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.)

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.)

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