Fees may affect credit/debit card choice

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Candice Choi

The customer isn't always king. Sometimes he's just a pawn.

The feud over the so-called "swipe fees" that retail merchants pay banks when customers use credit and debit cards is reaching a crescendo, and will likely hit registers in coming months.

Both sides — merchants and card issuers — insist they're fighting for the best interests of the consumer. At stake are billions of dollars in swipe fees, otherwise known as interchange fees.

Visa and MasterCard recently agreed to let merchants offer customers incentives for paying with cards that have lower swipe fees. Separately, new regulations issued this year will cap the debit card swipe fees merchants have to pay.

Banks and credit unions warn that they'll need to make up the lost revenue elsewhere.

Q: First off, what are interchange fees and why is there so much talk about them?

A: Let's start by clarifying a common misconception.

Contrary to popular belief, Visa and MasterCard don't issue credit cards; they run the networks that process transactions made using those cards. If it was the cell phone universe, think of the companies as operators of the phone lines and networks over which calls are made.

The use of their networks comes with costs, which are paid for in a complex way.

Every time a customer pays with plastic, the merchant pays a fee to the bank or credit union that issued the card. The fee typically ranges between 1 and 2 percent of the purchase amount.

Visa and MasterCard don't get a direct cut of this fee. But they make money through separate deals with the 16,000 or so banks and credit unions that issue cards.

So on one side of the battle line, you have card issuers and payment processors — such as Visa, MasterCard and American Express — arguing that plastic is convenient for businesses and helps drive up sales. They consider credit cards a perk the merchants should pay for.

On the other side are merchants who say they're paying too much and should be allowed to steer customers toward payment options that cost them less.

Q: So what's different at the register right now?

A: Under regulations that went into effect this summer, merchants can legally set a $10 minimum for credit card purchases. This could be inconvenient for anyone who relies on plastic and doesn't carry around cash.

It's not clear how many merchants will take advantage of the option. You're more likely to run into new minimums at the corner deli or other small stores.

Some stores had already required a minimum for credit card purchases, but that was in violation of policies set by Visa and MasterCard.

If you're paying with a debit card, there still shouldn't be any minimum purchase requirement. Of course, merchants can refuse to accept plastic of any type.

Q: What does the Justice Department's settlement with Visa and MasterCard mean for consumers?

A: Visa and MasterCard agreed to let merchants offer incentives for customers to use a card from a particular network. So, for example, a retailer might offer a discount to anyone who pays with a Discover card, which tends to have lower interchange fees.

Merchants can also state preferences for specific cards within a brand, such as basic Visa cards versus rewards Visa cards, which tend to have higher interchange rates.

The changes are part of a settlement Visa and MasterCard made with the Department of Justice over allegations that the companies were trying to insulate themselves from competition with their policies. American Express plans to fight the federal suit.

Note that retailers can already state a preference for debit card purchases, which come with lower interchange fees of about 1 percent, versus an average of 1.6 percent for credit cards.

So on a $10 purchase, 10 cents would go to the card issuer with a debit card payment. With a credit card payment, 16 cents would go to the card issuer.

This is why merchants prefer debit cards over credit cards.

Q: Are there any other changes in store that could affect me?

A: The Federal Reserve is expected to propose a new cap on debit card interchange fees in coming months.

Banks and credit unions are already warning that they'll need to make up the lost revenue in other places, perhaps by tacking on new fees or eliminating rewards programs for checking accounts.

On the other side, merchant groups counter that those are empty threats and that banks can't afford to alienate customers in this competitive climate.

Additionally, merchants say all the changes mean consumers will likely start seeing discounts or other perks depending on how they choose to pay. For example, a purchase might cost $5 if you pay with a credit card or $4.75 if you pay with a debit card. Or a grocery store might offer free delivery if you pay with a debit card.

It's still too early to say how it will play out, since many merchants are waiting for the Fed's proposed cap on debit card swipe fees before they strategize.

Q: Does this mean merchants will stop accepting credit cards, or maybe rewards cards, because they have higher interchange fees?

A: No. Visa and MasterCard can still require merchants that use their networks to accept all their branded cards. It's just that retailers can now offer incentives for lower-cost cards.

Merchants already have the right to refuse acceptance of cards from an entire payment network, of course. American Express and Discover for example, aren't as widely accepted as Visa and MasterCard. But Visa and MasterCard are so universal that merchants generally agree to the companies' term.

— AP