Last updated on June 19th, 2020
Restaurants are pushing for cuts to swipe fees for credit cards in the face of the COVID-19 virus. The restaurant industry is just one sector of the U.S. economy that has taken a hard hit from the recent public health emergency. This is especially true in the wake of government-mandated quarantines and CDC recommendations for social distancing.
As a result, dining establishments expect to see losses of $225 billion within the next three months. Many smaller eateries have had to close for business. Additionally, industry experts estimate that between 5 million to 7 million restaurant workers will lose their jobs.
Restaurants Request Relief
Consequently, the National Restaurant Association issued a public plea on March 18th, asking for a package of emergency aid from the federal government. The association, which represents over 500,000 food service businesses, is requesting that credit card companies delay planned fee increases. As well, the association is asking for these companies to postpone deadlines for retailers to upgrade POS systems to accept chip technology.
However, the request that is presently causing waves in the financial sector involves reductions to credit card interchange fees. These fees are what credit card companies charge merchants for accepting credit card payments from customers.
What many retailers refer to ask swipe fees are hitherto costing merchants approximately $100 billion per year in the U.S. alone. But that’s also $100 billion of revenue for banks and large payment networks, like Visa® and Mastercard®.
Past Changes to Swipe Fee Rules
Interchange fees have been a contentious topic on Capitol Hill for decades now. Merchants and organizations representing them have repeatedly brought the issue to the courts. However, legislators are reluctant to pick sides as both merchants and banks are important constituents.
Nevertheless, the current COVID-19 crisis may require lawmakers to take quick, if not immediate, action to prevent a complete collapse of the domestic restaurant industry. However, this wouldn’t be the first time lawmakers have had to step in to resolve the interchange fee dilemma.
Dodd-Frank Act: A Precedent?
The 2010 Dodd-Frank Act included a provision to reduce debit card interchange fees. The controversial Durbin Amendment (Regulation II) was a last-minute addition to the provisions of financial reform act that sought to provide better financial protections to consumers.
Before 2010, there were no government regulations on any type of interchange fee. Lenders had agreed to fix rates at about $0.44 per transaction. Additionally, lenders often interfered with merchants who tried to incentivize cash or check payments. For instance, merchants who charged a credit card processing fee to their customers could potentially be in breech of contract with the credit card company.
The Dodd-Frank Act reduced the debit card swipe fees by nearly half. Presently, merchants must pay credit card companies 0.05% of each debit transaction amount plus $0.21.
Effects of the Durbin Amendment
The reduction of debit card swipe fees as stipulated by the Durbin Amendment had some significant consequences. Merchants paid about $9.4 billion less each year in interchange fees. Merchants were now also free to charge customers fees for using credit cards.
As a result, banks raised account maintenance fees to compensate for their losses. The amendment also laid a provision for banks to raise debit card swipe fees by as much as one cent ($0.01) if they employed certain fraud prevention measures.
However, banks preemptively charged merchants increased fraud prevention fees without having implemented any new security measures. At least this is what merchants claimed.
Conversely, banks expressed the opinion that the amendment was unfair to consumers as they felt compelled to transfer the cost of the revenue loss to cardholders. As well, financial institutions felt that many merchants now had the liberty to “punish” customers for using their credit cards.
Jeff Tassey, the current leader of the Electronic Payments Coalition, considers Dodd-Frank to have been a failed policy. Speaking on behalf of the coalition, he argues that it did not benefit consumers and caused harm to smaller banks and local credit unions.
Swipe Fee Legal Battles
Dodd-Frank wasn’t the only time credit card interchange fees have come under fire. In 2005, several large and small merchants filed a class action suit against Visa®, Mastercard®, and other financial institutions.
The plaintiffs claimed that credit card companies had collectively fixed interchange fees. As well, plaintiffs argued that the same companies interfered with merchants steering customers towards using more cost-effective payment methods.
The ruling judge reached a settlement in 2013 that lowered interchange fees for merchants and protected credit card companies from undergoing similar lawsuits in the future. However, the settlement was reversed as many of the plaintiffs did not agree to the terms.
The case was supposed to go before a district court in November 2019. However, there has yet to be a final ruling on the suit.
Visa Is Already Changing Its Interchange Fees
Through all this discussion, Visa had already announced that it was updating its interchange fees earlier this year. This happened before the Coronavirus outbreak made waves in the United States.
This was the first time in over a decade since the credit card giant made any changes to swipe fees. Our coverage of these changes revealed that Visa intended to level the playing field, especially with the rise in online commerce.
One of the biggest beneficiaries of the fee changes would be physical grocery stores. However, many other brick-and-mortar retailers were also supposed to see rate drops.
Nevertheless, this wasn’t an industry-wide change in swipe fees. As such, neither Mastercard nor American Express announced any similar changes.
What Swipe Fee Changes Could Mean
The National Restaurant Association has requested fee cuts among other aid measures, including tax relief and federal loans for restaurant owners and employees. The association’s public announcement caught other trade organizations, like the National Retail Federation, by surprise.
Typically, many of these customer-facing industry organizations – which include restaurants, entertainment, tourism, and retail – communicate and coordinate any public requests for policy changes. The National Retail Federation isn’t opposed to interchange fee reductions. However, it argues that there are other aid measures that can offer more immediate relief.
In fact, the buzz around credit card swipe fee cuts can detract from approving more pressing assistance for the ailing restaurant industry. To reiterate what the leader of the Electronic Payments Coalition had stated, previous policies to regulate interchange fees were ineffective.
The team at BestCards.com may not wholeheartedly agree with that statement. After all, retailers did end up saving money, and any increase in retail prices were likely a result of other economic factors. As well, credit card companies seemed to have been offering an increasing number of rewards, perks, and sign up bonuses.
However, we do agree with the fact that it can be a long time before any merchants reap the benefits of any changes to swipe fees. Any policy changes would require a long regulatory process. As such, the COVID-19 crisis may be mostly behind us before new interchange fees start to affect restaurants’ legers.
