Will Inflation Bring New Swipe Fee Reform?
By Lorenzo Cruz
The credit card swipe fee debate could reignite as interest rates rise and inflationary pressures persist into 2023. If the sparks fly and catch fire, retailers could reunite to advocate for interchange fee reform, which has severe negative financial consequences for banks, the electronic payments ecosystem, and consumers alike.
The Importance of Interchange Fee
During the last legislative session, a retail coalition led efforts to introduce legislation that would have prevented banks from applying interchange fees on the tax portion of a credit card transaction and would impose a $200 fine per transaction for any entity that violates the law. Similar legislation has been offered across the nation more than forty times over the last 16 years. To date, no state has enacted the legislation, nor has this model legislation made it out of any committee.
Retailers contend this change would provide some relief for tax collection and would lower their second highest expense — credit card swipe fees. Members of the Wisconsin Bankers Association (WBA) empathize with retailers’ concerns, but there are other ways retailers could receive vendor compensation as payment for that work.
Interchange fees remain a critical revenue stream for banks of all sizes in rural and urban markets. The fees allow banks to recover the cost for fraud protection and for cybersecurity that card issuing banks provide to their customers. Retailers and consumers enjoy the credit card fee benefits of a seamless globally accepted transaction and a guaranteed payment that is secure, convenient, and affordable. Retailers also see higher volume and sales from credit card use, faster transactions, lower costs than those associated with handling checks and cash, and more sales channels.
Negative Impacts on Wisconsin
Passage of interchange fee legislation would have negative and impractical implications for the electronic payment system and consumers. Consumers would have to undergo a split tender transaction, being forced to use the credit card for the total sum of goods or services purchased in the first transaction but then would pay in cash or check for the remaining tax portion in a separate transaction. Retailers could see an increase in customer confusion and frustration as the speedy checkout line becomes a distant memory.
Currently, the electronic payment system has no way of separating out the tax piece of the transaction. Financial institutions and card networks only see the full transaction sum when approving, routing, and settling electronic payments. This design protects consumers’ privacy and allows for lightning speed transactions.
Visa’s network alone processes over $12 trillion in transactions annually. Visa has the capacity to handle over 65,000 transactions a second, however, the proposed special tax treatment change would require a major, costly overhaul of the system. The chip conversion for credit cards took over 25 years to research, test, and implement, which goes to show there is nothing simple about making changes to these networks. Wisconsin could easily become an island in the electronic payment space if the legislation passes.
With prices of gas and food increasing and talks of recession afoot, the last thing consumers would want is a legislative change that makes it potentially more difficult to use their card during these challenging times. WBA urges our retail partners and customers to pursue vendor compensation alternatives rather than tinker with the interchange fee in a harmful manner. Additionally, WBA members are encouraged to continue to educate customers and policymakers on the importance of interchange fees to banks and the communities they serve.