In his first year in business, Sean Harper paid more in credit card “swipe” fees than he earned in income. “That really hurt,” says Harper, the founder of Chicago-based TSS-Radio, a seller of satellite radio gear.
Harper is far from the only merchant hurt by the high cost of accepting credit card payments. Dwight Lafountain, owner of 30 Jiffy Mart convenience stores in New Hampshire and Vermont, says 80 percent of his customers now pay with plastic, compared to just 35 percent four years ago. And every time they swipe a credit or debit card, he pays a percentage to the card issuer, typically Visa or MasterCard.
The swipe fee consists of two parts: an “interchange fee” that goes to the credit card companies and a transaction fee that goes to the companies that actually process the transaction, usually banks. Credit card companies say swipe fees are the price businesses pay for convenience and guaranteed payment.
For a small business, the fees can range from 1 percent up to 5.5 percent of the total purchase price, thanks to extremely complex pricing structures based on hundreds of different factors, including the type of card and its associated rewards program, and the size of the transaction. Last year, Lafountain paid an average of $46,000 in swipe fees per store, more than he spent on health insurance. “These fees have become a major expense that is out of control,” he says.
Credit card companies racked up $48 billion in swipe fees in 2008, which is an increase of 300 percent since 2001, according to the National Retail Federation. A new report by former U.S. Under Secretary of Commerce Robert J. Shapiro found that about 80 percent of these fees are pure profit for the credit industry.
Small businesses fear they’ll soon be paying even more if swipe fees go unchecked. One reason? The Credit Card Accountability, Responsibility, and Disclosure Act that recently went into effect. The CARD Act aims to protect consumers from predatory credit card practices such as retroactive rate hikes. But it leaves small businesses more exposed than ever, say advocacy groups like the National Small Business Association.
These groups are concerned that credit card companies, which are now limited in their ability to squeeze individuals, will try to make up for revenue lost on the consumer side by jacking up fees paid by businesses, including swipe fees.
“I never thought I’d see the day when businesses pay more than 5 percent in swipe fees, but that’s happening all the time now,” says Robert Johnson, president of Consumers for Competitive Choice and founder of the Credit Card Con, an online movement lobbying Congress to crack down on swipe fees. “When you have two players — Visa and MasterCard — controlling 85 percent of the market, it’s hard to fight that.”
For their part, credit card companies say their interchange fees are fair and that any government regulation would have unintended consequences. For instance, card issuers say they could be forced to curtail the amount of credit they extend to businesses and consumers, because fees are used to offset their risk. “If interchange rates are forced down below what is sustainable for a card program, then [other] rates are going to have to go up,” Trish Wexler, spokesperson for the Electronic Payments Coalition, a credit card advocacy group, told CNN.
But regulation may be on the horizon. Johnson thinks it will come once the public and Congress fully understand the true cost of swipe fees (nearly $2 of every $100 U.S. consumers spend using credit cards goes to the credit card industry through the interchange fee). In much of the world, the fees are already regulated. In Australia, for instance, swipe fees are capped at 0.5 percent of the transaction total. In the European Union they cannot, by law, exceed 1 percent.
Johnson was heartened by the recent news that Sen. Arlen Specter (D-Pa.) is “seriously considering” a bill to limit swipe fees charged to merchants. And Rep. Peter Welch (D-Vt.) says he plans to reintroduce a “credit card bill of rights for merchants” in the House. However, Rep. Barney Frank (D-Ma.), chair of the House Financial Services Committee, has said swipe fees are “not on our agenda this year.”
Swipe fees aren’t just bad for business owners, say critics. They hurt consumers and workers too. The Shapiro report notes that businesses usually raise their prices to cover the expense of interchange fees and, as a result, the average U.S. household shells out $230 extra each year. That said, small businesses often aren’t able to pass on the costs. They have to compete with the large retail chains that tend to pay lower swipe fees based on the huge volume of business they do.
“You have a tendency to charge every customer something for these fees, even if they don’t use a credit card for the purchase,” confirms Irene Rhodes, chief executive officer of Consumer Fire Products, which sells fire protection systems. (In fact, people who pay by cash or check subsidize the majority of swipe fees, since most card users receive some payback through their rewards programs, which are funded through swipe fees.)
The Shapiro study also found that lower interchange fees could lead to the creation of 242,000 new jobs, mainly because business owners would be able to invest more money in their operations rather than the bottom line of Visa and MasterCard. Granted, some businesses will choose to keep the added revenue and not expand, which is why some lawmakers want proof that these savings will be passed directly to consumers before supporting regulation.
Max Brown, owner of Chinatown Coffee Co., a specialty coffee bar in Washington, D.C., says he’s sick of paying a 3.5 percent swipe fee on every transaction. But he’s not waiting for Congress to do something about it. Brown is currently investigating new technologies like mobile payment systems, which he believes could one day replace credit cards altogether.
“I don’t want to keep paying higher swipe fees every year,” says Brown. “We need alternative technologies that can compete against the big credit card companies and can offer a service to small business that is cost effective.” He’s evaluating a mobile payment product from Square. Other mobile payment providers include mPayy, Obopay, and PayPal Mobile.
In Europe there are cards with chips embedded in them that have no fee attached. But card companies here won’t use them, mainly because they don’t want to give up the highly profitable swipe-fee revenue stream.
Sean Harper of TSS-Radio is also looking for a better way. Last year he took matters into his own hands and created a new company called TransFS, a comparison-shopping Web site for credit card processing that can help small businesses save up to 40 percent on swipe fees.
He says interchange fees are set in stone by Visa and MasterCard and can’t be negotiated, whereas the fee paid to credit card processors can. At the TransFS site, processors compete for the merchant’s business. As a result, a merchant paying 5 percent in total swipe fees may be able to reduce payments to the processors and get a fee under 3 percent. Similar services in the marketplace include CardFellow and Payments-R-Us.
And then there’s the nuclear option. “I think credit card swipe fees are wrong, so I switched to a cash model,” says Angie Zimmerman, owner of Heavenly Flowers & Events in El Dorado Hills, California. “But it has cost me in terms of lost business.”