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Government to Regulate Credit Card Swipe Fees

This article was written by in Consumer. 30 comments.

It will be at least a month until we know what the final financial overhaul bill looks like and exactly what proposals are being made, but one smaller provision that exists in similar formats in both pieces of legislation is a change to the way debit and credit cards are handled in stores.

Currently, the companies that manage the networks that allow stores to accept cards as payment, mostly Visa and to a lesser extent Mastercard, can charge whatever they feel is fair for the service. This is often called a swipe fee, and is paid for by a percentage of the cost of the item being purchased, usually between 2 and 3 percent. Also called the interchange fee, American merchants deal with a higher percentage than any other country.

Also, it’s currently illegal for stores to set a minimum purchase amount to its customers who want to pay with plastic. You and I know that many stores do this anyway, but it’s technically not allowed.

In both the House and Senate versions of the upcoming bill, the network operators will be limited to charging a reasonable and proportional fee, instead. Nobody has yet written down what would make the fee “reasonable,” but in this case, “proportional” means it would have to be based directly on how much it actually costs to operate the machines and the network.

In 2009, $48 billion in revenue was generated by interchange fees, but it cost only 20% of that to run the network. Compare that with Australia, which charges a maximum of 0.05% for each transaction, and whose merchant network shows no signs of crumbling.

The other likely significant change is a new ability for retailers to offer discounts to customers using cash or to set minimum purchase amounts to customers using plastic.

If these changes were made tomorrow, do you think retailers would see this as an opportunity to lower prices?

Reform Credit Card Swipe Fees, Robert Shapiro,, February 22, 2010

Published or updated May 24, 2010.

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About the author

Smithee formerly lived primarily on credit cards and the good will of his friends. He is a newbie to personal finance but quickly learning from his past mistakes. You can follow him on Twitter, where his user name is @SmitheeConsumer. View all articles by .

{ 30 comments… read them below or add one }

avatar 1 Anonymous

No, they are already selling their products at the higher cost, so I doubt that they would go backward in their pricing. I do believe that the retailer will take advantage of the ability to offer discounts for cash payments, but they may not make a big deal of it and the consumer may still have to ask for it. These rules may help to keep costs down in the long run.

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avatar 2 Anonymous

No, the retailers won’t pass on the savings – and the unintended consequence (at least one) will be that the companies need to make up that revenue and will turn to the consumer side of the transaction.

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avatar 3 Anonymous

As a small business owner whose customers pay almost entirely with credit cards, I am THRILLED to hear this. I pay thousands and thousands of dollars in fees to the credit card companies each year (about $5k last year), not to mention the monthly fees I have to pay for the “resellers” and all the other BS that comes with it like security testing and mandatory quizzes to make sure I know the CC agreements. I hope you all appreciate how easy it is for you to use your credit cards, because for those of us accepting them, it’s a huge (and sometimes expensive) hassle.

Customers don’t understand that when they use reward cards, it’s the merchants who pay for those things, not the CC companies. The percentage the CC companies keep on a “rewards” card is double what a regular card is, which is more money out of my pocket. Frankly, I think I should be allowed to charge an additional fee when someone uses a rewards card – let the companies offering those rewards pay for them, not me!!

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avatar 4 Anonymous

Kimberly, why in the world should the retailers pass on the savings? The 2-3% the CC companies keep is money that should have been going into the merchants’ pockets – money that WOULD have gone in their pockets, if you had paid in cash or check. That’s money they rightfully deserve. It’s a little selfish to suggest that the retailers should suddenly lower their prices just because the CC companies are taking away less of their profits.

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avatar 5 Anonymous

I worked in a business setting. All this law is going to do. Is get rid of reward cards and cause free checking to go away and some people might see an annual fee for their debit and credit cards. Merchants are just shifting the burden to the customers. The fees are tax deductible. Right now I have two free checking accounts. If they started charging a fee for the debit card or a high monthly fee. I would have to close one account. May even have to go back to paying by check or use Electronic ACH. If you make more profit, the more taxes you pay.

One advantage this law has. Is merchant can’t discriminate on what type of card you can use with one exception. Merchants can refuse bank card that have $10 billion or over in assets but must refuse them all. Merchant can’t pick and choose. If they take credit and debit card, they must still take smaller & medium size bank cards if I under the amendment correctly. I am hoping this amendment gets thrown out. I don’t want to pay high bank fees for my own money.

