Credit Card Settlement May Side-Swipe Consumers

NEW YORK ( LowCards.com) -- Retailers reached an antitrust settlement on interchange fees with Visa ( V), MasterCard ( MA) and several large banks that will be good for merchants, but may hit cardholders with higher prices and drastically decreased credit card rewards. Indeed, if the settlement concludes another round in the battle over interchange fees, it begins a new round with the merchants and banks circling each other and trying to figure out how to pass on the costs to consumers without generating too much backlash.

For consumers not even aware that interchange -- or "swipe" fees -- were being charged, here's the back story leading up to the landmark settlement and the potential side-swiping of consumers that could occur as a result of it:

When consumers swipe a card for payment at the register, Visa and MasterCard charge the retailer a fee, commonly called an interchange or swipe fee, every time a credit card or debit card is used for payment. The card processor collects the fee and splits it with the bank that issues the card. The fee on a credit card typically ranges from 1.5% to 3% of the transaction, depending on the merchant and the type of card. Merchants have fought against this fee because it cuts into their profits and is one of the biggest costs of running a business. Merchants hope this settlement increases transparency and forces card processors to reduce the amount they charge for interchange fees.

Credit card processors defend the fee because it covers the expense of the processing the card, the risk of fraud, and the cost of providing funds while payment is pending.

The $7.25 Billion Settlement
Credit card companies have agreed to reduce swipe fees for eight months. This temporary adjustment is valued at $1.2 billion by plaintiffs' lawyers. In addition, MasterCard, Visa and major banks, including JPMorgan Chase ( JPM) and Bank of America ( BAC), agreed to pay more than $6 billion to settle accusations that they engaged in anticompetitive practices and price fixing in payment processing. Visa will pay $4.4 billion while MasterCard will pay $790 million.

The settlement did not include American Express ( AXP) or Discover Financial Services ( DFS) because both of these issuers already permit swipe fee surcharges, as long as merchants impose surcharges on payments with other rival cards.

A judge in the U.S. District Court must still approve the settlement and this may not happen until at least the end of the year. Merchants cannot assess a surcharge until this approval and there will be a cap on the amount they can charge. There are ten states that prohibit merchant surcharges and retailers in those states must still abide by state law. These states are: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas.

The settlement may not completely end the battle over swipe fees. The National Association of Convenience Stores, a trade group representing more than 3,700 merchants and a plaintiff in the lawsuit, rejected the settlement and hired a law firm to get a better deal. It is protesting that the settlement still leaves the issuers with too much control over swipe fees.

The settlement does not apply to debit cards. Last year, debit card swipe fees were basically cut in half by regulations in the Dodd-Frank financial reform law.

Effects on Consumers
As with past regulations and rulings that affect bank revenue, this settlement could cost consumers. If the merchant passes along the fee, cardholders could pay as much as 3% more when they pay with a credit card. If a cardholder carries a balance from month to month, the cardholder will also pay interest on the surcharge.

Cardholders who take advantage of credit card rewards could see dramatic cuts and changes in their reward programs. Historically, swipe fees helped pay for credit card reward programs and a reduction in swipe fee revenue could eventually lead to changes in credit card rewards. Even if the cardholder paid off the balance each month and never paid interest, the credit card issuer still made money from the swipe fee every time the card was used.

Banks offered rewards with debit card usage, but most banks ended their debit rewards program as soon as the interchange fee cuts took place on debit cards. Credit card rewards are too popular to discontinue, but issuers will try to find ways to make up for this lost revenue. This settlement comes at a time when card issuers are giving record rewards to attract customers with the highest credit scores. But those days may be over.

There is a chance that merchants may offer a discount to customers who pay with cash. Gas stations already do this.

Ideally, retailers will find a way to pass some of the credit card swipe fee savings to consumers. However, the debit card swipe fee was cut in half almost a year ago, and we haven't seen much evidence that the savings trickled down to consumers.

As an African folk saying goes, "When two elephants fight in the grass, it's the grass that suffers."

--By Bill Hardekopf

Bill Hardekopf is chief executive of LowCards.com, which compares and rates more than 1,000 credit cards. He is the co-author of "The Credit Card Guidebook."

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