Will Consumers Face Credit Card Surcharges? No.

On behalf of the big banks, the credit card companies Visa and Mastercard charge unfair fees to merchants. Some are speculating that as a result of a court settlement over these "swipe fees" that consumers will end up paying more when they make a credit card purchase. We don't think surcharging will spread. Here's why.

On behalf of the big banks, the credit card companies Visa and Mastercard charge unfair fees to merchants that harm all consumers at the store, including cash customers. Some — perhaps snookered by a Visa/Mastercard PR campaign — are speculating that as a result of a court settlement over these “swipe fees” that consumers will end up paying more when they make a credit card purchase. We don’t think “surcharging” will spread. Here is some background on why not.

This fall, a U.S. judge approved a preliminary settlement (previous blog) between merchants and the credit card networks Visa and Mastercard in a lawsuit over so-called interchange or “swipe fees,” which are fees imposed on merchants for accepting credit and debit cards. Merchants have long claimed that the fees, which range from 1-4% of purchase prices — more for rewards credit cards, less for debit cards — are not only too high but also non-negotiable. In particular, merchants have argued that these two firms, as opposed to the much smaller Discover and American Express, exert illegal power over the marketplace. When a cartel — in this case,  a duopoly of Visa and Mastercard —  imposes unfair fees or engages in other marketplace practices that unbalance the relationship between buyers and sellers, the cartel may be in violation of the antitrust laws.

As one condition of a preliminary settlement of a lawsuit over credit card swipe fee issues, Visa and Mastercard agreed, effective January 27th, to allow some merchants in some states, under very limited circumstances, to impose surcharges on customers who offer to pay with a credit card. It has been widely reported (for example, here and here) that consumers should now expect to pay surcharges everywhere, whenever they try and use a credit card. Yet, U.S. PIRG has repeatedly told the media that we doubt many merchants will impose extra surcharge fees on their credit card customers because they don’t want to upset their customers and lose sales. The threat of surcharging, which would lower credit card use (and therefore bank profits, which the banks wouldn’t like) may help merchants negotiate lower swipe fees, but we simply don’t think many merchants will surcharge their customers. In addition, 40% of all consumers live in 10 large states (California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas) that prohibit surcharging by state law. The settlement does not override these state laws.

We also agree with the merchants that Visa and Mastercard operate as an illegal duopoly that violates the antitrust laws designed to make the marketplace fair to both buyers and sellers. And while U.S. PIRG endorsed the goals of the 2005 merchant lawsuit filed over these issues, this fall we asked the court to reject this preliminary settlement. So did every major merchant association in the nation. There will be an additional court hearing later this year.

Why has U.S. PIRG sided with the merchants on this issue? What dog do consumers have in a business-to-business fight? It’s quite simple. Merchants are forced to pass the swipe fees they pay on to all their customers in the form of higher prices. U.S. PIRG agrees with the merchants that the swipe fees are unfair. Our view is that cash customers should not pay more at the store and more at the pump to subsidize credit card reward programs. Other than contributing to excess profits, credit card rewards are the  primary use of the swipe fees. When consumers who want more miles and other rewards use their cards more, the banks earn more swipe fee revenue from merchants and more interest and fees from customers (although Visa and Mastercard collect the swipe fees, the vast bulk of them are passed on to your bank). Unfortunately, this process does not create a virtuous circle where everybody wins. Merchants and cash customers at the store lose.

That brings me to the lawsuit settlement. A good lawsuit settlement should stop bad behavior, punish violators and compensate victims. This settlement fails on all three counts, so we filed an objection.

Does Not Punish Violators: The settlement’s payment to merchants of about $6-7 billion is just a few months of swipe fee income and the settlement also allows the banks and card networks to continue to raise swipe fees immediately.

Does not compensate victims: It provides only these modest payments to merchant-victims, which will immediately be swallowed up because the settlement also allows the banks and card networks to continue to raise swipe fees. The settlement’s other purported benefit, the right to surcharge, is illusory. This merchant fact sheet explains two Catch 22s. First, it requires merchants to surcharge in all their locations, but that is impossible for any merchant who has stores in surcharge-ban states as well as other states where surcharging is legal. Similarly, the settlement also requires merchants who accept American Express cards to surcharge them, too, but since American Express prohibits surcharging by contract, this is impossible.

Does not end bad behavior: The settlement prohibits merchants, including both objecting merchants and any future merchants, from bringing any similar cases in the future, including cases alleging violations in new payment technologies not yet being used, such as future mobile payment technologies. This effectively immunizes Visa and Mastercard from any future claims, no matter what new unfair schemes they roll out. (One warning sign of illegal practices is that prices continue to go up even when technology lowers costs. In the U.S., unlike the rest of the world, swipe fees have continued to increase even as new, better payment technologies have rolled out.)

U.S. PIRG has long supported swipe fee reform, as we explained in Senate testimony in 2010. Anti-competitive practices that raise prices are unfair. In 2010, we won a partial victory with passage of the Durbin amendment, which lowered the swipe fees merchants pay on debit cards. Importantly, the Durbin amendment also stopped the banks and card networks from using unfair contracts to prevent merchants from asking you to consider paying with cash or a debit card instead of a higher cost (to them) credit card. The Durbin amendment also made it easier to discount for cash, a legal practice which had also been blocked by unfair bank contracts with merchants. Since 2010, some gas stations have again begun discounting for cash. Previously, the banks used a powerful threat to prevent legal discounting: they claimed that any merchant discounts were really “disguised surcharges.” Unfortunately, because the banks also had the ability to impose contractual penalties simply by withholding credit and debit card payments owed to the merchants, very few merchants challenged their rules.

A recent FTC study has demonstrated that the Durbin amendment is working.

We will continue to take other actions to lower unfair interchange fees and expect to be active in the pending court review of the preliminary settlement in this case. That preliminary settlement, and other court documents, are here at the website of Robins, Kaplan, attorneys for the small number of remaining merchant plaintiffs, although the many objecting merchant associations all have new attorneys.


Ed Mierzwinski

Senior Director, Federal Consumer Program, PIRG

Ed oversees U.S. PIRG’s federal consumer program, helping to lead national efforts to improve consumer credit reporting laws, identity theft protections, product safety regulations and more. Ed is co-founder and continuing leader of the coalition, Americans For Financial Reform, which fought for the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, including as its centerpiece the Consumer Financial Protection Bureau. He was awarded the Consumer Federation of America's Esther Peterson Consumer Service Award in 2006, Privacy International's Brandeis Award in 2003, and numerous annual "Top Lobbyist" awards from The Hill and other outlets. Ed lives in Virginia, and on weekends he enjoys biking with friends on the many local bicycle trails.

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