The Great Credit Card Debate: Unveiling The Truth Behind Swipe Fee Legislation

I’ve given several talks over the years at CardCon. Last year it was a deep dive into how new programs and card products are constructed, putting together a panel with the head of Air Canada Aeroplan and Head of Loyalty for Bilt. The year before I did a conversation with the executive who launched Chase Ultimate Rewards and who later ran their United portfolio, covering topics like merchant-funded offers and FinTech underwriting.

So when the conference founder reached out to see if I’d come back this year to Nashville and what did I want to talk about, we brainstormed issues to dive deeply into. What would people be writing about, where a deeper understanding would help them do a better job and ask better questions? We settled on credit card interchange legislation, but I didn’t want to give a lecture, I wanted to do a debate to really poke and prod at the issues.

Regular readers know that I think having the federal government force payment networks provide their services to retailers at a lower price is a bad idea. Jason committed to find a strong advocate for the other side. Doug Kantor agreed. General Counsel for the National Association of Convenience Stores, he’s Aaron Eckhart in Thank You For Smoking, the guy the retail industry sends to Congress for this. He’s the guy.

Senators Dick Durbin (D-IL) and Roger Marshall (R-KS) are sponsoring legislation intended to drive down interchange (swipe fees). Merchants get a service – instant payment processing, convenience for their customers who can spend more than just the cash in their pocket. And building a system that allows any card to work anywhere in the world, connecting a customer’s bank with a merchant’s while protecting against fraud and providing financing in the process has been a successful business. Retailers argue that no business should earn 28% margins or higher.

It’s a bit odd because they’re not calling for price caps on Microsoft Office and cloud services (70%+ margins) or for that matter requirements that as the price of the products they sell fall at the wholesale level (think printer ink cartridges!) that those have to become less expensive to consumers.

This is about using government to take from one company to another, but retailers have to couch this as having public benefit, so they claim it’s really about lowering prices.

I went down a rabbit hole recently trying to figure out how this was supposed to lower prices. Already card acceptance is generally cheaper than cash.

  • Cash usually requires people (labor cost) to accept
  • Clerks make incorrect change
  • Clerks stick cash in their pockets
  • Heavy cash businesses often face higher insurance costs
  • The cost to accept cash is often estimated at 4% – 9%, higher than card swipe fees

If anything, card payments – where consumers also tend to spend more – subsidize cash payments. Yet some retailers do favor cash. Often that’s a surprise fee customers aren’t expecting, a junk fee to charge more to the majority who pay by card. Other retailers prefer cash because it makes tax fraud easier. Card payments also facilitate electronic point of sale systems which are labor-saving as well.

Kantor had written a piece in American Banker last month arguing not that prices have actually fallen in the past, but that they would have risen more without the Durbin amendment that capped debit card interchange.

  • Durbin also limited access to bank accounts for the poor. Banks used to make money when customers would spend money out of their accounts with debit. When that was no longer profitable, banks weren’t bringing in enough to cover the cost of servicing free accounts for many customers, so they started adding other requirements for free checking (like direct deposit, minimum balances) that pushed customers out of banking.

  • And it largely eliminated debit card rewards, the rebate customers saw from their transactions.

But he cited the Federal Reserve on the issue, and I’m just neurodivergent enough to really try to track down the substantiation for the claim. His piece linked not to the study backing it up, but to the lobbying group pushing for the law. And their site included a Fed reference, but only for cost incidence of fraud. For lower pricing they’d funded their own study from a consulting firm, which in turn cherry picked data, finding lower prices in only one vertical, retail grocery (selling the same items in close physical proximity to competitors, when wholesale prices fall consumer prices usually follow) and a second from a political shop that didn’t actually look at card processing costs.

Without this claim, though, we wouldn’t even be talking about card interchange – there needs to be a promise of public benefit.

In Australia, where interchange was capped, we saw higher card annual fees and caps on rewards (we also saw Qantas significantly devalue its points, so that cards could still earn one point per Australian dollar spent). Higher card acceptance costs are bad for both consumers and the economy. People still need credit, it’s less available, and available through other providers (like payday loan shops) at higher cost.

