The settlement of a class-action antitrust lawsuit against Visa, Mastercard and a group of banks went into effect at the end of January, opening the door to surcharging in states that don’t already bar it. State legislators sponsoring anti-surcharge proposals say their goal is to protect consumers.
Melissa Cassar, a spokeswoman for Visa, said the company has “no position to share” on the subject of surcharges. Spokesmen at Mastercard didn’t respond to requests for comment.
In Utah, the state bankers association, which includes JPMorgan, American Express (AXP) Co. and Wells Fargo & Co. (WFC), cited the class-action settlement in promoting the law. In a Feb. 19 hearing, Howard Headlee, the president of the Utah Bankers Association, told state senators that pricing for consumers is “something that should be decided not by a handful of attorneys in a room back East but by a legislative body.”
Under federal law, retailers can still offer discounts for debit or cash even if state law prohibits surcharges. Gas stations, for example, have long posted two retail prices, one for cash and one for credit.
The distinction between discounts and surcharges is more than semantics. Behavioral studies show that consumers react more forcefully to the threat of a penalty than the offer of a discount, said Adam Levitin, a law professor at Georgetown University who has studied payment networks.
“Research shows that consumers have a much stronger reaction to ‘surcharges,’ and are less likely to use credit cards if they understand that they will have to pay more,” Levitin said in an e-mail. “Credit-card companies, aware of this effect, have historically insisted that any price difference be labeled as a ‘discount.’”
Retailers have argued that discounts and surcharges are effectively the same thing. “I have a hard time getting my head around why giving a discount is okay, but surcharging is illegal,” said David Davis, president of the Utah Retail Merchants Association, which opposed the state’s anti-surcharge law.
In New Jersey, retailers fought back when legislation banning surcharges arose, and passed the Senate. It is awaiting action in the state’s other chamber, the General Assembly.
John Holub, president of the New Jersey Retail Merchants Association, said his group opposed the bill on the grounds that “there is zero transparency, the banks and the processors charge these huge fees, and we can do nothing about it.”
When he introduced the bill in February, Nicholas Sacco, a senator in the New Jersey legislature, cast the legislation as a consumer-protection measure: “Shoppers should not be hit with unfair surcharges based on how they want to pay.”
To contact the reporter on this story: Carter Dougherty in Washington at email@example.com