Inside the State Fight Over 'Swipe Fees'

Credit card corporations and banks are having a meltdown over slightly lower costs for consumers.

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The Senate, which Democrats control for a few more weeks, held a hearing on Tuesday to discuss the Credit Card Competition Act, a bipartisan bill that aims to reduce interchange fees, or “swipe fees” in the popular parlance.

Swipe fees, the proceeds of which are collected by the banks that issue credit cards, while the credit card corporations collect network fees, are assessed every time you pay a merchant with a debit or credit card. It’s what those financial institutions charge for facilitating the transaction in which you and the merchant just engaged.

Swipe fees total $126 billion per year, and at least a hefty portion of that is almost certainly passed on to consumers in the form of higher prices, or if it’s not passed on, is swallowed by sellers, costing them revenue and profit.

The real kick in the teeth is swipe fees have doubled over the past decade, largely as a result of the monopoly power of Visa and Mastercard, which control about 80 percent of the payment processing market and face no real competition on prices, so can raise them relentlessly without losing market share. Merchants claim that swipe fees have become their second-highest cost after labor, outpacing items such as rent and utilities.

The Credit Card Competition Act, again, is bipartisan, but I have no idea if it will be passed by a lame duck Congress. But the hearing did remind me that — as is often the case — state legislators have taken aim at swipe fees, too, leading the way while the federal government dithers. And the response by banks, credit card corporations, and a federal bank regulator is an important reminder of the hyperbolic nonsense big corporations throw around when their money geysers are threatened.

This year, Illinois Gov. J.B. Pritzker signed into law a relatively modest swipe fee reform. Once enacted in July, instead of applying the swipe fee — which, remember, is assessed as a percentage of the transaction — to the entire cost of a purchase, Illinois merchants will be allowed to exclude items such as taxes and gratuities, slightly lowering the swipe fees they’ll pay. (In exchange, the state also reduced the ability of retailers to benefit from a sales tax boondoggle I’ve explained before. That’s not a major part of the story, though it is good news.)

Illinois’ swipe fee reform will provide some small savings to Illinois retailers and consumers, and result in slightly lower incomes for financial institutions. But from the response of the corporate lobby, you’d think Illinois lawmakers had mandated sacrificing the first-born of every credit card company executive.

One spokesperson for a credit card company front group promised that “no stone will be left unturned to correct this draconian disruption to the safe, secure, hassle-free credit card system Illinois consumers, small businesses and community financial institutions rely on every day.” Banks and trade groups have all sued to stop the law from going into effect, claiming it will have grave consequences and undermine the entire banking system — despite the fact that those same companies operate in Europe, where swipe fees are capped at a much lower rate than retailers pay here in the U.S.

The banks also claim that implementing the law is simply too hard, technologically, despite their nearly limitless resources, a common corporate tactic to try to evade regulations they don’t like.

The financial firms fighting Illinois’ law also received an assist from a federal bank regulator, the Office of the Comptroller of the Currency. The OCC sided with the banks and the credit card corporations, claiming that Illinois’, again, very modest reform, would dismantle the entire national banking system if allowed to stand. The Illinois law “significantly interferes with federally-authorized banking powers that are fundamental to safe and sound banking,” the OCC said.

This is not the first time that the OCC has waded into state law. During the buildup to the financial crisis in 2008, several states tried to tighten regulations around subprime mortgages, the financial instruments at the heart of the banking meltdown. The OCC stopped them, as I wrote about more than 15 years ago (and now I feel old, woof), and then disaster struck.

Not that I think swipe fees will cause a market crash or anything on the level of the subprime mortgage crisis, but it’s simply worth remembering that bank regulators, especially at the federal level, focus on preserving bank profits, often at the expense of consumers or small businesses, and that corporate executives and their allies will go to great lengths to prevent popular policies that lower their profits, even by a tiny amount, from passing into state law, because a copycat effect always follows such successful efforts.

Now the interesting wrinkle in this policy battle is that not all the proponents of lower swipe fees are small. Big box stores such as Target and Walmart don’t want to pay them either, and often come support advocates pushing for swipe fee changes — meaning this time, perhaps, a corporate titan with at least some power to offset Wall Street is in the game. To be determined is how useful or effective they intend to be.

But none of the internecine corporate warfare should distract from the fact that swipe fee reforms can help both consumers and local businesses in the here and now, if they go into effect, and that they’re broadly popular. “This is a commonsense measure that helps bring down costs for Illinois families and retailers,” said Illinois State Sen. Cristina Castro. “And it is something that is starting to gain ground in other states.”

Indeed, several other states, including Pennsylvania, Georgia, and Tennessee, are examining swipe fee changes. I’d guess that Illinois’ law, if it stands, will become a popular model to emulate — but enabling it to stand is going to be quite the battle.

Editor’s note: This post has been changed to clarify that banks collect interchange fees, while credit card corporations collect other fees.

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SHAMELESS SELF-PROMOTION: I talked to Sherwood News about why I think state attorneys general are going to step up to fight the expected merger boom that will result from the incoming Trump administration’s laxer view of antitrust law. Read it here.

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UPDATE: Philadelphia recently became the second U.S. city to ban the use of algorithmic price-fixing software to set rental housing prices. The organization where I work, the American Economic Liberties Project, got a nice shoutout in the Wall Street Journal for our role helping legislators who want to tackle the issue. You can learn more at our End Rental Price Fixing campaign hub, as well as read my previous writing about this problem.

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SIMPLY STATED: Here are links to a few stories that caught my eye this week.

• A proposed bill reforming the live events ticket market in Massachusetts could lock in Ticketmaster’s monopoly, even as the Massachusetts attorney general is suing Ticketmaster for being a monopolist.

• Houston’s tax increment reinvestment zones are helping more affluent parts of the city, rather than poorer ones, which is precisely the opposite of what they were intended to do.

• Arizona Attorney General Kris Mayes intends to continue her more aggressive antitrust enforcement, even if federal enforcers back down under the Trump administration.

• Colorado’s new law limiting the costs that monopoly utilities can pass on to customers is working.

• Michigan House Democrats used the waning days of their majority — which they lost in the election — to pass a tax handout for Big Tech data centers.

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— Pat Garofalo