Credit card swipe fees have come under attack by merchants with two major lawsuits. These fees are what merchants pay to the credit card company (such as Visa, MasterCard, Amex), the credit card issuer (such as Chase, Capital One, Bank of America), and the merchant account processor. The largest portion of the fee is the amount that goes to the issuer, known as the interchange fee. These fees vary by issuer, type of card, type of transaction and other factors. The result is transaction fees that range from 2%-3%, about 7 times what merchants are charged in Europe. These fees are very lucrative for the credit card companies and the issuing banks with an estimated $50 billion collected each year.
The first lawsuit in question was actually filed back in 2005, but was just recently settled in December 2013. This class action suit brought by merchants accused Visa and MasterCard of price fixing and antitrust violations. The settlement awarded $5.2 billion to merchants and allowed them to start charging consumers a “convenience fee” when paying with a Visa or MasterCard to help defray costs. However, most merchants have been reluctant to assess this surcharge for fear of consumer backlash, and some states prohibit the practice.
The National Retail Federation opposed the settlement saying that it did not go far enough and left merchants vulnerable to future fee increases by requiring them to waive their right to sue in the future over similar rules to the ones the class action suit addressed. The Merchants Payments Coalition contends that credit card swipe fees are set in secret and not transparent to merchants or consumers. Furthermore, merchants cannot negotiate the fees.
Many merchants opted out of the settlement, including major retailers such as Walmart, Target, and Macy’s, leaving them the option of filing separate suits. That is just what Walmart did at the end of March when it filed suit against Visa claiming that the company conspired with banks to fix swipe fees. As a result, Walmart claims, it was forced to pass exorbitant fees onto its customers by charging higher prices on goods and lost $5 billion in sales because of it. Why Walmart only sued Visa and not Mastercard is unclear.
Additional lawsuits are likely from the other retailers that opted out of the class action settlement.
What does this mean for consumers? It puts rewards programs in jeopardy since these fees are what fund the programs. Consumer advocates argue that rewards programs mostly benefit more affluent users, whereas a reduction in fees that merchants charge would be passed through to all credit card users in the form of lower costs on goods. (Currently, consumers pay $400, on average each year, in indirect costs related to swipe fees.) Of course, whether consumers would ever actually see these price reductions seems questionable.
Ultimately, the government may get involved in the issue. The Federal Reserve Board capped debit card swipe fees in 2011 so credit card swipe fees may be next on their agenda.