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Credit Card Use Just Got More Expensive

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They're baaaack! Swipe fees, those charges Visa (NYSE: V  ) and MasterCard (NYSE: MA  ) impose on merchants for the privilege of allowing customers to use credit cards in their stores, are back with a vengeance and threatening to raise the cost of your purchases by as much as 4%.

As part of the $7.3 billion antitrust settlement with the financial services industry last July, the credit card issuers and a number of large banks including Bank of America and Wells Fargo agreed to reduce the amount they charged merchants for processing credit card transactions, but only for eight months, after which they'd go back up. In addition stores that previously were prohibited by Visa and MasterCard from passing along the cost of processing the transaction to consumers would now be permitted to do so. That deadline expired Sunday.

It's easy to understand why the financial services industry was eager to settle the suit. Swipe fees are big business. Business Insider estimated credit card companies generated $50 billion annually in interchange fees, as they're called, so paying a $7 billion fine to settle the case and lowering the rate for eight months -- which cost them an estimated $1.2 billion -- is a good deal to essentially keep the status quo. Moreover, merchants are now very limited in their ability to bring suit against the credit card companies in the future.

Swiping from your wallet
Of course, merchants have an option to eat the cost of the transaction rather than pass it along to the consumer, and in an economy that remains weak many are hesitant about increasing costs that might drive customers away. Wal-Mart, which opposed the agreement, said it would "cost consumers tens of billions of dollars each year," while Target, another vocal opponent, called it "bad for both retailers and consumers." It said it didn't plan on imposing the surcharge on its customers merely to "allow Visa and MasterCard to continue charging unfair fees."

The theory behind the swipe fee is that it is paying the credit card company for the risk inherent in the transaction as well as the cost of the transaction itself. You've made a purchase and received merchandise and the store has gotten paid right away, but the credit card company typically has to wait at least 30 days to get its money when you pay your bill. Of course, the credit card companies are also charging you interest if you carry a balance on your bill, but they say that's not enough to cover the costs. The Merchant's Payment Coalition might beg to disagree. They say only 13% of the swipe fee goes to processing the transaction; much of the rest goes toward its marketing its cards to other consumers.

American Express (NYSE: AXP  ) and Discover Financial Services (NYSE: DFS  ) actually allowed merchants to charge swipe fees so they weren't party to the imbroglio. But they told retailers they had to treat all credit card companies the same, so if they imposed a fee on an AmEx card, they'd also have to impose one on Visa and MasterCard purchases. And since they were effectively prohibited from doing so by those issuers, the merchants imposed no fees at all.

But it's also one of the reasons why AmEx cards are accepted at fewer places than Visa and MasterCard. Since they charge higher transaction costs, it costs the merchant more to process a transaction using them .

Buddy, ol' pal, ol' friend of mine!
The battle with the credit card customers was one of the reasons Home Depot began including PayPal as an option at checkout. By using eBay's (NASDAQ: EBAY  ) alternative payment processing system, the do-it-yourself big box retailer can minimize the fees it pays to Visa and MasterCard. You, as the customer, don't pay a fee at all for using PayPal at checkout. You can also avoid fees by using a debit card since the settlement surcharges didn't apply to them, and, of course, there's always cash.

In fact, PayPal may be one of the biggest beneficiaries of the battle. At the end of 2012, the eBay division had signed up 23 national retailers to permit using PayPal at checkout, exceeding their goal for the year by three. That means consumers have more than 18,000 retail locations at which to use the alternative payment service, including Jamba, Radio Shack, and JC Penney .

Indeed, PayPal was one of the big factors in eBay's strong fourth-quarter results, reporting a 24% increase in revenues last year. With a focus on smartphones and tablets, PayPal Mobile handled $14 billion in payment volume in 2012, more than triple the year-ago figures, and it expects to hit $20 billion in payment volumes by the end of this year.

Keep the change
Particularly with the economy being in the state it's in, it's unlikely you'll be paying those 4% surcharges anytime soon. But keep an eye out! If a merchant is charging you, they're required to notify you. Still, higher interchange fees plus an inability to pass along the costs to consumers are a troubling development with conditions so fragile. While the Wal-Marts and Targets of the world can eat those costs relatively painlessly, small retailers and mom-and-pop stores will see their profits take a dive. The credit card companies and the banks, however, once again come out on top.

To learn more about the most talked about bank out there, check out our in-depth company report on Bank of America. The report details Bank of America's prospects, including three reasons to buy and three reasons to sell. Just click here to get access.

Read/Post Comments (3) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 30, 2013, at 6:23 PM, EquityBull wrote:

    Good article.

    One thing though the 4% is the max cap. They can only pass along the fees to the lesser of the fee itself or 4%. So for example Visa could charge a merchant the typical 2% and the retailer could only pass along maximum of 2%.

    Most retailers will not be adding these fees to purchases. Also when the fees went down lo and behold the retailers did not pass one dime of savings to the consumer. They just put that cash in their own pockets. Surprise surprise huh...

    This was about lobbyists vying for politicians ears to pick the winners and losers. The Durbin act was a joke on capitalism IMHO. So much for free markets. Retailers have a choice. Cash, visa, mastercard, discover, amex, paypal. Plenty of competition. Government should stay out of it and stop picking winners and losers.

    In the end everyone has to compete. that is called capitalism. Only the strong survive. It promotes excellence. Dick Durbin does not understand this

  • Report this Comment On January 31, 2013, at 8:42 AM, fortunategromit wrote:

    I'm no retail expert, but I would think that retailers have been factoring swipe fees in the price of their goods for a long time now.

    It seems that all this settlement does is provide the retailers the opportunity to tack another fee on for the consumer to eat while pointing a finger at credit card companies.

    As the previous commenter said, most retailers won't be doing this. The smart ones anyway.

  • Report this Comment On June 08, 2013, at 11:49 AM, PhilipCohen wrote:

    "The battle with the credit card customers was one of the reasons Home Depot began including PayPal as an option at checkout. By using eBay's (NASDAQ: EBAY ) alternative payment processing system, the do-it-yourself big box retailer can minimize the fees it pays to Visa and MasterCard."

    What a load of nonsense! "PreyPal" is little more than a parasite riding mainly on the backs of MasterCard/Visa ...

    And the ugly reality for consumers, particularly smaller payees, dealing with the clunky, unscrupulous PayPal ...

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