Incidentally in Australia where merchants were permitted to add fees for card acceptance, in 2015 the government found that far from passing savings to consumers, consumers were being overcharged – fees well in excess of the actual cost of card processing.

U.S. airlines are saying that interchange limits would destroy rewards, but that’s not exactly right.

  • The current proposed law probably doesn’t eliminate rewards, just as it hasn’t in Europe and Australia, though Kantor conceded that they want to go further than the current legislation under consideration.

  • Airlines oppose the law because it guts rewards, not because those go away entirely. Even profitable Delta earns most of its net profit (e.g. ~ $2.2 billion out of $2.9 billion last year) from card rewards.

  • Without these rewards we’d have fewer major airlines. During the pandemic, even with $58 billion in direct government subsidies, airlines needed to borrow against the future revenue from card deals in order to stay afloat. American Airlines in particular borrowed $10 billion against AAdvantage to stay liquid during Covid.

  • Southwest Airlines said a big driver of its Hawaii expansion was to make its co-brand card attractive to customers. They’ve become not just a significant carrier to and from the islands but also a major inter-island airline as well. They were crucial during the Lahaina fires in West Maui.

Card, and interchange, are so woven into the fabric of the economy that it’s difficult to even predict the damage of redistributing money to retailers. And it comes at the cost of consumers, rather than their benefit – and not just in terms of credit availability.

To compete for customer business, cards often provide much better consumer protections than what’s required by law. That can mean extended warranty and purchase protections, but even more frequently $0 fraud liability (and unlike debit, funds haven’t already left your account with fraudulent charges) and the ability to charge back to merchants not just for a couple of months as required but for as much as 18 months. Less profitable products won’t compete for consumer dollars in the same way.

There were issues we didn’t get into. I expected Kantor to make the ‘reverse Robin Hood’ argument that card payments redistribute income from poor to rich, which isn’t true since card acceptance is cheaper than cash, since interchange regulation doesn’t lower prices, and since the study the retail industry usually relies on is highly misleading. (Redistribution with card actually takes place in some cases, but between those who don’t pay off their cards each month to those who do.)

I’ve struggled and struggled to find something beyond provincial, pecuniary benefits to retailers in this proposed legislation and I’ve genuinely been unable to come up with an honest consumer or societal benefit. What it is, though, is the perfect fundraiser for politicians going into 2024 elections. It raises big dollars from both retailers and financial services for both Democrats and Republicans. Rather than Thank You For Smoking the better analog may be Eddie Murphy’s The Distinguished Gentleman.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. very well stated. Hope you are invited to Congess to testify when this issue comes up for debate – as it most certainly should be before any vote is taken, if the proposed legislation gets that far.

    And a cash-based society also leads to much more tax fraud which is a big reason why the government should be opposed to reducing the benefits of a plastic financial system.

  2. Well researched – though I wonder if bringing attention helps or hurts the matter – on the one hand it can help Americans who benefit from rewards see what’s at stake and make it a clear third rail for politicians – on the other it can magnify what might be a near DOA piece of legislation and bring out the Robin Hood tropes.

  3. The fiasco from the debit card limitations via Durbin Amendment should already be sufficient data points to show the intended benefits did not materialize, and really became an impediment to competitive banking.

    Trying for a sequel to the credit card interchange fees is just a worse idea.

    These are things that sound like it’s a benefit but actually has unintended consequences, or possibly just misdirection in the name of helping consumers.

  4. In the current system, big spenders and card issuers effectively team up via premium cards to force meaningful rebates from retailers. These costs eventually hit poorer consumers, driving their unrebated prices up. My family jetsets around the world on the backs of the uneducated masses. God bless America!

  5. A flaw in Gary’s argument is that cash is more expensive than credit card acceptance. This is not true, particularly for small businesses and especially small family run businesses.

    Another point is why should small businesses have to pay higher fees when someone uses a reward card, high enough to pay the cash back? That’s like extortion where the credit card company says small businesses must accept all cards and pay more to fully cover the cash back.

