Most people are keenly aware of the annoying ATM fees, late fees and over-limit fees that some banks impose. Yet few know about the credit-card “swipe fees,” which are invisible to consumers and have been the bane of hundreds of thousands of merchants, including Mike and Suzanne Schumann, furniture-store owners in Minneapolis.
For the Schumanns, who own three storefronts, staying ahead of the cost of these swipe fees is as critical to their business as staying ahead of interior design trends.
That’s because the costs associated with accepting plastic amounted to more than their profit and represented their third biggest overhead expense last year—after rent and payroll.
A merchant’s swipe fee is based on a complex algorithm that accounts for variables such as the type of the credit card, but the fee generally amounts to between 1.5% and 3% of a transaction.
The Schumanns, co-owners of Traditions Classic Home Furnishings, are among many merchants who say they hope they soon may be able to impose a surcharge of 2.5% to 3% each time a customer pays with a credit card, in order to help cover their swipe fees. A 2.5% surcharge on a $3,000 sofa amounts to $75, for instance.
Visa Inc. and MasterCard Inc. have long banned such surcharges in the U.S., as part of the rules for retailers such as the Schumanns to follow in order to accept their cards.
But that no-surcharge rule is likely to be eliminated or altered, under a potential settlement of long-standing lawsuits retailers have brought against the card networks and numerous banks that issue their cards, over the setting of the fees.
The settlement discussions have taken place over the past year, and some expect a deal to be reached before the September trial date for the litigation, which includes more than 50 lawsuits filed by merchants since 2005.
A settlement could also include payments by the defendants ranging from $8 billion to $12 billion and a temporary reduction in interchange fees, according to analysts. Visa and MasterCard, which allow cash discounts, declined to comment.
Retailers and trade groups for years have been angered by fees charged on card transactions.
Credit-card swipe fees cost merchants and their customers $30 billion a year, according to estimates by the National Retail Federation. The fees are meant to cover processing costs. But retailers and other businesses, small and large, are angry, in part because some of the fees may be used by issuers to also shoulder the cost of their elaborate marketing campaigns, such as benefits programs for shoppers.
A settlement could bring a new dilemma for U.S. merchants like the Schumanns, however.
Consumers may be turned off if they feel they’re being penalized for paying with plastic, especially if they don’t have a previously existing relationship with the merchant, according to Amar Cheema, associate professor of commerce at the University of Virginia, who has studied how consumers think about and respond to surcharges.
When considering their options, retailers may be “better off incorporating the surcharge into the price of the product itself” and then giving a discount for paying cash, says University of Virginia’s Mr. Cheema. “You frame the price as an additional reward for a cash-toting customer rather than a penalty for those using plastic,” he suggests.
Another drawback for smaller merchants may be slower checkout lines. That could leave them vulnerable to competition from rivals who can get shoppers in and out more quickly.
Even Mr. Schumann, one of the many small business plaintiffs in the litigation, notes that he wouldn’t necessarily begin tacking on surcharges for purchases with plastic right away. “I think it will depend on what our competitors do,” he says.
Keith Lipert, owner of Keith Lipert Gallery, a gift shop in Washington, D.C., says he wouldn’t impose a surcharge. About 95% of the purchases in his store are made with credit cards, he says.”I don’t think customers would be happy,” he adds.
Although he isn’t involved with the suits, he says he finds it “unconscionable” that he’s charged a percentage of the sale for swipes rather than a flat fee.
The payments companies and banks argue the fees are justified because the money helps pay for efforts to keep fraud costs down and card acceptance helps boost sales for merchants. They also note there are costs associated with handling cash and checks.
Andrew R. Johnson contributed to this article.