We all know that when we go to a local mall, convenience store, restaurant or movie theater, we're paying for much more than just the product or service. When we purchase food at the grocery store, we're not just paying for that bag of chips, we're paying for the cost of getting it to the store, a portion of the electric bill of that grocery store, a small portion of the health insurance for the full time employees and even a portion of the high priced liability insurance that covers the store if you would slip after hitting a puddle and decide to sue. (Whether you are going to the mall or the movies it is important to know how your finances are, check out How Do Your Finances Stack Up?)

TUTORIAL: Credit Cards

These are well-known by most consumers but that bag of chips has a lot more fees built in to it than that. One of these fees took center stage again in late June of 2010. It's called the interchange fee, but politicians changed the name to the swipe fee.

Although statistics are scarce, blogs and websites are filled with articles about why it is still important to carry cash. Many of us don't carry cash anymore because credit and debit cards allow us to not have to carry around jingling coins or bacteria-laden bills and, presumably, cash is less secure than credit cards because cash doesn't allow us to dispute the charges. What we don't commonly think about is that credit cards come with a cost.

The Journey of the Swipe
You go in to your favorite store to buy the must-have shirt that will be your party shirt for the summer. You pick it out, try it on and head to the register to pay. You pull out your credit or debit card and swipe it through the machine. At that time, the merchant is charged an interchange or swipe fee. That swipe fee is normally 1-3% of the cost of your new shirt but some merchants are charged as much as 5%.

This fee may seem a little high but the banks and payment processing companies like Visa and MasterCard argue that when you swipe your card, the merchant is paid right away but it will most likely be a minimum of 30 days before you pay your credit card bill and possibly longer. You may argue that the interest you incur as a result of holding a balance pay for that expense but, according to the companies, interest alone doesn't cover the costs. (For a better understanding of credit card interest, read Understanding Credit Card Interest.)

Statistics
Interchange fees have averaged 44 cents for every transaction and, although this seems like a minuscule amount, merchants who ultimately pass that fee on to consumers paid $48 billion in interchange fees in 2008. For every $100 you spent, $2 of that has gone to credit card companies even if you paid cash. Americans pay two times more in interchange fees than they do in late fees and three times more than ATM fees.

The interchange fee is supposed to cover the cost of processing your credit card payment. However, according to the Merchant's Payment Coalition, "only 13% of the credit card interchange fee goes to processing credit card transactions; much of the rest goes to pay for billions of pieces of unsolicited junk mail annually, among other dubious credit card marketing activities aimed at students or those with bad credit histories."

The Reform
If there's a potential hero for the merchant and the consumer in this, it may be U.S. Sen. Richard J. Durbin. The Durbin Amendment sought to allow the Federal Reserve to set interchange rate fees and allow the merchant to set a minimum amount that a consumer must spend in order to use a card. Finally, retailers could offer customers discounts if they paid by cash or other methods that don't come with swipe fees.

In May of 2010, the bill passed. Credit card companies were concerned when the proposed cap on interchange fees was only 12 cents. In Late June of 2011, after a heavy amount of lobbying by special interest groups representing the big banks, the maximum interchange fee was set at 21 cents and will go in to effect on October 1, 2011

The Effects
The compromise left credit card companies breathing a sigh of relief but merchants, who were claiming victory when the fee was 12 cents, now applaud the cap but argue that the 21 cent cap will do little to help their bottom line and virtually assures that consumers won't see any price relief. The government found the same thing. A U.S. Government Accountability Office study found that when Australia lowered their credit card fees in 2003, it had no noticeable effect on the price of goods and services.

The Bottom Line
Although the swipe fee legislation serves the purpose of regulating a fee that was, for a long time, decided behind closed doors, it will only have a small effect on maintaining profit margins for merchants and little to no effect on lowering the prices that we pay for every day items. (To learn more about credit cards, check out How Credit Cards Built A Plastic Empire.)

Related Articles
  1. Credit & Loans

    10 Reasons To Use Your Credit Card

    There are several benefits to paying with credit instead of debit, if you use a credit card responsibly.
  2. Credit & Loans

    5 Extreme Ways To Raise Your Credit Score

    Desperate to rebuild your credit score because you can’t obtain a loan with a decent interest rate? Here are some extreme options to try.
  3. Personal Finance

    The Top 5 Personal Finance Experts to Follow in 2016

    Here is a look at five money and investing experts who can help you reach your financial goals for 2016.
  4. Economics

    What is a Trade Credit?

    Trade credit means that a customer purchases goods from a seller who allows the purchaser to pay for those goods at a later time.
  5. Investing

    Amazon Financing Now in the U.K.: Is America Next?

    Amazon has unveiled a great credit product in the U.K. Will America be the next country to have access to this financing option?
  6. Credit & Loans

    Why You Should Use Your Credit Card For Purchases

    Responsible credit card users who always pay off their monthly balances should use their cards to buy everything.
  7. Credit & Loans

    The Fed's Interest Rate Rise & Your Credit Cards

    The U.S. Federal Reserve recently raised the lending rate from 0% to 0.25% – the first time since 2006. How does that affect your credit card payments?
  8. Investing News

    Warren Buffett: Be Fearful When Others are Greedy

    It is prudent for the investor to understand when the party has gone on long enough and the clock is about to strike midnight. Be fearful when others are greedy.
  9. Savings

    Building an Emergency Fund

    Do you have enough savings to cover the costs of unforeseen crises? We show you how to plan ahead.
  10. Retirement

    Understanding Credit Card Interest

    Paying these rates can impact your disposable income and your investment returns.
RELATED FAQS
  1. Can a business charge me an extra fee for paying with my credit card instead of cash?

    In some states a business is permitted to charge an extra fee for customers paying with credit cards instead of cash. This ... Read Full Answer >>
  2. How can you pay your Walmart credit card?

    Holders of Walmart credit cards can make payments on their balances due by mail, online or at Walmart and Sam's Club stores. ... Read Full Answer >>
  3. Is Apple Pay safe and free?

    Apple Pay is a mobile payment system created by Apple to reduce the number of times shoppers and buyers have to pay for goods ... Read Full Answer >>
  4. Can you use your Walmart credit card at Sam's Club?

    Consumers can use their Walmart credit cards to shop at Sam's Club. However, they cannot use their Walmart credit cards when ... Read Full Answer >>
  5. How can you cancel your Walmart credit card?

    Walmart offers two types of credit cards: the Walmart MasterCard and the Walmart credit card. How to Close Your Walmart Credit ... Read Full Answer >>
  6. Does the Walmart credit card have an annual fee?

    The Walmart credit card does not charge annual fees to its cardholders. It does, however, have other fees associated with ... Read Full Answer >>
Trading Center