Swipe This: Small Businesses Smile About Card Fee Controls

Elmore Store owners Warren and Kathy Miller are elated that the Senate passed legislation that could limit the swipe fees they pay with each credit-card and debit-card transaction.
Elmore Store owners Warren and Kathy Miller are elated that the Senate passed legislation that could limit the swipe fees they pay with each credit-card and debit-card transaction.

Just yesterday, a customer at Elmore Store, a small convenience store in 850-resident Elmore, Vt., paid for a purchase with an American Express (AXP) card, then asked the clerk to void the transaction and use a different card instead. Although Elmore Store didn't make a penny on the first transaction, American Express still charged the store 81 cents for the voided swipe.

"This is the kind of racket that has to be stopped," says Kathy Miller, who owns the store along with her husband, Warren, both pictured here. So it's no wonder that Miller, along with many small-business owners, are elated at the news that these swipe fees could be reduced. "I think it's wow!" Miller says.

The U.S. Senate on Thursday passed an amendment that would allow the Federal Reserve to limit the fees that businesses pay for credit- and debit-card sales. The amendment is part of the broader financial services reform legislation, and it still has to win House of Representatives approval before it becomes law, but analysts expect that will happen, according to Bloomberg News.

Assistant Senate Majority Leader Dick Durbin, D-Ill., who proposed the amendment, called the vote a victory for small businesses. "It will prevent the giant credit card companies from using anti-competitive practices, allow merchants to offer discounts to their customers and restore common sense and fairness to this broken system," Durbin said in a written statement. "Making sure small businesses can grow and prosper is vital to putting our country back on solid economic footing."

Credit-Card Stocks Fall

Of course, while the amendment helps small business owners like Miller, it will likely reduce profits credit-card companies like Visa (V), MasterCard (MA) and American Express. Visa, which has the largest network of debit cards, saw its stock fall 9.9% to close at $77.26 per share Thursday. MasterCard shares dropped 8.5% to $212.45 per share, and American Express was off 5.1% to $40.64 per share.

The nation's largest banks, which also issue credit and debit cards, will also collect lower fees as a result of this amendment. Credit and debit card issuers, including JP Morgan Chase (JPM), Bank of America (BAC), Citigroup (C) and Capital One Financial (COF), saw their share prices fall Thursday as well.

Credit -card companies argue that the legislation would hurt consumers. If it passes, banks will have to recoup those fees -- which cover not only the cost of processing a transaction, but also some operational costs, such as fraud protection -- from customers instead of retailers, American Bankers Association chief executive Edward L. Yingling told The Washington Post.

Visa sent along this statement: "Visa will continue to work with policymakers to educate them about this flawed legislation that imposes price controls on debit products and allows retailers to dictate which payment card is used by consumers at the point of sale."

Small Businesses Rejoice

But Senator Durbin argues that Visa and MasterCard have continued to raise swipe fees even though processing costs have decreased. Credit- and debit-card networks charged an estimated $48 billion in swipe fees in 2008. "High swipe fees are yet another way that banks and credit card companies hurt small businesses by charging fees that cut into already tight profit margins," Durbin said in his statement.

At Elmore Store, Miller says that she and millions of small business owners have no control over credit card fees. They can't negotiate the rates or add it to their customers' bills, and that hurts their profit margins.

"Each time a customer swipes their card, it costs us 2.65% plus 20 cents per sale," Miller says. "If a bicyclist stops for a bottle of water, it costs 23 cents to swipe the card. You do the math – it hurts."