Candice Choi

Merchants, card issuers’ feud over swipe fees coming to a register near you

By Candice Choi
Associated Press / October 28, 2010

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The customer isn’t always king. Sometimes he’s just a pawn.

The feud over the so-called swipe fees merchants pay banks when customers use plastic is reaching a crescendo and will probably hit registers in coming months.

Both sides — merchants and card issuers — insist they are fighting for the best interests of the consumer. At stake are billions of dollars in swipe fees, otherwise known as interchange fees.

Here’s what you should know:

Q. First off, what are interchange fees and why is there so much talk about them?

A. Let’s start by clarifying a common misconception. Contrary to popular belief, Visa and MasterCard don’t issue credit cards; they run the networks that process transactions made using those cards.

The use of their networks comes with costs, which are paid for in a complex way.

Every time a customer pays with plastic, the merchant pays a fee to the bank or credit union that issued the card. The fee typically ranges between 1 percent and 2 percent of the purchase amount.

Visa and MasterCard don’t get a direct cut of this fee. But they make money through deals with the 16,000 or so banks and credit unions that issue cards.

So on one side of the battle line, you have card issuers and payment processors arguing that plastic is convenient for businesses and helps drive up sales — a perk they should pay for. On the other side are merchants who say they’re paying too much and should be allowed to steer customers toward payment options that cost them less.

Q. So what’s different at the register right now?

A. Under regulations that went into effect in July, merchants can legally set a $10 minimum for credit card purchases. It’s not clear how many merchants will take advantage of the option. You’re more likely to run into new minimums at the corner deli or other small stores.

Q. What does the Justice Department’s settlement with Visa and MasterCard mean for consumers?

A. Earlier this month, Visa and MasterCard agreed to let merchants offer incentives for customers to use a card from a particular network. So, for example, a retailer might offer a discount to anyone who pays with a Discover card, which tends to have lower interchange fees.

The changes are part of a settlement Visa and MasterCard made with Justice over allegations the companies were trying to insulate themselves from competition with their policies.

Q. Does this mean merchants will stop accepting credit cards, or maybe rewards cards, because they have higher interchange fees?

A. No. Visa and MasterCard can still require merchants that use their networks to accept all their branded cards. It’s just that retailers can now offer incentives for lower-cost cards.

Candice Choi is a personal finance writer for Associated Press.