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NACS Magazine SEPTEMBER 2016 89

Understanding the issue’s legislative,

judicial and regulatory past is essential

to know what’s ahead.

By Eva Rigamonti

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very time a consumer swipes a debit or credit card at a register, the bank that issued the card collects a “swipe fee” (also known as an interchange fee). Banks instituted these swipe fees back in the 1960s and over the last 50 years, these fees have

skyrocketed and become the banks’ golden goose: a lucrative revenue driver completely divorced from its original purpose.

Today, swipe fees are a multibillion dollar industry for the banks—and the second highest cost to convenience retailers after labor. According to recently released NACS State of the Industry data, swipe fees cost the industry $10 billion in 2015 (down from $11.4 billion in 2014 largely due to significantly lower costs in the fuel market). Card fees have essentially tripled since 2003.

And consumers? They do not even know that they pay for the “right” to swipe their payment cards, because these fees are hidden in the price of goods.

The reason these fees have increased exponen-tially since the 1960s is simple: Visa and MasterCard have a duopoly over the payment card marketplace and they—along with the biggest banks—fix prices so that banks don’t compete with each other on the fees. Basically, the card networks centrally set the fees that banks charge merchants. As you can guess, without competition to keep the price down, the networks have successfully set unreasonable fees—and the banks eat them up, because it means more profits for them.

Even though the banks compete on every other facet of their business, they do not compete over swipe fees. If this seems unfair, it is. Convenience store owners compete every day to make a profit. There is no reason the card networks and the banks shouldn’t have to compete like everyone else. That is why NACS has been fighting for swipe fee reform for more than a decade.

Legislative ReformIn late 2004, NACS helped found the Merchants Payments Coalition (MPC), a partnership of retail associations representing convenience and fuel retailers, drugstores, supermarkets, restaurants,

online merchants and other businesses harmed by these unfair swipe fees. MPC members represent 2.7 million stores with approximately 50 million employees.

As with consumers, many members of Congress did not know about swipe fees, so the MPC spent, and continues to spend, a great deal of time educating pol-icymakers about this issue. These educational efforts have paid off. In 2009, for example, the Government Accountability Office published a report highlight-ing how swipe fees have risen over time, the factors impacting the degree of competition in the credit card market and the impact on consumers.

Much of the Coalition’s efforts have been focused on getting legislation through Congress that would change the anti-competitive payment card environment. Beginning in 2008, the MPC made some headway with the introduction of H.R. 5546, the Credit Card Fair Fee Act. Sponsored by Representatives John Conyers (D-MI) and Chris Cannon (R-UT), the legislation would have allowed merchants to collectively negotiate with the card networks and banks for card fee rates and terms. The bill was successfully reported out of the House Judiciary Committee but was not brought up for a vote on the House floor. Similar legislation was introduced in 2009 in both the House and Senate.

Also in 2009, Representative Peter Welch (D-VT) introduced H.R. 2382, the Credit Card Interchange Fees Act, which would have prevented the card networks from charging merchants more for pre-mium payment cards and restricting merchants’ network routing choices. While the House Financial Services Committee held a hearing on the legisla-tion, it did not move out of committee.

In June 2010, the MPC achieved a tremendous victory. An amendment to reform the debit card market was offered by Senator Richard Durbin

U.S. merchants pay six to 10 times more for debit transactions than it costs banks to handle the transactions.

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(D-IL) and was enacted as part of the Dodd-Frank Wall Street Reform Act. The Durbin Amendment required the Federal Reserve Board to write regu-lations ensuring that debit card swipe fees that are centrally set by the card networks for the largest banks in the nation (those with more than $10 billion in assets) are “reasonable and proportional” to the banks’ cost of processing debit transactions. It also fostered competition among debit networks by obli-gating banks to allow merchants to choose their own network routing option for each debit transaction.

In addition, the Durbin Amendment gave merchants the ability to offer discounts based on whether the customer used credit, debit, cash or check, and the ability to set minimum amounts of up to $10 for credit card payments.

Ultimately, the Fed imposed a limit on centrally fixed debit swipe fees. If banks choose to compete and set their own fees, they are not bound by the Fed’s debit swipe fee limitations. But if a bank does charge the amount set by the card networks, those large banks can only charge 21 cents, plus one cent for fraud prevention, plus 0.05% of the transaction amount, on every debit card transaction.

Although U.S. merchants still pay six to 10 times more for debit transactions than it costs banks to handle the transactions, debit swipe fee reform has resulted in savings to merchants and consumers alike. In fact, economist Robert Shapiro found that debit swipe fee reform has saved consumers nearly $6 billion per year and has supported more than 37,000 jobs annually.

Unfortunately, Financial Services Committee Chairman Jeb Hensarling (R-TX) and Representative Randy Neugebauer (R-TX) are now attempting to repeal the Durbin Amendment—even though debit reforms have helped consumers, mer-chants and small banks. Hensarling has a draft bill called the Financial Choice Act that would repeal much of the Dodd-Frank Wall Street Reform Act, including the Durbin Amendment. Neugebauer, on the other hand, has a bill (H.R. 5465) that would only repeal the Durbin Amendment. It is imperative that retailers contact their members of Congress to ensure they know how bad these pieces of legisla-tion would be for their businesses.

