New Jersey's potential ban on credit card surcharges has faced few hurdles in the state Legislature, despite fierce opposition from retail groups.
But the surcharge issue is only a peripheral battle in a complex, years-long war over the fees credit card companies levy on retailers for each transaction they process. Those fees — called interchange or swipe fees — are a source of revenue for credit card companies and a source of frustration for retailers. And they've prompted no shortage of battles before judges and lawmakers alike.
John Holub, president of the New Jersey Retail Merchants Association, said retailers are the victims of an "oligopoly" in which a handful of giant companies are free to raise swipe fees without customers' knowledge or fear of competition.
"As a retailer, you have to accept Visa and MasterCard — you have no choice — but meanwhile, you're unable to negotiate the fees that they charge," Holub said.
According to California-based Nilson reports, Visa and MasterCard alone made up more than 80 percent of the volume of debit and credit card purchases in the United States in 2011.
Holub said swipe fees, which are designed to cover the cost of the electronic transaction, continue to rise, particularly for credit cards that offer reward programs. That's why Holub wants the Legislature to curb swipe fees, instead of banning retailers from passing the costs of those fees on to customers, as per the current proposal.
Richard Arnold, an attorney representing major retailers like Kroger, Walgreens and Stop & Shop, said credit card companies have historically banned retailers from disclosing swipe fees, leaving customers in the dark on the costs borne by merchants.
"The rules that Visa and MasterCard and American Express have inhibit that communication," he said. "There are hidden fees inside of every credit card transaction that cardholders are absolutely unaware of."
But Trish Wexler, a spokeswoman for the Electronic Payments Coalition — which represents Visa, MasterCard and most major banks and credit unions — said there's a problem with those arguments.
"It's not true that anyone has a gun to retailers' heads, that they have to take these cards," she said. "Plenty of retailers choose to have a cash-only business."
Stores, she said, take plastic because it helps their bottom line.
"Retailers who accept cards get more sales, and those customers spend more on their cards than they do when they pay with cash," she said.
The fight over swipe fees isn't new. Retailers sued Visa and MasterCard in 2005, claiming the card companies were colluding to keep fees high. A judge last year granted preliminary approval to a proposed settlement, under which merchants taking Visa and MasterCard before 2004 would be entitled to a share of $6.05 billion from the credit card giants. The companies also agreed to $1.2 billion in temporary fee relief, and a number of policy changes designed to give retailers leverage.
That's where New Jersey's surcharge fight comes in.
As part of the settlement, Visa and MasterCard agreed to change their policies to allow retailers to pass swipe fees on to customers in the form of surcharges. That change took effect Jan. 27, and within a week, lawmakers here were working to join 10 other states in banning such surcharges.
Wexler said retailers can use surcharges as a bargaining chip when negotiating fees. She said the settlement also gives retailers new rights to join other retailers and collectively negotiate fees.
A federal judge will hear objections to the proposed settlement in September before deciding whether to finalize it. The judge has the final say over the injunctive relief portion of the settlement, which includes the policy changes and temporary fee cuts. However, merchants entitled to damages because they took the cards prior to 2004 can opt out of that portion of the settlement and file separate lawsuits if they choose.
Holub said the settlement doesn't do enough to remedy the alleged price-fixing.
"The irony of it is, the lawsuit filed by retailers was intended to lower swipe fees, and somehow it's blown up into this fear that retailers are going to start surcharging," he said.
Holub said he hasn't heard from any retailer interested in adding surcharges, because doing so would drive away customers. But that view isn't universal within the retail community. Arnold, the attorney representing a number of big-name retailers, supports the settlement. He said surcharges would be one tool retailers could use to help guide customers to lower-cost cards, such as debit cards. Debit card fees were capped as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2011.
In fact, Arnold said, when Congress first legalized credit card surcharges in the 1970s, consumer groups supported the change, though it never had an impact, since credit card companies banned surcharging contractually.
Arnold said swipe fee transparency will enable retailers to use other tools besides surcharges — like discounts or in-store rewards programs tailored to customers that use low-fee cards.
Wexler said the settlement offers important concessions to retailers.
"What these retailers really want is for Congress to get involved and to repeat (Dodd-Frank) for credit cards," she said. "That's why they're objecting to the settlement."
Holub doesn't deny he wants legislative action, though he said it doesn't have to come at the federal level.
"I think one silver lining with this issue is I think we have gotten some interest from legislators regarding swipe fee antitrust reform," he said, "because the state can take action."
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