November 27, 2015

Small Retailers Seek Limits on Credit Card Interchange Fees, But Is It Protectionism?

Regulation of Credit Card Interchange FeesCredit card interchange fees became a hot issue in 2009.  Big retailers got hot under the collar — and so did small merchants who are watching their profits with a hawk’s eye.

Interchange, or “swipe” fees are fees that credit card companies and banks charge every time customers use a credit card to make a  purchase from them.  These fees typically range from 1% to 3%  of the price of a purchase.  The fees are charged to the retailers.

Some small retailers find these fees cutting unacceptably deep into already-slim profit margins.  For instance, this article from  Bozeman Montana points out how much credit card fees eat into small retail transactions and gasoline purchases.  As a result, some retailers are offering discounts to customers who pay cash. Even with the discount, the retailers net more per sale than when they accept credit cards and have to pay the interchange fees — that’s how much of a bite those fees take.

In September of 2009, franchisees of 7-Eleven convenience stores around the country picketed the U.S. Capitol, calling themselves victims of interchange fees.  Instead of the usual “don’t mess with business” message, this crowd was actually inviting lawmakers to step in.  They requested that lawmakers limit interchange fees.

And in a blog op-ed from earlier this month, the head of a grocery and convenience store trade association calls for Congress to “level the playing field” for small businesses.

Leveling the Playing Field, or Protectionism?

But is it really leveling the playing field?  Or is this about giving one specific subset of businesses (small retailers in price-sensitive industries) protection?

When it comes to small business, “one man’s ceiling is another man’s floor.” Help one group, and you may hurt another.

Remember the efforts to protect the steel industry a number of years ago?  That backfired.   It protected one industry (steel producers)  but at the same time raised costs for others (small manufacturers and end users of steel). Eventually the steel tariffs were reversed, when it became evident that protecting one industry came at the expense of others.

Today that Unpopular Business, Tomorrow YOUR Business

Controlling credit card interchange fees sounds black and white when you have a noble cause.  ‘The ends justify the means,’ you think. ‘After all, someone has to look out for small businesses and protect them.’  The idea appeals to our David-versus-Goliath sensibilities.

But where does “protectionism” end?  What if the tables are turned, and it’s government telling YOUR small business how much profit you can make?

Let’s say, for example, that you have a Web design business, and you normally charge $95 a hour.  That may sound like a lot — outrageous to some people.  But you know different.  You have to pay your employees’ wages, cover their benefits, pay rent and overhead, pay for advertising and marketing to attract clients, pay for various business services, and still try to make a profit for yourself as owner.

Then the government steps in to tell you that you can only charge $75/hour.  Would you consider the government to be “helping”?  Few small business owners I know want government telling them how to set prices.

No Easy Answers

The U.S. Government Accountability Office (GAO) looked into the subject of interchange fees during the year.  Their  report (PDF) concluded this is not a simple straight-forward issue with easy answers:

  1. Some or all of those interchange fees may have been passed on to consumers already.  Who’s to say that if fees were reduced, it would result in lower costs for consumers.  Chances are, the fees have already been recouped by retailers, at least in part.
  2. Some small business owners feel that being able to offer credit actually is a net positive, despite the fees.  Customers using credit cards tend to spend more, the seller gets access to the funds immediately and doesn’t have to contend with bad checks or collection issues.
  3. The GAO also pointed out the risk that credit card issuers, when hit with lower revenue from fees, might decrease the availability of credit, and could cut back on rewards cards-moves that would harm both consumers and retailers.

The Credit Card Interchange Fees Act of 2009, which Rep. Peter Welch (D-VT.) introduced because he contends “credit card fees are killing small businesses,” would limit the fees merchants accepting credit cards could be charged. The bill would also prevent charging higher fees to merchants when customers use reward cards, and would give the Federal Trade Commission the right to review interchange-fee practices. Other legislation that is under consideration would give merchants more freedom to negotiate fees with their banks.

Regulation May Set the Wrong Precedent

So what’s the answer?  It’s a mixed bag.  While at first glance it sounds noble to help small retailers battle an unpopular industry, on the other hand it really amounts to a form of protectionism.  And that may set a precedent that we as small business owners would find unacceptable if the tables were turned.

