Controversy over transaction fees spurs new legislation


By Ann Meyer

Sean Harper launched FeeFighters to help businesses comparison shop for credit card processing. Photo courtesy of FeeFighters.
Sean Harper launched FeeFighters to help businesses comparison shop for credit card processing. Photo courtesy of FeeFighters.

When Lindsay Gaskins considered the costs of launching Marbles the Brain Store, credit card and debit card transaction fees weren’t on her radar screen, she said.

Now they are.

Credit and debit cards account for about 70 percent of the company’s transactions, said Gaskins, who started the company in 2008. Its Grand Avenue store paid $18,000 in transactions fees last year, and the company  has seven other locations, Gaskins said.

By switching credit card processors, Gaskins said she was able to shave 10 percent off the fees she was paying. But Gaskins and other merchants would like to see them reduced further.

A top issue for retailers

“Reducing swipe fees is one of the top issues for the retail industry,” said J. Craig Shearman, vice president of government affairs and public relations at the National Retail Federation in Washington, D.C. “It’s as big as tax policy or health care or other issues that have seen higher profiles.”

Yet because the fees are largely hidden and rarely discussed, many small businesses don’t know how much they are paying or how to reduce them, experts said. Besides the interchange fee that Visa and MasterCard charge, which hovers around 2 percent, processors add processing fees, network fees, and licensing fees, Shearman said.

“Many smaller retailers know it’s an issue, but they don’t understand the complexities of it,” Shearman said. “That makes it easy for banks to feed misinformation.”

The Durbin amendment

Retailers hailed the passage last summer of the so-called Durbin amendment, sponsored by Illinois Sen. Dick Durbin as part of the Dodd-Frank Wall Street Reform & Consumer Protection Act. The Durbin amendment aims to limit the  debit card transaction  fees banks could charge to a level that the government determined to be reasonable and proportional. While the act doesn’t include credit card transaction fees, sources  said, additional legislation is likely  to follow.

As part of the Durbin amendment’s requirement, the Federal Reserve   in December established as reasonable fees of 7 cents to 12 cents per transaction and is hearing comment on its recommendations  until April, sources said. The recommendations represent  a reduction of about 75 percent from current debit transaction fee levels, said Peter Garuccio, spokesman for the American Bankers Association.

But new legislation introduced in the U.S. House this week would delay the rule’s implementation by calling for more study on its consequences, Garuccio said, noting that the bankers association opposed the Durbin amendment and is supporting the new legislation.

“We think the Fed’s rule should be stopped. We think it will have harmful consequences for every bank,” Garuccio said. Banks provide a value to merchants by processing debit card transactions, protecting them from fraud, employee theft and reducing overhead costs, Garuccio said.

The global picture

According to a 2010 report by Fumiko Hayashi, senior economist at the Federal Reserve Bank of Kansas City, debit transaction fees in the United States are among the highest in the world. The report notes that five countries impose no interchange fees on debit card transactions.

Transaction fees are one of the leading expenses for retailers, often second only to labor costs, experts said. And many business owners feel the fees are entirely out of their control, said Sean Harper, chief executive of Chicago-based FeeFighters, an online business that helps merchants compare processing fees and negotiate for better rates.

In a previous business, Harper estimated he overpaid transaction fees of about $40,000 because he didn’t shop around. “The industry is very, very good at sneaking in extra fees,” Harper said.

FeeFighters uses a technology platform that  dissects processors’ offers on  a fee by fee basis  and aims to help small businesses make better-educated decisions about which  processor to choose. Harper and partner Josh Krall started the business  in 2008 after realizing that transaction fees were a major frustration for many business owners.

A small business issue

Ultimately, retailers want a say in how much they pay for processing, said Jeff Lenard, spokesman for the National Association of Convenience Stores. Since the 1950s, he said, “Credit card companies have written the rules and policed the rules. Retailers are just fed up.”

About 60 percent of the nation’s 146,000 convenience stores are owned by single-store operators, Lenard said, making it a small business issue.

Transaction fees   often are complicated and  poorly understood, experts said. Gaskins of Marbles the Brain Store said she began   using a QuickBooks point-of-sale system that came with a designated credit card processor when she launched her company and didn’t realize she could negotiate for lower fees. By using FeeFighters, Gaskins said she was able to negotiate a 10 percent savings.

Significant savings

Dan Kuthy, president of PVPower, started out with the processor recommended by his bank, he said.  But after taking a close look at his bills, he said, “It seemed like the rate was always changing.” It had inched up to 3.5 percent due to add-on fees, before he found a rate of about 2.75 percent with another processor. Given that his e-commerce store for solar components rang up half of its $1 million in revenue through credit cards last year, the savings from switching processing companies have been significant, Kuthy said.

“Transparency and simplicity are the real issues,” Kuthy said. Businesses should be able to easily determine how much they are paying and have the freedom to shop around. PVPower tries to pass on the cost by offering a discount for payments by check, but many customers prefer to use plastic, he said. “We don’t want to risk losing the sale, so we eat it” most of the time, he said.

While convenience store operators can offer a cash discount for gas, even that can be problematic, Lenard said. Unless it’s carefully communicated, those paying with plastic then  feel they are being overcharged, Lenard said.

Updated at 11:50 p.m. March 20