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avatar 6 Anonymous


You are not correct that the 2-3% is money the retailers should have. What is your profit margin? 10%. If the interchange fees were 20% would you just lose 10% per transaction? No. It might seem like that’s money you are losing but mostly, over time the competition causes prices to get set at the rate of all cost + reasonable margin. There are many things that go into costs. If your rent goes up, that’s a cost, if your light bill goes up thats a cost, if your cost of goods goes up thats a cost. In the short term, yes retailers eat costs all the time. But in the long term eventually there has to be a reasonable profit or people will get out of the business, decreasing competition and supply until prices can rise to the point where those who are left can make a reasonable profit. This is also true of credit card fees. They are built into your cost model, even though it might look like you are just losing out on extra profit, for the most part that is not really true. Since credit cards usage is ubiquitous now, they are mostly factored into the costs.

Now as to those worried that the retailers won’t lower their prices. You are exactly correct. They will not. It’s only 2% so they are not going to bother to lower that 2%. But what will happen over the course of the next few years is that competition will cause them to raise their prices less until that 2% increase in profit they get will be squeezed out. It could happen a lot quicker than that in some areas too. Lets say for example that a typical retail outlet makes a 10% profit after all their expenses. If they were selling 75% of their revenue via credit cards and their fees got lower 2% they would get an extra 1.5% in profit. This would raise their margin to 11.5%. Now all these retailers were willing to run their business at a 10% profit before and now they have extra profit. Business owners like to expand their business and they do this buy getting more customers to buy more stuff. There are really only two ways to do this, provide a better product or product your product at a better price. Since the products are not changing the only option they have is to compete on price and quickly that 10% standard profit margin will be used to compete on price by not raising prices as their costs go up (costs always go up). So they will hold their prices until they get back to the acceptible profit margin again. The competition will force this. Some will certainly do it and if others try to raise prices they will lose business.

So whether or not retailers quickly lower prices is irrelevent. Everyone likes to make a big deal out of it like the dirty retailers are just getting fat off of it and keeping it for themselves. The competition will quickly squeeze it out and we will all be better off if we can stop all these reward games which we are all paying for. We are paying 2% more for our products to get a 1% reward. But we feel good about it because we don’t realize we are paying 2% more.

Trust me if you drastically lower the interchange fees, that savings will quickly find its way back to the consumer after giving the retailers a very short term boost in profits.

And sorry Stacy, but as I explained her, you won’t be “keeping” that extra money very long. You will find that within a year or so your business will be running on the same margins it always did. That’s just the way competition works.

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avatar 7 Anonymous

You make some pretty ridiculous assumptions there. First of all, you’re wrong in assuming that most companies upsell everything 2-3% to accommodate for credit card processing fees. That may be done by some companies, but considering it’s a blatant violation of the contract we sign with the credit card companies, I doubt you’ll find much evidence of it. We simply accept it as a cost of doing business and move on.

Second, only a struggling business will keep their profit margin the same year after year. I want to make more each year than I did the year before – EVERY business wants that – so my profit margin will increase more and more. Having additional profit as a result of lowering costs is great, but I’m not going to pass that on to the consumer because that’s money that should have been in my pocket to begin with.

If interchange rates go down, and you see prices drop by a similar amount, then frankly that business was in breach of their CC processing contract to begin with, and they were effectively penalizing cash and check customers. The companies whose prices aren’t affected are the ones who were eating those costs – in my eyes, those are the business owners who have been acting most ethically and in the best interests of their customers.

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avatar 8 Anonymous

Why shouldn’t the burden be shifted to the customers? Hello!? If you’re the one using the card because you can’t/won’t pay cash, you SHOULD have to pay for that privilege. Why should merchants have to pay for you to use a credit card? That’s absolutely absurd. If you use a service, you should expect to pay for it.

Also, why do people seem to think tax deductible means free? At the very most, the deduction will save you about 30%, so the other 70% is still money out of your pocket. Pretty useless defense, in my opinion.

Also, merchants already can’t discriminate against which card you use. We all sign long contracts with the CC companies stating that we will not offer discounts for cash purchases, we will not pass on the cost of the fees to the consumers, and we cannot refuse to accept cards with higher transaction/interchange fees (among various other rules).

Credit cards aren’t “your own money.” They are, by definition, credit, meaning that someone else is paying your bills for you. If you don’t want to pay fees to use your own money, pay in cash.

Sorry Greg, you’re living in a dream world. How this change has any affect on checking accounts is absolutely beyond me

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avatar 9 Smithee

For what it’s worth, as a self-aware consumer, I am much more likely to return to a store that accepts plastic. Carrying cash is a hassle.