    If Airlines survive only because of credit cards then where is that money coming from? Small businesses! Small business is the poor of the business world. Therefore, credit cards are ripping off the poor of the business world.

    Sorry, I like my rewards but realize that I am a bully for participating in the scheme.

  6. The most likely change to get memorialized in law and regulation will be one that supports big business at the expense of consumers anyway since any savings will be pocketed by the parties best able to pocket the savings: the sellers. And the card-issuing banks and the card network providers will then move further along on also cutting the card benefits without reducing costs in the aggregate for retail consumers.

  7. Limit credit card abuse but a cashless society is the beginning of the end your freedom. Once they got us totally digital imagine what restrictions will be imposed.

  8. @Derek

    I completely agree with you on this subject. More and more we see businesses, especially small ones are charging a fee for using a credit card. It’s not like they like handling cash, it’s that using the credit cards are costing them customers. For a customer, higher fees cost them. For a business, the use of credit cards cuts their margins.
    I do understand that cash back and miles programs have costs associated with them. For people that don’t fly, or fly minimally, why should they pay for those programs. Most people do NOT want to SUBSIDIZE your flights.

  9. @ Gary — Your increased coverage of this seems to indicate that you must thik this will pass. If it asses, existing miles will be devalued by 75-90% as the airlines screw us all over.

  10. I agree with Derek’s comments.

    Further, the simplest way to end the graft allowed against society as a whole, caused the ubiquitous rewards and cashback schemes, is for Congress require that the card holder be billed by the card company for all charges, fees, etc. involved with each transaction. The law should also require that all merchants accept legal tender or checks thereof, at the customer’s option. Merchants would have separate agreements with the card companies for their means of reporting sales via cards (including any hardware involved) and being remunerated.

    Use of one’s card thereby becomes a convenience that the person pays for purchase by purchase, and the person can shop around among card offering companies for the one that gives the best deal. All together, that would be a fair and efficient system.

  11. The massive consolidation of the banking industry that got facilitated during and after the Clinton Administration is what really drove customer-unfriendly changes for current account and affiliated debit card users. The Durbin limits benefited retailers mostly at the expense of the banks but that’s would have hit consumers even less if there was more competition in retail consumer banking and not so much consolidation.

  12. @Gene – No, I do not think this will pass. It will not pass in the next year. This is not a Biden administration priority, and a divided Congress headed into a Presidential election isn’t going to do this.

    This post was prompted by my debating the issue with a lobbyist on Wednesday in Nashville, so it was top of mind.

  13. Keep up the good work Gary… this is a clearly a money grab by large retailers. They are likely making large contribution s to his campaign funds. I was a retailer most of my career. I climbed the corporate ladder and was pretty successful in my field. Eventually, the company I was working for became a billion dollar retailer and I was a senior VP. Believe me… for any large retailer, getting this passed is worth billions to them. They will pocket the difference between 3% and 2% and for one fiscal year, it could dramatically sway the profits and stock price of a major company. The consumer won’t see a dime of the change. Something that is priced $29.99 will not change to $29.69.

  14. Hmmm, imagine airlines making the majority of their profit from operations and not from credit cards…what a novel concept.

  15. LTE,

    Retailers’ acceptance of checks from consumers for retail transactions has been declining and that’s probably a battle already lost. Cash acceptance is declining overall as we start doing more online shopping/ordering but for reasons of security, privacy, liberty and maximizing societal equity within the prevailing environment, it’s critical that cash acceptance continue to be widespread and mandated. Ideally, even online retailers should be required to accept cash payment/settlement; but I doubt that such an attempted mandate would fly at this point.

  16. Retailers are free to upcharge for the use of credit. I’m free to pay the fee or frequent retailers who don’t. Let the market manage the issue in this manner.

    Anecdotally, people under the age of 30 do not use cash, even to pay each other.

    To Gary’s points about the costs of cash, accepting cash makes sense if there are very few hands in the till, such that it’s easy to reconcile sales to cash. It takes more than one person to make sure the cash hasn’t disappeared. That costs more than reconciling credit card transactions through your preferred provider (Such as Square) to your automatic bank deposit, minus fees.

