Card Swipe Settlement: Merchants Question Benefit

July 18, 2012 -- There's one thing plenty of people agree on about the new $7.25 billion settlement reached between big banks and retailers on credit card swipe fees: They don't like it.

"People on both sides of the issue are disappointed," says Anisha Sekar, VP of credit and debit products for NerdWallet, a website that helps consumers decide which credit card program is best for them.

Under the proposed deal—which, if approved by a judge, would be the largest antitrust settlement in U.S. history--merchants would be free to tell customers at checkout how much extra they're paying to use a given credit card than if they'd paid by cash. Merchants also would have the option of imposing a surcharge on credit card purchases, which would help them recoup some of the hefty fees they pay to banks for credit card transactions.

The Wall St. Journal reports that for many retailers, those fees represent the third-biggest cost of doing business, right after rent and payroll. A merchant's average fee, says the Journal, is 1.5 percent to 3 percent of each credit card transaction.

Defenders of the settlement reached last week say that under it, merchants' costs would be reduced; and further, that consumers would get more information to help them make better decisions about which card to use (or whether to use a card at all, and instead to pay cash).

Jeffrey Shinder, an attorney who represents some 145,000 convenience stores through the National Association of Convenience Stores (NAC), questions how much of a benefit consumers might get.

"If this goes through intact," he says, "you should ask yourself: Are merchants really going to surcharge? I have my doubts."

A merchant's appearing to single out credit card customers for a special charge he calls "a PR nightmare in a tight economy." Moreover, he says, state law in New York, California, Texas and seven other states prohibits such surcharges. These states together, he says, account for 42 percent of transaction volume. So, the settlement's terms "won't affect half the country."

"All of which is to say," says Shinder, "that I don't think there's going to be much impact. It's why this is not a landmark settlement. It's not going to benefit consumer welfare."

It could, however, be a huge pain in the neck for merchants. Doug Kantor, counsel for NAC, foresees widespread confusion and frustration: "At the end of the day, merchants will throw up their hands and say, 'I can't do it,'" he predicts.

NerdWallet's Sekar likes some elements of the settlement.

She points to its collective bargaining provision, under which merchants can band together to negotiate lower fees from banks. It's a "major step forward," she thinks, in bringing downward pressure on fees, and thus downward pressure, potentially, on what consumers have to pay.

"In the long term, it might be effective in lowering rates," she says. "As of now, each individual small business person has little influence. But a group of independent drug stores, say, can hash out fees with Visa."

As for fairness of forcing Mastercard and Visa buyers to pay a surcharge, she likens the situation to airline passengers' having to pay more for checked luggage. When bag fees first were introduced, she says, "There was this visceral reaction from consumers—'how unfair.'" Now, she says, travelers like her who never check a bag love the fees. Reason: They no longer have to pay for a service they don't want or need.