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avatar 10 Anonymous


I totally agree with everything you have said. I don’t own my own business, but I work at a small business with only about 9 employees. I actually had a glimpse of the total transaction fees for the year. Completely outrageous. We don’t raise prices on our items either.

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avatar 11 Anonymous

@Joshua & Stacy,

You are missing the point. I am not saying you consciously say well it now costs me 2% to take payments by credit card where as 15 years ago it didn’t therefore I raise my prices 2%. Thats like saying your electric bill raises your costs 1% and so you immediately raise all your prices 1%. Thats not how it works. You eat it. I understand that. But eventually if you eat everything you go broke, so prices have to go up. If for some reason your electric bill raised your costs 1% but no one else seems to be paying higher electric bills then you are never going to be able to raise your prices for that because the competition will underprice you. But if they are all seeing it, eventually the prices will go up. If costs continue to squeeze out profit no one will be attracted to whatever your business is anymore and then people will get out of your business and that will create a supply gap which will allow the remaining businesses to raise prices.

I am repeating myself here but this is just the way economies and competition work. Its not specific to your business and you might not think it is happening because you can’t point to the point in time your costs went up and then directly link that to being able to raise your prices. It doesn’t happen immediately. It might not happen for years. But eventually the economy equalizes the costs and incorporates them into the cost of the good.

And this isn’t about charging more for cash versus credit. I am not saying you are raising your prices for credit transactions. The economic competitive environment eventually factors in all costs of doing business and when 75% of your transactions have a 2% surcharge, that costs has to get factored in. If you are required to charge the same for cash and credit, that is no problem, the system will factor in the cost of doing business across the entire payment system and just adjust prices for all transactions accordingly.

You can believe what you like but if those fees go away, within a few years your extra money will be squeezed out. If you grow your profit margin that is great and thus you might not think it got squeezed out because you can’t see it, but it did get squeezed out.

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avatar 12 Anonymous

“Also, it’s currently illegal for stores to set a minimum purchase amount to its customers who want to pay with plastic. You and I know that many stores do this anyway, but it’s technically not allowed.” Really? I had no idea! The only places I ever see this are at small, local “mom and pop” types of shops. I just assumed it was because the fees were too large for them anyways. How come no one is enforcing this rule?

“If these changes were made tomorrow, do you think retailers would see this as an opportunity to lower prices?” No, they probably need the extra pennies with the poor economy.

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avatar 13 Anonymous

“Why shouldn’t the burden be shifted to the customers? Hello!? If you’re the one using the card because you can’t/won’t pay cash, you SHOULD have to pay for that privilege. Why should merchants have to pay for you to use a credit card? That’s absolutely absurd. If you use a service, you should expect to pay for it.”

This statement is quite rediculous. If you truly believe that credit cards are only beneficial to consumers, and it’s a service that they should be paying for but that you are currently paying for and that it provides you no benefit then why do you accept them? You don’t have to take credit cards. Cash and checks are still considered legal payment devices you know. Just refuse to take credit cards and then you will be fine.

Of course you take them for 2 reasons.

1. Is that that is the method most people are capable of paying with. If you required cash, too many people don’t have it, don’t carry it or don’t want to pay with it so they won’t buy your stuff if you don’t. Thus it is more beneficial for you to get a sale and keep 98% of the price than to not get a sale. That’s a benefit to you.

2. Once you accept a credit card payment and get a signature from them, your money is secure. Even if they have no money to pay and stiff the bank, you still get paid. This is not true with bounced checks and counterfeit money. So your funds are more secure, that’s a benefit to you as well.

Again, keep in mind I am in favor of eliminating these fees. I think they are way too high and that the issuing banks are just squeezing money out of the system. You seem to think they are squeezing it out of the merchants. I think that’s the same fallacy as people who think that corporations pay taxes. In the end, over the long term, the consumer pays for everything. Taxes, merchant fees, stealing, mistakes, oil spills, everything. Sure there are times and reasons why certain things get eaten by a business for a while, but over the long term, prices adjust to pass costs on to the consumer ……. All of the costs.

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avatar 14 Anonymous

Oh, so we’re at the “If you don’t like it then leave” argument? As in, if you don’t like the government, then move somewhere else? If you don’t like credit cards, just don’t take them? Sure, ok, great advice, I’ll just stop taking credit cards and lose likely half of my customer base and tick off the other half. Let’s be mature here, just because you disagree with something doesn’t mean you can or should just run away from it.