Judicial and Regulatory Reform NACS and the MPC have also advocated for swipe fee reform outside the halls of Congress. Soon after its founding, the Coalition met with federal regulators, such as the Department of Justice (DOJ) and the Federal Trade Commission (FTC), to spread the word about the anti-competitive nature of the swipe fee market. DOJ initiated antitrust lawsuits against Visa, MasterCard and American Express challeng-ing the rules they had in place to prevent merchants from offering consumers discounts, rewards and information about card costs.

In July 2011, Visa and MasterCard agreed to a con-sent decree (or court order) with DOJ prohibiting the two card companies from prevent-ing merchants from offering discounts and other incentives to customers for using lower-cost credit cards (e.g., basic cards instead of high-end reward cards that carry higher swipe fees) or other forms of payment (cash, debit or checks). American Express decided to fight the DOJ. While DOJ won at trial against American Express, the case is still being considered on appeal.

Separate from the DOJ cases, in 2005, NACS, along with several other trade associations and more than 1,000 merchants, filed a series of individual and class action lawsuits against Visa, MasterCard and the major banks to challenge the setting of swipe fees and related rules. After years of litigation, a settlement was reached in July 2012 and formally approved by the District Court in September 2013.

NACS strongly opposed the settlement, but the lawyers representing the class agreed to it over our

RECORD-BREAKINGIn September 2011, building on 7-Eleven’s successful "Stop Unfair Credit Card Fees" consumer petition campaign, convenience store operators joined with U.S. Representatives Peter Welch (VT-At Large) and Bill Shuster (R-PA) to deliver an additional two million new customer signatures collected during the NACS "Fight Swipe Fees" campaign, which asked Congress to put an end to unfair, hidden credit and debit card swipe fees that cripple Main Street merchants and their customers. The total number of signatures delivered to Congress was 3.7 million—the largest number of consumer signatures ever collected for a public policy issue.

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objections and a majority of named plaintiffs in the case. The settlement included a monetary award of $7.5 billion, but had no worthwhile changes to the way Visa and MasterCard centrally fixed swipe fees. And, while allowing for continuation of the same problematic antitrust behavior, the settlement cut off all merchants’ legal rights to sue for future viola-tions of the law by Visa and MasterCard—forever.

NACS educated its members on the potential negative impact of the settlement and provided information on how to opt-out. Almost 8,000 merchants opted out of the settlement, and since then, hundreds of merchants have filed separate opt-out lawsuits against Visa and MasterCard.

Many merchants and associations, led by NACS, demonstrated their objection by filing an appeal with the U.S. Court of Appeals for the Second Circuit challenging the original class action settlement. Approximately two years later, on June 30, 2016, the Second Circuit—in a huge win for merchants—voided the $7.5 billion class action settlement. In its ruling, the court found that retailers were inadequately represented in the litigation and concluded that the settlement unfairly forced merchants to give up their right to sue about card fees in the future. After decer-tifying the case as a class action, the court sent the case back to federal district court in Brooklyn, where a status conference was held on August 11 to determine the next steps in the case. (At press time, this conference had not yet taken place.)

What’s Next?In the class action litigation, the August 11 con-ference will likely lead to a battle over who should represent merchants in the lawsuit in the future. The outcome of that battle may help determine whether the litigation can help lead to real reforms.

On the legislative and regulatory front, NACS continues to work to defend reforms to debit swipe fees. We’re also working to gain competi-tion and transparency in credit cards as we move into new technologies such as mobile payments;

those battles are at a critical stage because of the rapid pace of technological change. How new technologies impact payments and whether they enhance competition in the marketplace will determine how the market develops in the next generation. As always, NACS will advocate aggressively for you, and all of our members, as those changes progress.

Eva Rigamonti is an associate at Steptoe & Johnson, LLP.

FACTS ABOUT SWIPE FEES

Visa and MasterCard together control 80% of the credit card market.

U.S. swipe fees are seven times higher than the standard European rate on each transaction and more than four times higher than in Australia.

In the United States, banks gouge merchants between 2% and 4% of every credit card purchase even though their costs are smaller. The average profit margin for U.S. merchants is 1% to 3%. That means swipe fees going to the banks often equal or exceed the merchant’s profit on each transaction.

Swipe fees are, on average, the second-highest operating expense merchants face and they are the fastest-growing expense for merchants, with growth that even outpaces the growth in health-care costs.

Today, hidden swipe fees are costing the average family more than $400 a year—no matter how they pay for their purchases.

A 2013 study conducted for merchants by economist Robert Shapiro of Sonecon LLC found that reforming swipe fees on debit cards saved consumers $5.8 billion in lower costs for goods and services and saved merchants $2.6 billion in 2012 alone.

The savings in turn created 37,501 jobs.

Debit swipe fee reform has saved consumers nearly $6 billion per year and has supported more than 37,000 jobs per year.