Credit 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:
- 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.
- 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.
- 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.