Charging Customers Swipe Fees will Cut into Everybody's Profits


Despite high unemployment and an economy that just can't seem to get out of second gear, credit card companies have been seeing their numbers get better each month. As I mentioned previously, late payments have been decreasing since early spring, and charge-offs for bad loans have been falling, as well.

Credit card companies and banks have both felt the effects of these tailwinds, and banks, in particular, are expected to see these profits offset some of their losses in other types of loan activity. Issuers are feeling so confident, in fact, that credit card interest rates have been rising steadily, particularly for those with scanty or dodgy credit histories. Even rates on accounts with stellar credit have risen nearly one-third of one percentage point over the last year, padding the issuers' bottom lines even more.

Lawsuit settlement may crimp profits for all
These heady good times may be coming to an end, however. The Wall StreetJournal reports that merchants have long been unhappy with credit card giants MasterCard (NYS: MA) and Visa (NYS: V) , due to their long-standing policy of prohibiting merchants from assessing consumers an extra fee for using those cards for purchases. That unhappiness translated into a multitude of lawsuits against the two companies by a number of businesses who want the flexibility of recouping the swipe fees that they pay each time a customer brandishes a Visa or MasterCard.

Credit card companies aren't the only ones being sued, and banks like Bank of America (NYS: BAC) , JP Morgan Chase, Citigroup (NYS: C) , and Wells Fargo are also being targeted, because swipe fees go right into the issuing bank's pocket. The gist of the suit alleges that Visa and MasterCard, who set the swipe fees, have engaged in conspiratorial behavior in setting these fees. Approximately 50 lawsuits have been consolidated, some with file dates as long ago as 2005.

The trial is set for September, and most analysts predict that a settlement will occur before the trial date. The expected outcome is that merchants will be able to set surcharges on purchases where the customer chooses to use a credit card for payment. Because both Discover and American Express already allow merchants to surcharge as long as they do so for every credit card, it looks likely that any such purchase will soon have an extra fee attached.

Fool's Take
Do merchants really believe that consumers will simply pony up an extra charge at checkout with no argument? Perhaps, but their motivation for the suit also seems to be to pressure Visa and MasterCard to lower their swipe fees. The logic goes that revenue is dependent upon transaction frequency, so the card issuers won't put that recipe at risk just to continue with the higher fee schedule.

The banks keep the fees, however, so dropping the fees may not be as cut and dried as the plaintiffs believe. That battle may take some time to win if, in fact, the merchants prevail. Meantime, consumers may get very angry indeed. There are so many different ways to pay for goods these days -- including good old cash -- that paying an extra charge won't be accepted easily. Merchants may find customers stalking out of their stores in a huff, or simply foregoing those spur-of-the-moment purchases of which credit cards are so supportive.

I predict losers on both sides of the fence here, with incensed consumers right smack in the middle. As shoppers turn to alternative ways to pay, I see eBay's (NAS: EBAY) PayPal getting an even bigger piece of the e-payments pie, particularly with internet shoppers who usually use a credit card. Keeping an eye on the settlement process and subsequent scuffles should prove enlightening, indeed.

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Fool contributorAmanda Alixowns no shares in the companies mentioned above.The Motley Fool owns shares of American Express, MasterCard, Bank of America, Citigroup, and JP Morgan Chase. The Fool owns shares of and has created a covered strangle position in Wells Fargo.Motley Fool newsletter serviceshave recommended buying shares of Visa, Wells Fargo, and eBay.Motley Fool newsletter serviceshave recommended creating a write covered strangle position in American Express. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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