PITTSBURGH — You probably swipe a credit or debit card through a magnetic stripe reader dozens of times each month. It's a simple act, but it's it at the core of a battle between titans with billions of dollars at stake. On one side are big banks, which take a cut every time a card is swiped. On the other are retailers like Mike McArdle, who are tired of paying Visa, MasterCard and their member banks $1 or $2 every time a customer makes a purchase.
McArdle runs McArdle's Pub on Pittsburgh’s South Side, the very definition of a family business. It opened in 1939, and the sign above the front door doesn’t look like it’s been changed since. It once held a prime spot near two of the Steel City's largest steel plants. Both of them have long since been converted to shopping malls, but McArdle's plugs away, thanks to its position just off the main entertainment strip in Pittsburgh's hippest neighborhood.
For years, banks have held the upper hand in the fight with the McArdles of the world, but no more. Last week, the U.S. Senate approved legislation that could drastically change the way banks are compensated for card swipes, and that could impact what happens every time you pull out your wallet. In fact, the legislation could provide incentives — that means money — for Americans to leave the plastic in their wallet and pull out old-fashioned cash instead.
As part of its omnibus financial reform bill, Congress is taking on what are called interchange fees — the price that merchants pay for banks to process their credit card transactions. Formulas vary, but generally stores pay a flat 50 cents or $1 per transaction fee, plus 1 to 2 percent of the purchase price. Retailers have screamed for years that the fees are too high and that the card associations impose anti-competitive restrictions on them – given the limited choices among standards like Visa, MasterCard, American Express, and Discover.
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Last week, in a surprisingly bipartisan vote, the Senate agreed to an amendment that would instruct the Federal Reserve Board to limit the fees card processers can charge merchants. It also included two practical changes that would have an immediate impact on shoppers:
*Current contracts between merchants and banks forbid stores from requiring a minimum purchase amount before customers can use cards — a provision that is sometimes ignored. Merchants hate this rule, as a $1.50 card purchase can become almost worthless to a store owner after minimum interchange fees are paid. The Senate bill would prevent banks from forbidding minimum payment requirements.
*The bill also would make it easier for merchants to encourage consumers to use cash by preventing banks from limiting a store owner’s ability to offers discounts to cash-paying customers, according to its supporters.
As you might imagine, banks and merchants view the bill quite differently.
"Swipe fees have spiraled out of control in recent years, and this amendment is necessary to rein in these excessive fees and ensure that Main Street receives a fair shake," said the Merchants Payment Association, which represents retailers. "These fees are harmful across the board – from large businesses to small retailers to American consumers.”
But Trish Wexler, a spokeswoman for the Electronic Payments Coalition, which represents banks and card companies, said the law would hurt consumers by raising their credit costs and gutting reward programs.
“Consumers will end up paying in the form of higher rates for their cards, reduced or eliminated debit card rewards programs, or a restriction on the amount of debit cards that are issued," she said. "Call this a win for retail, because that’s what it is."
Bernie Rafferty, behind the bar, thinks minimum charges are a good idea
At its core, the question is simple: if stores are paying 1 or 2 percent less in bank fees, who will keep the money — the retailers or the consumers? Wexler is convinced that big stores like Walmart would simply pocket the extra cash and not pass along savings to shoppers.
There is a third possibility, however: Stores could split the difference. If the total card fee is 2 percent, they could offer shoppers a 1 percent discount for paying cash.
"OK, so you buy something for $50 and you get a $1. I don't see consumers getting too excited about that," Wexler said.
Back in Pittsburgh, McArdle partly agreed. A 3-cent discount on a $2.50 draft beer (yes, draft beers only cost $2.50 at McArdle’s) probably wouldn't entice many drinkers to pay in cash. On the other hand, the minimum payment provision made sense to bartender Bernie Rafferty.
"Last weekend we had a guy in here who wouldn't keep a tab open,” he said. “He paid six separate times for two beers with his credit card. Those initial 50 cent fees really add up.”
While the legislation would forbid card firms from restricting discounts for cash payments, the Electronic Payments Coalition says that merchant contracts — and Visa and MasterCard policies — already allow that. Rather, they say, current contracts only forbid the reverse: adding a surcharge for credit card transactions. To consumers, that distinction is semantics, but the banks and retailers, it could mean millions of dollars.
Some gas stations offer cash discounts, but few other retailers do. Most, like McArdle, would have a tough time changing their systems to create an entirely parallel price system. On the other hand, discounts could encourage more consumers to pay in cash and provide an incentive to avoid hefty credit bills.
Would you pay in cash to save a few nickels or dimes on every transaction? Even if you would, don’t start hoarding bills just yet. The amendment still must pass the House of Representatives and survive the sausage-making process that will produce the final financial reform legislation.
To read more about the swipe fee battle, see "Retailers, card industry escalate fee fight."
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