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The hidden cost of swipe fees
This is an archived article that was published on sltrib.com in 2013, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.

In an effort to protect consumers, Gov. Gary Herbert signed legislation last week that bans merchants from adding surcharges to credit card purchases. Sounds good, right? There's just one problem. The new law bans a practice that doesn't exist and ignores the very real issue driving sky-high credit card swipe fees.

Ask any business owner who accepts credit cards about swipe fees and you'll get an earful. Every time a customer pays with a card, up to 4 percent of the sale goes back to the banks and credit card companies. Considering that the average profit margin for most retailers is 1-2 percent, these fees drive up prices and make it harder for small businesses to expand, hire more workers or even stay in business.

The system for credit card swipe fees is rigged by the two dominant credit card companies that control 80 percent of the market. They set the swipe fees in secret to benefit the banks that promote their cards, leaving business owners and consumers in the dark and on the hook.

Merchants can't comparison-shop or negotiate swipe fees the way they do for other expenses. It's a take-it-or-leave-it deal and every bank agrees to charge the same thing. If merchants accept cards, they have to accept the fees, which can be raised at any time.

In fact, credit card swipe fees have more than tripled in the last 10 years even with new technology that should be driving costs down. And, swipe fees in the U.S. are higher than anywhere else in the world, even though we have the highest volume of card transactions.

In 2011, merchants paid more than $50 billion in swipe fees. For many retailers, these fees are their fastest-growing expense and their second-highest operating cost after labor. Business owners have no choice but to build some of these fees into their pricing, making everything consumers buy more expensive no matter how they pay.

To make matters even worse, merchants have no idea what the fee will be on any transaction until their bank statement comes at the end of the month. Visa has more than 60 different fee categories, and Mastercard has more than 240, but the fee isn't printed on the card.

Unlike the card companies, retailers operate in a very competitive environment. They know that their customers can and will shop elsewhere for a better deal if their prices are too high. That's why the vast majority of retailers have no interest in adding a surcharge onto the bill for customers paying with credit cards. It's simply bad for business. Merchants work hard to attract customers by offering goods and services at a fair price set by a competitive marketplace.

But the credit card companies don't face the same kind of competition and they're not worried about business owners and consumers. The fees are designed for their real customers — the banks. High swipe fees are a cash cow for banks, a lucrative revenue stream separate and apart from interest charges and late fees.

Making surcharging illegal doesn't address the fundamental problem. What the card companies and banks are doing is price-fixing, plain and simple. Price-fixing is illegal if anyone else does it; it should be illegal for credit card companies and their banks, too.

If lawmakers really want to help consumers and lower prices, they should focus on fixing the broken market for credit card fees. We need competition and transparency so credit card swipe fees don't keep going up and up, and we need transparency so everyone understands what the fees will be when consumers pay with credit cards.

Brad Call is executive vice president of Maverik, Inc., a Utah-based food convenience store.

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