  17. For many businesses, an additional cost of accepting cash is paying the armored car company to come get the deposit and take it to the bank, and to bring back the change order.

    Most definitely businesses do not accept cash with zero cost.

    I prefer to pay with a credit card and pay the bill in full every month. I will never use an ATM/debit card for anything other than getting cash from the bank machine, and the only thing I use cash for is hotel room tips, the occasional Mega Millions ticket, and the hunger box at church.

  18. As pointed out by Derek, the small business are being overlooked big time in this debate.

    Cost of cash is not so high for them – no armored truck, easier to reconcile, often times family members are part of it. For restaurants, often time that cash is paid out right away to settle tips – yet the tips left by patrons with a credit card are “taxed” with the credit card fee.

    The 3-4% credit card fee is significant for a small business. Remember this is a sales fee. If your profit is 15% then effectively the credit card fees takes between 20% to 25% of your actual profit away. That is a lot that a small business could use to grow or improve their staff retention in an economy where labor is still quite problematic.

    What is also very problematic is that businesses have no way to tell what is the exact fee ahead, and are blindly obligated to pay whatever number the processor will conjure out of their 300 interchange fees that keep changing every month via footprint messages hidden the statements.

    The system is designed to be obscure and hard to understand. Small business do not have the resources to audit and track the merchant’s fee handling.

    Furthermore, for the “free market” argument, there can’t be one if there is no transparency. Try to get quotes from multiple processors and all of them make it such that you can’t compare apples to apples.

    While a big retailer has the resources to fight and at least negotiate based on volume, small business do not.

    How about legislation is used not to cap fees, but to require transparency and being awareness of the actual costs of using credit cards for all parties, and also give the business at the POS the chance to decide if they will accept, reject, or pass the cost to the consumer, and just then let the free market economy decide what happens?

    Then we will have actual competition for the benefit of the consumer.

  19. I struggle to understand how adding a 1-2% to every single purchase to subsidize frequent flier points or cash back and the marketing fees that bloggers like this one make is valuable to society. This cross-subsidy is absolutely and as far away from free.markets as you can get.

    I do understand how saving 1-2% with every single purchase is beneficial. And yes, retailers pass on all costs of doing business to consumers, since those who don’t fail financially and shut down

    It’s quite simple.

  20. @derek cash in small businesses is even more expensive as there is more theft since there is less internal controls and safeguards . Small business get robbed more often then big box stores..

  21. Right conclusion – don’t fix prices. Incorrect premises – cash is cheaper then credit. The conclusive evidence is the “discount for cash” that is ubiquitous.

  22. Cash is perceived as cheaper than credit because the cost of accepting it is indirect (additional employee time, shrinkage, theft, armored car fee, etc.). The credit cost is more direct because it is shown as a deduction on the amount deposited by the credit card company to the merchant, and hence is more obvious. So the merchant thinks credit is more expensive even if it is not.

  23. As both an avid user of rewards and a small business owner, I am torn.

    The merchant fees are becoming outrageous. For my company, there was a staggered price graph starting at 2% for a Canadian, non-premium card rising to 5% for a non Canada/US premium card.

    When one’s margins (I am in the travel business) are around 10%, paying up to 50% of our income simply to “cash the cheque” is absurd. To rub salt in the wounds, clients would extoll the virtues of their cards not realising that I, and other merchants, were the ones actually paying for their rewards!

    Frankly, the programs have become too rich, I will stop automatically taking cards, and now e-transfers are so simple that is less of a problem. For those wishing to use a card, a service fee needs to be added to make financial sense for the merchant, and at that point, the cardholder can make a choice based on their perceived value of the reward.

  24. Linking to the vile cesspool of a platform really limits reach of your article.

    Enough if us have swore off a weapon of societal destruction in the hands of a low IQ, petty madman.

    Yes, I am referring to linking X (formerly Twitter)

    Use alternatives. Thanks.

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