The Swipe-Fee Free-for-All

Retailers are battling the banks, but you may win

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Illustration by Oliver Munday for TIME

For decades the folks at Visa and MasterCard have been slobbering over the prospect of a cashless society, and they're getting their wish. Debit transactions surpassed credit in 2003 and continue to grow twice as fast. Today you can use debit cards to pay for anything from a Subway sandwich to a safari — which I did last June in Africa.

Cash is easy to lose; it's a target for criminals; it's dirty — and yet the feds frown on laundering it. Cashless is safer, faster. But cashless does not mean costless. According to the Federal Reserve, banks collected $16.2 billion from retailers in interchange or "swipe" fees in 2009 for the use of debit and prepaid cards — an average of 1.14% on each of the 37.7 billion transactions in the U.S. "Every month, merchants get an itemized account of their swipe fees," says David Robertson, publisher of the card-industry newsletter the Nilson Report. "This has been sticking in their craw."

The matter of how much merchants should pay for debit transactions is being fought over furiously on Capitol Hill. The card issuers are contesting new rules that establish a 12ยข cap on swipe fees beginning in July. Retailers, who claim that swipe fees have tripled since 2000, like the new rules, and they seem to be winning. Yes, it's a Goliath-vs.-Goliath battle, but you have a dog in this fight, since some of that money could end up in your pocket or, if banks decide to pass on the costs, you could face higher fees for checking and debit cards.

Whether the register amount is $1 or $1,000, an electronic transaction costs the same to process. The current percentage fee isn't logical, say retailers, who complain that Visa and MasterCard won't negotiate on the price either. Retailers also say that if swipe fees fall, competition will force them to pass along some of the savings.

The card guys find this laughable. The reason the retailers even accept debit cards, says MasterCard general counsel Noah Hanft, is that "it's a good deal. It would be a greater deal if they paid nothing, but they are prepared to pay what they pay now." Faced with the prospect of losing swipe swag, the bankers started dialing their lobbyists, who started dialing their employees — oops, their Senators. Soon enough, a letter from a group of solons fretted about "replacing a market-based system for debit-card acceptance with a government-controlled system."

That would be swell if the system were truly market-based, but it operates more like a utility. And allegations of duopolistic pricing are what got us here in the first place. Let's not forget too that a couple of years ago, these free-market-loving banks fought desperately, and successfully, to keep Walmart out of the banking industry. They feared, correctly, that Walmart would underprice them.

The banks warn that swipe fees subsidize things like free checking and that you can kiss those things goodbye if the new flat fees take effect. Other bank fees would rise too.

So raise them. Visa, MasterCard and their member banks are entitled to a reasonable return for providing interchange services. But why should retailers subsidize bankers? Charge what your retail-banking products are worth, or subsidize free checking with income from other retail-banking products. Walmart often sells diapers below cost, and it doesn't ask P&G to make up the difference. The Federal Reserve will issue its final rule in April; it will take effect July 21. A group of Senators has proposed to delay it for two years to "study" the issue. "The choice is clear for members of Congress: stand up for small-business owners and their customers or stand up for Visa, MasterCard and the world's biggest banks," said Amar Ali of A to Z Wholesalers in Dallas, who is part of the merchants' lobby. It's not as clear as he thinks.