While consumers value the convenience and flexibility that credit and debit cards provide, the benefits come at a price for restaurant operators and, ultimately, their customers. Every time a customer pays with a credit or debit card, the business pays a fee — commonly called a “swipe fee” — to the bank that issued the card.
While the amounts of fees vary, the average credit card swipe fee in the industry is over 4% — a substantial amount when industry profit margins average about 3 to 5 percent. Merchants often pay both a percentage of the sale and a flat fee per transaction. Main Street businesses pay about $50 billion per year in swipe fees on credit and debit card transactions.
A lack of competition in the credit card market complicates the situation for merchants. Visa and MasterCard are the dominant card companies, with their cards accounting for about 80 percent of all transactions. Between them, the two companies have more than 250 credit card swipe-fee rates. Merchant statements are complex, making it difficult for many merchants to understand the costs they incur as a result of accepting the cards, and there is no way for a merchant to really know if they are getting charged the correct rates.
The National Restaurant Association supports measures to ensure credit and debit swipe fees are fair, transparent, and understandable by merchants and consumers.
Challenging excessive swipe fees
The National Restaurant Association has been a proponent of both legislative and legal solutions to the problem of excessive swipe fees. In 2006, the Association became a named class plaintiff in an antitrust lawsuit against MasterCard, Visa and their member banks over excessive swipe card fees. The Association, the only plaintiff in the case representing the restaurant and foodservice industry, objected to a settlement proposed in 2012 over concerns that the settlement did not protect restaurateurs from excessive and increasing swipe fees and would negatively impact the emerging mobile payments marketplace. The proposed settlement is still pending in the Eastern District Court of New York.
The most significant legislation to curb excessive debit swipe fees is the Durbin Amendment, passed in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Durbin Amendment ordered the Federal Reserve to issue regulations to ensure debit card swipe fees charged by the largest U.S. financial institutions — those with $10 billion or more in assets — are “reasonable and proportional” to the cost of processing the transaction. The amendment also requires more competition between networks on every debit card.
The Federal Reserve issued a proposed rule that contemplated a 7 to 12 cent reasonable and proportional rate. However, the Federal Reserve’s final rule limited debit card swipe fees to 21 cents per transaction — less than the average 44 cents that merchants previously paid on signature debit transaction, but significantly higher than the 12-cent limit the Federal Reserve had proposed in 2010. Both alternatives are way too high given that the Federal Reserve’s own data demonstrates that over 90% of covered transactions cost less than 2 cents to process.
The National Restaurant Association, along with the Food Marketing Institute, the National Association of Convenience Stores, the National Retail Federation, Boscov’s Department Store and Miller Oil Company, filed a lawsuit against the Federal Reserve, arguing that the final rule did not follow Congressional intent when it issued the rules. In July 2013, the U.S. District Court, District of Columbia, ruled in favor of the NRA and other plaintiffs, stating in its opinion that the Federal Reserve had disregarded Congressional intent. The Federal Reserve appealed the decision and the U.S. Court of Appeals for the District of Columbia overturned the U.S. District Court decision on March 21, 2014. The NRA is reviewing its legal options in the wake of the U.S. Court of Appeals decision.