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Anita Campbell - CEO

Anita Campbell Anita Campbell is the Founder and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses, and also serves as CEO of

26 Reactions

  1. Anita: Thanks for speaking up against the protectionism! We didn’t get a credit card terminal at our place due to the high fees, but I didn’t have any problem with the banks and credit card companies are charging the retailers. Hopefully the free market will solve this, by offering new services, e.g. micropayments, SMS payments, etc.

    If you are interested in my take on the steel tariffs, please read my post from 2003: “Associated Steel” Versus “Rearden Steel”?

  2. Hi Martin,

    At first blush it sounds so black-and-white: just stop those bad banks from charging such high fees!

    But it’s not simple or clear cut at all — not when you start asking where it stops.

    I think small retailers are undergoing stress, and unfortunately the problems are bigger than credit card fees. There’s just a ton of competition and in retail segments where profit margins are already razor thin, I can see how it would be extra difficult. It can’t be much fun to run certain kinds of retail businesses these days.

  3. Anita,

    I can certainly appreciate the concern about opening the door for government intervention. The problem has been, by their own admission, Visa & MC have been playing the role of government regulator–while also being for profit companies. I promise I won’t start ranting about the failure of self regulation and the current meltdown, but one has to admit with a for profit Visa and MC saying that they are balancing the interests of banks and merchants while setting the fees on merchants doesn’t really pass the smell test.

    Instead of government regulation, how about we go to the other extreme of deregulation? If you want the merchants to work it out,you have to eliminate all of the steering rules like 1) no surcharging, 2) honor all cards, etc. That way the merchants will have the leverage they need and they can negotiate directly with both the card networks and the issuing banks for lower interchange. This model was just put in place in New Zealand with fantastic success.

  4. Common Sense: I am interested to learn more about the model in N.Z. Could you direct me to some blog posts or articles?

    Anita: Yes, it is tough times for the retail business area. In Sweden all the shops and other places must have electronic cash-registers nowadays. I heard about a small business owner (hairdresser) who had to dish out about $1500 for a new cash-register with this new built in “black box” that the Swedish tax office has access to.

  5. It sounds like small business is seeking protectionism but really it is the big banks and credit card companies that have benefited from protectionism all these years.

    The rates and fees credit card companies would make a mafia don blush with envy. They get untold access to law makers and funnel millions of dollars into their coffers to get preferential treatment.

    Small business has no one speaking for them, yet they create the most jobs and have the most impact locally. I’m not a protectionist…but getting rid of corporate welfare would be a wise thing to do.

  6. Whoops, forgot to say “the rates and fees credit card companies charge”

  7. All we would need is for one credit card company to come along and offer better rates for small businesses. A break with the lock-step of the industry. They could pick up a ton of the SMB market.

  8. How about looking at it from another angle? When a consumer chooses to use a credit card, they are requesting a loan and borrowing money for a short term period of normally 30 days. If the full credit card balance is paid when the statement is received by the consumer, then the consumer has received a short term loan at no cost (no loan processing fee and no interest expense). Instead the business that accepted the credit card pays a fee for the processing of the consumers’ short term loan and for the receipt of funds. Fairness would seem to dictate at least splitting the fee between the business and the consumer. Any thoughts?

  9. I am a bigtime freemarkets guy – I was brainwashed / educated at the University of Chicago. 😉 I normally would completely agree with you – it is best when government stays out of commerce. However, the one exception is when there is an obvious monopoly.

    It’s good that you brought up the issue of potential side effects from legislation around interchange fees. With government action it seems that the biggest downsides are usually those which were not anticipated.

    However, clearly the high cost of accepting credit cards is quite a burden to businesses, particularly small businesses. Additionally, all the costs of credit card processing (networks, software, etc) have decreased while interchange rates have gone up. Also, usually costs go down as volumes increase, here credit card volumes have increased hugely and costs have gone up. Finally, credit card issuing has historically been the most profitable line of business for financial services firms (with returns on asset 2x those of other financial products). So I do empathize with the business owners who are upset.

