Swiping fees, also known as interchanging fees, were originally designed to protect consumers against fraud and to reduce the burden of overhead costs. Merchants using credit card services have been increasingly agitated by the idea that banks are using swiping fees for profit, however, which has spawned the creation of the Durbin Amendment to the Dodd-Franklin Act. While some sing it’s praises, others are not so sure that the amendment is used as intended. Instead of creating more competition in the credit card services sector, many people believe it is feeding into a duopoly.
Visa and MasterCard are the two strongest competitors in the market and essentially set all transaction fees for merchants. While some opt out of accepting these cards due to what are perceived as outrageous fees merchant fees, doing so is likely to hurt business success. Only accepting cash is reported to drive customers away to competitors who offer the convenience of credit card use.
Credit cards are inherently more secure the cardholder, and their payment history can be tracked. However, without a cap, it seems like the rise in merchant swiping fees would never end. The Durbin Amendment sought to introduce mandatory competition by law and to introduce a cap in fees to correct the impossible duopoly created by MasterCard and Visa. Interchange fees in Europe are considerably lower after anti-trust regulation was implemented, seemingly the inspiration for the Durbin Amendment.
If this was such a great idea, then why are so many people now against it? Well the amendment’s policy makers will stand beside it until it dies, however, critics feel the duopoly can’t be resolved with a simple blanket regulation from the federal government. Banks argue that they used the profits made from swiping fees to fuel rewards systems and free checking accounts to their customers.
Now these perks which used to cost an account holder nothing are being charged a percentage or flat rate per month to hold the account. Most card issuing banks took about 1.3% of every dollar spent each year from swiping fees, especially by merchants who accept credit cards online. Once, it was a source of $3 billion a year for banks such as Bank of America.
Now it seems that the new regulation will cost the industry more than $6 billion–a substantially hard hit. To top it off, no one has really seen the decrease in retail prices among merchants that was promised by proponents.
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Guest post is provided by Charge.com Payment Solutions, Inc., providing credit card merchant account services to small businesses. Visit their website for more information.