You’re making blanket assumptions and generalizations that are barely more than predictions. Each industry is different, each business is different, and it will affect different businesses in different ways. You’re basically assuming that you know how every business runs its finances and handles its cost and profit margin and prices. To make such a generic hypothesis and state it as fact is not only naive but it’s useless for discussion.

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avatar 15 Anonymous

“I’ll just stop taking credit cards and lose likely half of my customer base”

Thank you for admitting they have benefit to you by confirming my reason #1 for taking them.


“You’re making blanket assumptions and generalizations that are barely more than predictions.”

No, I am talking about basic micro-economic theory. If you are of an opinion that differs from what is taught in economics textbooks, that is fine. You can state that you do not believe in the supply-demand curve.

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avatar 16 Anonymous

Suddenly we’re talking about supply-demand now? Where did that come from? Look, it’s clear that you believe you can predict what every business is going to do financially if this amendment passes. Good for you. I guess time will tell if your crystal-ball prediction will come true.

My point is that interchange fees belong with the consumer, not with the businesses, but since the businesses currently carry the burden of the fees, the businesses should and will be the ones to see the savings here.

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avatar 17 Anonymous

Yes we are talking about supply demand. Competition sets supply and users set demand and that gives you the price. competition changes in response to price which changes supply which changes price …. Are you getting deja vu, jeez I am, for like the third time.

You are welcome to the fees if you can keep it. I recommend every business keep every damn cent of profit they can. Why just keep those fees, raise your prices, keep more. Why do you set your prices where you do? Oh right, competition, supply demand. Obviously.

So keep all those fees. Every cent. For 20 years. I fully welcome it. And that is not sarcastic, you should make as much as you possibly can.

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avatar 18 Anonymous

In the end the consumer pays for everything. Right now the consumers are paying the transaction fees indirectly. Any expense is built in to the cost of goods or services.

Of course individual merchants may or may not pass along the savings from lowered transaction fees. While some might pocket the profit, others will cut prices. Long term Apex is right, the market will rebalance based on market conditions.

Stacy, what kind of business are you in? Do you think all your competitors will just pocket the difference if transaction fees are lowered? Or will some of them use it as an opportunity to cut their prices? If transaction fees go down 2% and your competitor then lowers his prices 2% then how will you react?

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avatar 19 Anonymous

Hey now, thats not fair. Competition is related to supply-demand and we are apparently not talking about that. :) We are talking about a special kind of cost that is different from all other kinds of costs because it is a law of the universe that this cost is never able to have any impact on price.

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avatar 20 Anonymous

Merchants will not lower prices in the short term. After awhile a few might due to competitive pressures but I don’t see that being widespread. Even if they don’t lower prices, I would rather see them pocket the difference for their service rather than giving it to the middle man.

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avatar 21 Anonymous

How does it affect a checking accounts. One way is debit cards. Another way if the law passed would mean very few banks would have free checking anymore. The banks will make up for the lost fee anyway they can. In fact, with the last change. A lot of companies started charging Annual fees and lowering people credit line for credit cards.

This is what will happen
Debit card annual fee
More Credit card annual fee
Signature transaction fee
Pin transaction fee (some back already do this)
Less free checking accounts

If your tax person told you, you couldn’t deduct the fee. He/she is wrong. You can deduct the full fee. I use to have a small business as well. Any fee I paid out (Card or otherwise), I could fully deduct.

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avatar 22 Anonymous

When I was a child, before super markets, big box stores and credit cards, my mom & pop ran their grocery store the same way all the other merchants in our small town ran their businesses.They provided free credit to their steady customers. They also had to deliver purchases to their customers free of charge. The cost (and losses) for small town merchants under the cash/check system was more than 2% of the goods they sold. Bookkeeping and banking was an onerous chore in those days as well. Think mountains of coins that had to be counted and rolled every day and clerks who made math mistakes.
My parents and grand parents prices had to stay competitive because much of their merchandise was also sold at the drug store, the mercantile, the gas station and the feed store. Not that they wanted to sell small quantities of motor oil, magazines and bandannas, but what the customer wanted…
Today my parents would complain about cc charges but they would not return to the old fashioned cash, check, charge system.

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avatar 23 Anonymous

If competition automatically lowers prices to cost + margin, why are the interchange fees so high in the first place?

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avatar 24 Anonymous

BTW I do believe that (despite Stacy’s protestations), but I am honestly curious how we ended up where we are today, with interchange fees much so higher than in other countries. I would love for our country to switch to all-electronic money, but a 2% fee on every transaction may be too much drag to let that happen.

