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It’s Official: Court Approves Swipe Fees For Consumers

Dec. 17, 2013
Credit Cards
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It seems like every time we turn around, we’re getting hit with a new fee. There’s a fee for taking money out of an ATM, a fee for purchasing movie tickets with an online service, a fee for staying in a parking space for too long – will it never end?

Not anytime soon. In fact, according to a new court settlement, credit card users are going to face a new fee pretty soon in the form of swipe fees. That’s right, merchants are now able to pass the transaction fees charged to them by credit card companies onto us.

But the swipe fee situation is more complicated than it seems on the surface; take a look at the details below for more information.

In the beginning

In order to understand the contentious issue of credit card swipe fees, it’s important to have a grasp on what those fees actually are. Basically, it works like this: every time you or I swipe our credit cards to make a purchase, the merchant is charged a fee by Visa or MasterCard (and indirectly by Discover and American Express). Known as interchange fees, or “swipe fees,” the major credit card companies fix these fees at 1-2% of the transaction total.

For years, retailers have complained that these fees are too high and worse, that they have no other option. In other words, the credit card companies have, according to merchants, maintained a monopoly over the swiping industry.

Various lawsuits have been filed against Visa and MasterCard over the years by retailers over the swipe fee issue, but the class action suit brought by a group of merchants in 2005 – just settled in December 2013 – has resulted in what is likely to be a lasting change. A judge agreed to let Visa and MasterCard settle with the merchants for $5.7 billion, a significant victory for retailers nationwide.

Swipe fees for all?

While American businesses might be celebrating the settlement, consumers aren’t so excited. This is because, as part of the court agreement, merchants are now permitted to charge an additional fee when customers pay with credit cards.

This may seem straightforward: more fees for you and me. But the reality is much more complex, and it’s not all bad news. For one, it’s possible that prices for goods and services could decline slightly overall. This is because, up until now, the swipe fees were built into the cost of the stuff we buy, whether we were paying with credit or not. If merchants are now allowed to pass that fee on to the people who are generating them – credit card users – base prices may decrease a bit.

Another potential positive outcome for consumers is that credit card companies may feel pressure to ramp up their rewards programs even more. After all, now that the fee for paying with credit is more transparent, credit card companies are going to have to justify the cost.

Finally, it’s also possible that merchants won’t tack on an extra fee after all. It’s likely that people will be outraged at the idea of paying extra to use credit and decide to stop going to stores that add on the charge. This means that retailers might just press ahead with the status quo – building the swipe fee into the cost of the product, rather than itemizing it.

No matter which way you slice the cake, the consumer is bound to be the winner in this settlement, regardless of the scenario that ends up becoming reality.

An unsettled settlement

While the $5.7 billion settlement between retailers and credit card companies is huge, it hardly means that the issue of swipe fees has been put to bed. This is because some of the largest merchants in the nation – such as Amazon, Wal-Mart, and 7-11 – opted out of the suit. These big-box stores want to hold onto their ability to take legal action against Visa and MasterCard in the future, and participating in a class-action suit would have prevented them from being able to do so.

It’s fair to assume that at some point, one of the retailers that didn’t get a payout from this court case will take Visa and/or MasterCard to court over swipe fees themselves. In other words, the swipe fee issue is far from settled.

The bottom line: credit card transaction charges might be coming our way, but that’s not necessarily a bad thing. Be sure to keep a lookout for these fees – as well as the product price reductions and credit card rewards upgrades that will likely accompany them – in the new year.