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Businesses contemplate passing credit card swipe fees to customers in surcharges or cash discounts

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Posted at 6:00 AM, Jul 09, 2024

BALTIMORE — Customers are noticing additional fees or a cash option on their checks. This is so businesses can offset credit card swipe fees.

Swipe fees, or interchange fees, are how much Visa, Mastercard, and other card networks charge a merchant when a customer uses a credit card to make a purchase.

“Three to 4 percent of the sale is part of our processing fees,” said Julianne Sullivan, CEO and owner of Bella’s Liquors in Annapolis, Md. “These fees are my second highest operating expense. My first highest is, obviously, payroll with all my people, and my second highest is my credit card fees that total almost $100,000 a year.”

And in the last several years, Sullivan said these fees have gone up. “Fees went up 13.5 percent and my sales went up 3 percent."

She’s trying to find ways to stay profitable without passing along these costs to customers, but it’s become more difficult.

“You know, everything is getting more and more expensive, so it's not easy, we understand that, and we're trying to, you know, toe the line. But at some point, it's going to be either we increase our margins, or we pass it back to the customer,” said Sullivan.

Many businesses face a similar dilemma. Customers have reported seeing credit card surcharges, added convenience fees, or in Ocean City, Md., Mug & Mallet owner, Shannon Tippett, is offering a cash discount.

“We started that this year. And most customers are like, ‘Why are they getting a discount if they pay with cash?’ And it's like, well, really, they're just not paying credit. We're saving money, so we pass that savings on to them,” Tippett said.

These fees cost her around $10,000 a month during peak season.

“That's a big chunk of change. Whereas before, when you could argue to get a lower rate, you might have only been paying $2,000 or $3,000,” Tippett added.

Since the pandemic, she’s been unable to negotiate lower rates forcing her to come up with different ways to cover these fees without raising menu prices.

“I think everyone is kind of tired of paying more for things, so if we can find a way to alleviate that burden for people by offering a cash discount, I mean, like I said, it's not like it's that much money on $100. You're getting $3 off. But $3 to spend at Thrashers for french fries, or $3 to get a funnel cake. It all adds up in the long run,” said Tippett.

Swipe fees have been a point of contention between merchants and payment networks for many years.

“Merchants and mainstream businesses have been waiting a very long time to get some basic relief here. They filed lawsuits in 2005 to try to change the system. They're still going,” said Doug Kantor, general counsel for the National Association of Convenience Stores.

Recently, the judge overseeing that longtime lawsuit rejected a $30 billion settlement proposed by Visa and Mastercard. In her opinion, United States District Judge Margo Brodie indicated that the companies could withstand a substantially greater judgment and “the estimated $6 billion in annual savings to merchants is paltry compared to the $100 billion that merchants paid in interchange fees on Visa and Mastercard transactions in 2023."

“Visa and MasterCard have this huge market share, they actually control 83 percent of the credit card market, so there's nowhere to go. And that's why these fees have gotten so high, why they've increased so much over the years, and why you see merchants facing a point of desperation,” said Kantor.

A spokesperson for Mastercard said they’re disappointed and respectfully disagree with the court’s ruling. In an email, Will O'Connor, Senior Vice President of North America Communications for Mastercard, wrote:

“It is surprising – and unexpected – considering that the settlement reflects significant work and arms-length negotiations overseen by an independent mediator and the court-approved plaintiffs’ counsel. We believe the settlement would have provided millions of business owners substantial certainty and enormous value in how they manage their card acceptance activities.”

Swipe fees typically cost merchants a little over 2 percent, but sometimes as high as 4 percent, according to the Merchants Payments Coalition. The agreement would have lowered rates by 0.04 percentage points for three years and set a cap on rates for five years.

While the lawsuit plays out, businesses are balancing what to do with these fees without pushing away their customers.

“No matter what, these costs get passed along to consumers. The data says the average American family pays $1,100 a year to cover these fees. It's a huge, huge cost,” Kantor told WMAR-2 News Mallory Sofastaii. “Customer frustration is totally understood but it's directed to the wrong place, because it's really the credit card industry that's imposing these big fees.”

Congress is also paying attention. The Credit Card Competition Act of 2023 aims to enhance credit card competition by requiring large banks to allow more choice around payment networks.

In the meantime, customers might want to check their bill more closely for any added fees and carry cash for possible discounts.

According to NerdWallet, it is legal in most states for businesses to charge an additional fee to use a credit card, except in Connecticut, Maine, Massachusetts, and Oklahoma. Colorado caps the surcharge at 2 percent. Cash discounting is currently legal in all 50 states.

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