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avatar 25 Anonymous


That’s a great question. Actually that’s a superb question. Visa and Mastercard control 80% of the market. They are basically the same entity and only just recently listed as two separate entities on the stock market. They set the price for the interchange fee. That means they do not allow banks to compete for interchange fee rates. And even if they did, why would a bank want to do that, the merchant would get the benefit but only when accepting cards issued by banks that took a smaller interchange fee.

If Visa and Mastercard wanted to encourage smaller interchange fees they would prefer and only give banks accepting the smallest interchange fee the right to issue cards for their network. This would drive down interchange fees to a more reasonable market based level and merchants and inevitably consumers would eventually benefit.

But Visa doesn’t care about merchants or consumers. The more cards they have out there the more revenue they make off their cut of the interchange fees (which is actually tiny compared to what they give to the banks who issue the cards). So to ensure they get the most number of cards into the market they set the rate at a relatively high level to give banks large incentives to issue cards.

Visa and Mastercard are using their near monopoly power (allagopoly) to basically price fix the interchange fee and remove all market forces from that end of the transaction.

Its also worth noting that Visa first set the interchange fee at 1.95% in 1971 when there were probably 1/100th as many transactions as there are today. Banks found that to be a sufficient compensation then when the network was much smaller, less efficient and had far less economies of scale from which to make profits. Now the network is ubiquitous, and does a volume that is so large that profit exudes from the system. And yet the interchange rate remains at 2%.

This is also comparable to the long distance allagopoly that was run by AT&T, Sprint, & MCI. Long distance rates were solid at 15-25 cents per minute for a long time. Then in the mid 90s congress forced the allagopoly to open their lines to usage by third party long distance providers and allow outside competition. You may recall this created the explosion of 10-10 numbers for long distance and they drove the average price of long distance down to about 3 cents a minute. And they made profit doing it. It means the near monopoly of the big 3 long distance companies had been over-pricing their product for years simply because the system kept the true market forces of competition from finding the real price.

Visa and Mastercard are doing the same thing and its time to take them out to the wood shed.

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avatar 26 Anonymous

Just for the record, when it’s mentioned that it’s “illegal” to 1) set minimum charge amounts and 2) add a direct credit card surcharge, it is because those actions violate the merchant agreement with Visa/MasterCard/Discover/American Express. I am unaware of any law in the U.S. that actually makes those actions “illegal” though… it’s possible that there could be some state/municipality laws on the books that I’m not aware of.

This debate reminds me of this:

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avatar 27 Anonymous

No. We don’t need anymore money “games” from retailers. Once they start something like this, there will no end to it. It’s like the “rebate” scam. It used to be that retailers submitted the rebates and passed the savings on to the consumer. Now the retailers don’t want to wait for their money. Let the consumer wait and brainwash the consumer into believing that rebates are a good thing. They are a cash cow for manufacturers. Fact is that most people forget to mail in the rebate or the conditions of the rebate are so ridiculous that it’s not worth it. The manufacturers depend on that so they don’t have to rebate anything. I, for one, never fall for the rebate game. I could care less that I get a lousy $20 rebate that I have to wait 4 months to collect. I’ll buy the item somewhere else where it’s $20 cheaper without playing with rebates….like on line.

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avatar 28 Anonymous

What are you referring to?

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avatar 29 Anonymous

I am not sure of when the other comments on this forum were made, but I have had to educate our book keeper on merchant fees. She doesn’t read, doesn’t do research and frankly isn’t much of a book keeper. And apparently neither her or our accountant are aware that fees, along with any other banking charge or fee, are tax deductable. The owners, spurred on by the book keeper, got their knickers in a wad about adding a fee charge. I started getting complaints from customers ( i do all the sales and quoting here) about this charge. I looked into and lo and behold you can’t do that. I also pointed out the simple math that you aren’t recovering those fees by adding them to the bill. In fact you are increasing the amt you are paying the CC company because now the total is higher. You know, basic rocket science.
We are a small company and the fees are ridiculous but that is what tax deductions are for. At least we don’t have sales tax in OR so working that out from the merchant fees isn’t an issue.

And I don’t have anytype of schooling economics but I do understand supply/demand and micro /macro economics.

Interesting commentary this.


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avatar 30 Anonymous

If your bookkeeper didn’t know that bank and credit card processing fees are tax deductible, you SERIOUSLY need a new bookkeeper. There’s no telling what else you’re mistakenly paying taxes on!

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