Credit card fees put swipe in 'swiping'

Laurie Woodstock of The Bowerbird Gift Shop in Old Lyme processes a customer's purchase at the store Tuesday Jan. 5, 2009. Due to high swipe fees for credit card users the store has signs posted on their cash registers to promote more cash or debit card sales.
Laurie Woodstock of The Bowerbird Gift Shop in Old Lyme processes a customer's purchase at the store Tuesday Jan. 5, 2009. Due to high swipe fees for credit card users the store has signs posted on their cash registers to promote more cash or debit card sales.

Now that credit-card companies have consumers hooked on plastic, local merchants charge that Visa and MasterCard are using expensive "swipe fees" to make out like bandits.

The fees average about 2 percent of the purchase amount every time someone uses a credit card, but merchants say there's little they can do to cut expenses when the monolithic dealers in plastic money hold all the cards - literally.

"It's a monopoly," says Tom Kalal of East Lyme, former proprietor of Jordan Brook Nursery in Waterford and current owner of a lawn-service company. "They doubled my swipe fees in less than a year. Unless you're a huge retailer, you have no power."

Both Congress and the U.S. Department of Justice currently are looking into the fees. The justice department is investigating possible antitrust violations, while politicians are under the gun from merchants - particularly those who run gas station convenience stores - who feel squeezed by the fees in an already difficult economic climate.

"As an industry, we think we're being overcharged," says Cathy Barber, president of the New England Convenience Stores Association.

Convenience stores were hit particularly hard a couple of years ago when gas prices skyrocketed over $4 a gallon, she says. With consumers complaining, she says, gas stations cut their margins to the bone, yet credit card fees started sucking out more of their profits because the costs double when a fillup is $70 instead of $35.

Even today, credit card companies can make more money from a transaction than convenience-store owners receive. Barber ran numbers for a typical 15-gallon fillup that show credit-card companies making 84 cents and store owners 66 cents, assuming a fairly standard 10-cent profit per gallon of gas and a transaction fee of 2 percent.

"Very few businesses could survive on that type of margin," Barber says. "That's why you hope customers run into the store and buy a cup of coffee - or you're not going to be there for long."

According to a November 2009 report by the Government Accountability Office, both Visa and MasterCard - which account for nearly three-quarters of all credit-card volume in the United States - had only four different types of swipe fees less than 20 years ago; now, the two together have more than 300 rate categories. At the same time, maximum swipe fees - known formally as interchange fees - have risen by more than 1 percentage point for both credit cards.

"It's out of control," says Chris Kitchings, owner of The Bowerbird gift shop in Old Lyme.

Kitchings says credit-card fees cost her about $2,786 in November, or about $1.30 per transaction. The fees represented nearly 2.2 percent of her total sales for the month.

It's not her highest expense - labor, rent and insurance cost The Bowerbird more - but Kitchings says she considers it outrageous.

"It's so hard to keep on top of," she says.

Credit-card companies defend swipe fees by pointing out that they are covered by merchants, not consumers, and help pay for the billions of dollars of credit that are extended to people every month. Without these fees, they say, credit would dry up and the economy, on the way to recovery, would stumble yet again.

The percentages that credit card companies take in fees are no higher on average today than they were a decade ago, but the total transactions performed using plastic are much higher, says Trish Wexler, a spokeswoman for the Electronic Payments Coalition, a credit card industry arm. It's the amount of the transactions, rather than the fee schedule, that is causing merchants to cry foul, she says.

"The real question is who should pay for the fees," she says. "Every single case of merchants paying less show that consumers would end up paying more."

Credit-card company defenders also point out the firms' huge expenses involved in protecting consumers' personal information from possible identity theft, as well as escalating default rates, as reasons why the industry fees should not face caps.

But Timothy Phelan, president of the Connecticut Retail Merchants Association, says his group would like to see some kind of regulatory body keep a lid on credit-card fees. Right now, according to the GAO report, credit-card swipe fees are not subject to regulation.

The GAO notes that the lack of regulation, combined with Visa and MasterCard's virtual lock on the credit-card market, may encourage the companies to raise rates with little fear of possible repercussions. And merchants, the GAO says, have little power to negotiate lower rates.

The GAO adds that credit card companies force merchants to accept any form of plastic within their network - including the expensive rewards programs that sometimes carry fees of more than 3 percent - if they want customers to be able to use Visa or MasterCard to pay their bills.

The GAO points out that many banks have entered the credit-card fray in recent years, but they have tended to add attractive and expensive bonuses for cardholders rather than trying to keep down costs for merchants.

"The rates are absolutely nonnegotiable; it's take it or leave it," says Jeff Lenard, a spokesman for the National Association of Convenience Stores.

Lenard says his group, which recently sponsored a study showing that interchange fees are far higher in the United States than in any other country, is simply trying to force credit card companies to come to the table with merchants to negotiate lower rates.

"The only expense out of your control is credit cards," he says. "They write all the rules."

Unfortunately for merchants, credit card companies have done a good job convincing consumers they're better off using credit and debit cards, says Kitchings of The Bowerbird. It would be suicide at this point, she and others say, to refuse to accept plastic money.

"You've got to pick your battles," Kitchings says.

Still, the nickel-and-diming can be maddening, she says, ticking off several variations: fees for reward cards, third-party transaction fees, charges for cards that can't be read, fees for phone charges, debit fees, monthly service charges, authorization fees, foreign-handling fees.

Matthew Longino, owner of Galaxy Roller Rink in Groton, says he accepts credit cards only for birthday-party reservations that average about $100. Even then, he loses about $3.50 on every transaction, he says, which only reinforces his belief that cash is king.

Marcie Boyer, co-owner of the Flavours of Life fair trade store in New London, says she encourages cash transactions, and in the past year or so has noticed more and more people paying with greenbacks.

"People do ask us before we charge, 'What's best for you?'" she says. "We always says debit is better than credit ... but cash and checks are free."

Credit card facts:

The first general-purpose credit card was introduced in 1950 by Diners Club.

Visa and MasterCard account for about 71 percent of all U.S. credit card purchases; American Express’s share is 24 percent, with Discover at 5 percent.

Interchange rates that ranged from 1.25 percent to 2.08 percent for MasterCard and Visa less than two decades ago now range from 0.9 percent to 3.25 percent.

About 73 percent of all American families possess at least one credit card.

U.S. consumers hold nearly 700 million general-purpose credit cards, with total charges of more than $1.9 trillion a year

Debit cards cost merchants less than credit cards, and reward cards are the most expensive form of credit.

SOURCE: Government Accountability Office report, November, 2009

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