    The best situation would be for a viable competitor (or several) to visa/mastercard/discover/amex to emerge. Revolution Card had interesting potential but now is part of American Express and is unlikely to compete vigorously. Paypal has great potential.

    Interchange rates are regulated in many other jurisdictions, including Australia and the EU, and there haven’t been any major negative impacts (rewards programs were dropped or weakened).

    For those who are interested in learning more about this topic I recommend a presentation released by Diamond Consulting in 2006. It is no longer on their website but it is available in the internet archive at –

  10. Author has higlighted very important issue and thats true it becomes some times very high when there is tough completition and low margins.

  11. Anita: Have you heard up Square, Inc.? “Twitter co-founder takes aim at mobile payments”

  12. @Phil – yes but at the same time, the merchant has access to cash flow within a day or two once the transaction settles.

    The theory/argument is that if the consumer has an ability to make that short term loan, it means they can buy what they want right then and there as opposed to waiting until pay day or when they have cash so its supposedly a win-win for both parties.

    I would say the example above and check fraud are the two main reasons merchants accepted credit cards to begin with…

  13. Martin: Details of the New Zealand deal are still being made public and they will not go into effect until April 2010. I got my information from a retailer in NZ who is currently negotiating the interchange rates with the various NZ banks. I won’t tell you the rate I am hearing because it is unbelievably low and I don’t want to drop a bomb like that without having published resources to back my claim. I will say that it is lower than Australia’s regulated rates.

    Phil & Toffer: I certainly think that Phil’s point is a good one and splitting the fee should be an option. Here’s another option: If you listen to the banks justification for interchange, they always cite the fact that they are providing a loan and they are assuming 100% of the repayment risk, which is true. However, the banks charge an interest rate that, theoretically, should be related to that risk of repayment. So once customers succesfully repay their obligation, shouldn’t the merchants have their interchange refunded to them plus interest for the time that the banks were holding their capital?

  14. Credit card loans are among the most profitable kinds of loans that a bank makes.

    It’s a bit of a strange argument for the banks to make that they are providing the customer with a loan and should be paid by the retailer for the service, since in every other context banks pay referral fees to parties that originate loans for them.

    For example, car dealerships get paid by banks for referring auto loans, mortgage brokers get paid for originating mortgages, accountants get paid for originating tax-refund-anticipation loans, etc.

  15. Martin: I got the source document for you! At the least likely place possible–the MasterCard website. Go to: and then select the pdf of the MasterCard Rules. Go to page 174 (it looks like page 11-4 on the screen) and there are the details. This document appears to have been written by lawyers, but you can see what they have done.

  16. You are a bit incorrect , the no surcharge rule, and the honor all cards rule benefit both the consumer and the merchant, the consumer does not have to worry about whether his or her card does not work, and the no surcharge rule is enacted as a free market contract, basically its no different than sony telling one of their authorized retailers look you can’t sell this product or advertise for less than a certain price.

    Its a contract, the tables can easily be turned, how about the fact that the national retail foundation opposed to the minimum wage. In Australia consumers suffered and retailers didn’t pass on the savings to consumers , the federal reserve bank paper notes that this is a complex issue that doesn’t have an answer but of course special interests don’t care about that they want the maximum profit and benefits to themselves which is understandable to a degree but not in the consumers interest.

    They know that, which is why they try to form misleading “consumers for competitive choice advertisements”, or many blogs taking on the big banks, which is ironic because national retailers like walmart would want lower interchange fees, who is the next “big”.

    Here is something that really tips the author’s point, how about forcing businesses to accept credit cards during the next congressional session, think it can’t happen, in new york city taxi cabs have to accept credit cards, one can say well this only applies to business with more than 50 employees or national franchises aka retailers, or give tax breaks to companies who do electronic transactions aka credit cards , countries have been having paperless transactions, given the risks of cheques and potential for no guaranteed payment and fraud (which of course the credit card companies have to deal with and the interchange fee covers that risk), then merchants choice will probably be to have to accept credit cards.

    Is there a much better solution that can be in the retailer’s interest , perhaps but its not likely to asked, they want the best profit and the best rates , but when you ask too much, the tables can be turned the other way the next session.

  17. But it’s not simple or clear cut at all — not when you start asking where it stops.

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