Most Americans swipe their credit cards in the checkout line without thinking twice. But our ability to do so is under attack.
Seven years ago, a group of stores launched a lawsuit alleging that credit card issuers unfairly dictate the so-called swipe fees. Although the parties agreed to a settlement last summer, some stores are threatening to renege. They should give up the fight.
Competition in the payments industry is strong. Stores are not constrained by a Visa-MasterCard duopoly as they claim. Large stores, such as Wal-Mart, already negotiate special fees with the credit card issuers. Visa and MasterCard also face competition from Discover and American Express. And companies like PayPal and Dwolla are expanding their share of the payments market every day.
In the face of such competition, credit card networks can hardly impose high rates on stores with impunity. If fees are too high, stores will be less likely to accept credit cards. If they’re too low, cardholders will have to pay to maintain credit card companies’ networks through higher fees on their cards.
Swipe fees underwrite many benefits for customers, stores and the economy.
For starters, the instantaneous processing of credit card transactions guarantees that merchants will be paid. Quick transactions let workers serve customers faster and leave stores with less cash, cutting theft.
Swipe fees have also allowed credit card companies to drop annual fees by half since 1990. Moreover, swipe fees empower the card companies to offer rewards programs, such as “cash back” or frequent-flier miles.
Stores argue that they’ve raised prices to cover swipe fees and that lower swipe fees would translate to lower prices. But the U.S. Government Accountability Office found “no conclusive evidence” that prices declined after Australia capped swipe fees in 2003. The GAO did find, however, that credit card issuers reduced rewards and raised annual fees.
Because of the settlement, Visa, MasterCard, and the nation’s biggest banks are set to pay $7.25 billion to retailers across the country. Stores can now negotiate collectively over future swipe fees.
The costly legal battle over swipe fees was a threat to growth in the marketplace. This settlement represents a good outcome and allows the innovations that have occurred in the payment industry to continue.