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52 March 2014 | beautystorebusiness.com Beauty & The Law SWIPE FEES ARE REL ATIVELY SMALL CHARGES that banks impose on every credit and debit card transaction. Considering how many credit and debit card purchases there are, swipe fees add up quickly for retailers, consumers and credit card companies. According to a 2013 study prepared for the Merchants Payments Coalition, "Americans made an estimated 25.4 billion credit card purchases in 2012 with a total value of $2.4 trillion. These transactions carried … fees which in 2012 totaled an estimated $41.2 billion and averaged $1.62 per transaction." High transaction fees injure consumers and retailers, but the credit card companies obviously have a strong interest in pocketing the largest fees possible. A Federal Court recently approved a settlement in an antitrust case that could bring down swipe fees, benefitting both retailers and consumers, but many organizations question the long-term wisdom of some of its terms. Retailers and other companies that accept credit cards sued Visa and MasterCard eight years ago, alleging that they conspired to keep swipe fees high. The $5.7-billion settlement is the largest antitrust settlement in history. That money will be set aside to compensate businesses that paid inflated fees. The settlement also allows businesses to impose a sur- charge for credit card use and educate their customers about this hidden charge. But the settlement leaves many retailers concerned because it may be very hard to charge customers extra for using a credit or debit card. THE SWIPE-FEE PROBLEM When your beauty business accepts a credit card, the bank that issued the card approves or denies the charge and sends that information to your bank. If the transac- tion goes through, the bank that issued the card pays you, but withholds a "merchant discount fee" that is made of a swipe fee and miscellaneous fees for process- ing the transaction. The swipe fee is about 80% of the total merchant discount fee. Visa and MasterCard pro- hibit issuing banks from setting their own fees. If some issuing banks charged higher fees, then a store wouldn't know how much to charge for its goods and services because it wouldn't know how much the issuing bank would send for the purchase. To avoid this problem the credit card companies established default fees that all banks are required to impose unless an individual mer- chant could negotiate a special lower rate. The default fees vary depending on whether the card is a premium card or not. While the default fees solve the problem of rogue card issuers charging unpredictable fees, they also open an opportunity for the credit card companies to set inflated fees that they can impose only because of their monopoly control of the credit card industry. It's hard to remember a time when banks were reluctant to issue credit cards but, when credit cards were new, swipe fees were a necessary incentive to induce banks to issue them. Banks didn't charge a transaction fee for honoring checks and so swipe fees were a new source of income for them. No court has found that swipe fees violate U.S. antitrust law. The credit card companies have additional rules that restrict retailers' options to minimize swipe fees. If you accept Visa, for example, you are required to accept all Visa cards, no matter what swipe fee the issuing bank charges you. The credit card companies also prohibited merchants from charging surcharges to cover the swipe fee and mer- chant discount fee. Nine states have laws enforcing the surcharge ban. (New York's law was recently overturned and is discussed on page 56.) These bank rules and laws combined to allow banks to charge fees that were above the fees a free market would otherwise tolerate. THE LAWSUIT CHALLENGED SWIPE FEES ON ANTITRUST GROUNDS The lawsuit that was settled was a consolidation of more than 40 smaller class-action complaints and 19 individual cases brought by retailers and merchants against Visa and MasterCard and various banks that issued credit cards. The fact that this was a class-action litigation means that there were numerous retailers affected by the defendants' alleged actions, and it was impractical to have each of them bring suit separately. The plaintiffs wanted a remedy for all individuals and companies in the same situation. There are 12 million retailers and merchants that the plaintiffs claim to represent. The antitrust law that the plaintiffs relied on was enacted in 1890, and was designed to prevent monopolies from controlling markets. The plaintiffs argued that Visa and MasterCard used their domination of the credit and debit card industry to keep the swipe fees high. The plaintiffs claimed that Visa and MasterCard both restrained trade, fixed prices, and tied and bundled products in violation of antitrust laws. The plaintiffs also claimed that Visa violated the antitrust laws by attempted monopolization, and that it did have a monop- oly. The net effect was that the card companies could set high swipe fees. The Court did not reach the merits of the allegations because the parties settled before trial. THE SETTLEMENT ALLOWS RETAILERS TO SURCHARGE FOR CREDIT CARD SWIPE FEES Under the settlement, Visa and MasterCard agreed to establish a fund of $5.7 billion to compensate retailers and merchants who accepted Visa or MasterCard between Taking a Swipe at Swipe Fees Retailer anger and antitrust law collide over a $5.7-billion credit card fee settlement. by Jean Warshaw Almost 8,000 class members opted out of the settlement before the deadline and are free to press their claims against Visa/MasterCard. Image courtesy of Barry Burns B e a u t y A n d T h e L a w 3 1 4 . i n d d 5 2 Beauty And The Law 314.indd 52 2 / 3 / 1 4 3 : 1 8 P M 2/3/14 3:18 PM