Taking an even closer look at credit card fees

I appreciate State Rep. Marcus Richmond’s recent post regarding ‘swipe fees’ on credit card purchases, and the financial impact those fees have on veterans. As a community banker committed to serving our military community, I share Rep. Richmond’s concerns about the financial well-being of our veterans. However, his proposal is to support a significant change to the existing safe and secure credit card payment system that is being proposed by U.S. Senators Durbin of Illinois and Marshall of Kansas.

Their proposal would significantly benefit the large retailers, at the expense of all consumers, and would absolutely in no way benefit veterans. Let’s dig deeply into the proposed bill and see how the bill will benefit merchants at the expense of consumers and veterans.

First, we need to examine exactly what those ‘swipe fees’ really amount to in an average credit card purchase. The average ‘swipe fee’ on a transaction is about 2.0%. The 2.0% is not added to the price of the item(s) purchased at the checkout but is included as a ‘cost of doing business’ and part of the business overhead. In exchange for the 2.0% ‘swipe fee’ that the merchant pays, they will receive 98.0% of the total sale immediately. The merchant doesn’t have to spend time and money to hunt down and collect funds from consumers who have given the merchant an insufficient check, spend time counting and re-counting cash, or hire armored car services to take cash to a bank.

The 2.0% ‘swipe fee’ is divided up between the credit card-issuing bank and the network that processes the transaction such as Visa, MasterCard, Discover, or American Express. The ‘swipe fee’ allows a customer to pay for the merchandise over time (on credit) while the merchant gets their money (minus the 2.0% fee) the same day. The card issuing bank uses its portion of the ‘swipe fee’ to offset collection efforts for the cardholders who do not pay on time, the losses due to numerous fraudulent transactions that occur every day, rewards programs that are highly valued by their customers, and the overhead for supporting the credit card operation. No one is getting gouged in the process.

‘Swipe fees’ are no different than the cost of cash registers, shelving for displays or the cost of lighting the store… they are all a part of the cost of doing business. It is the desire of every merchant to keep their costs as low as possible. The large volume merchants who stand to gain from passing the Credit Card Competition Act (Wal-Mart, Costco, Target, Walgreens, Lowes, Home Depot, etc.) are the same merchants who were successful in passing “the Durbin Amendment” several years ago which regulated the cost of swipe fees for debit cards. Those very merchants (who are now seeking to pass the CCCA which affects Credit Cards) used the ruses of “lowering the cost to consumers” and “wouldn’t affect community banks” if the Durbin Amendment was passed. Well, we all know that the Durbin Amendment passed, and none of us, especially veterans, saw lower prices and community banks like ours were negatively affected.

If the Credit Card Competition Act passes, credit card issuers will see their revenues reduced and be forced to decrease services like rewards points (airline miles, etc.) to their credit card customers. Also, there will be absolutely no incentive for retailers to lower their prices to help consumers and instead the large retailers will see a huge boost in profits from the legislation. Veterans and other consumers who are supposed to benefit from this legislation will end up with the same pricing from retailers (no savings) and fewer services (like rewards points) from their community banks.

Congress needs to understand that consumers appreciate the safety, convenience, and benefits that come with our existing credit card system. If the intent of the proposed legislation is to improve the lot of veterans, this is not the way to approach it. If the retailers are really interested in the welfare of those who served in uniform, they should give veterans a 2.0% discount on all their purchases – a direct effect to the folks who should be getting the benefit.

Don’t attempt to ‘fix’ the credit card system for the benefit of a few when the system isn’t broken.

Editor’s note: Larry T. Wilson is the Chairman and CEO of First Arkansas Bank & Trust. The opinions expressed are those of the author.