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Imagine strolling into Bob’s Sandwich Emporium to discover that the chalkboard behind the counter lists both lunch specials and financing specials.

That pastrami on rye with extra pickles, the board explains, will cost $10 if paying with a debit card, $10.16 if paying with a Visa credit card, and $10.25 if paying with an American Express card.

Quick: which card do you pull out of your wallet?

This scenario is anathema to the card companies and card-issuing banks that reap massive profits on the so-called interchange fees that merchants pay every time a consumer swipes a card. But it’s now a possibility, thanks to three converging events: new rules governing debit card fees under the Dodd-Frank financial reform law, two massive antitrust class actions against card companies, and a Justice Department antitrust investigation that appears to be coming to a head.

Debit card merchant fees are already significantly less than credit card fees and will almost certainly fall even lower under Dodd-Frank. And if, under pressure from the DOJ and private plaintiffs, card issuers let merchants offer discounts or surcharges that encourage customers to use their lowest-fee cards, consumers could decide en masse to use debit cards to save a few cents at the register. This could mean the end to popular rewards programs offered by the card companies, but would also likely save retailers and merchants billions of dollars.

Card companies and their affiliated banks make piles of money from interchange fees. For each U.S. transaction, a customer’s card-issuing bank charges the merchant a fee that is set by Visa and MasterCard. These fees average about 1.6 percent, including the lower-fee debit cards. AmEx, which forgoes a bank middleman to contract directly with the merchants, charges an average 2.5 percent for each transaction. The fees add up to big numbers: in 2009, interchange fees generated nearly half of Visa’s $3.17 billion net revenue and MasterCard’s $2.38 billion, according to Bloomberg News.

Consumers, however, never see or hear about those fees.

Contracts that merchants sign with card companies provide, at best, confusing directions about when and how they may apply a surcharge to steer customers from a higher-fee card to a lower-fee one. (This is why Bob may glower when he sees you pull out your AmEx to pay for a pastrami on rye, but he doesn’t say anything).

New law likely to cut debit card rates

New pressure on the card companies is coming from the Dodd-Frank law. It gives the Federal Reserve the power to set a ceiling on the interchange rate for debit cards. Debit card transaction fees are already much lower than credit card fees, and under the Fed’s supervision, those rates will almost certainly go lower still. In Europe, the retailers’ debit card rate averages about one-fifth of one percent.

In the last few weeks, while many consumers were using their credit and debit cards on vacation, lobbyists for AmEx, Bank of America, Visa, and JP Morgan Chase met with senior Fed officials to try and influence the debate over interchange fees. Visa and MasterCard argue that the interchange fees are necessary to cover the cost of transferring payment from a cardholder’s bank to them, and in return, they provide an easy and safe payment system. AmEx’s interchange rate, the company told Fed officials at a private meeting, “is based upon value delivered to merchants.”

Trish Wexler, a spokesperson for the Electronic Payments Coalition, a card industry trade group, said that the card companies are asking the Fed to conduct a study so that they better understand the implications of a new debit card ceiling before they enact new rules. Wexler said that any attempt to set a top rate would amount to an “unprecedented government overreach into the private market.”

Retailers and merchants, meanwhile, have been fighting for change in a pair of long-running multi-billion dollar class action lawsuits against Visa, MasterCard, and AmEx. Merchants argue that the card companies’ restrictions are anticompetitive and that they should be able to offer discounts to customers who use lower-fee cards.

The lawsuits have been moving slowly through the courts for more than five years. Visa and MasterCard merchants are awaiting a decision on class certification, while the AmEx retailers are still trying to convince a federal appeals court that they even have the right to sue.

Sources say DOJ close to filing antitrust lawsuit

The merchants’ lawsuits against the card companies could get a substantial push forward from the Justice Department.

In October 2008, the DOJ announced that it was investigating the card companies for their anti-surcharging and steering policies. That probe appears to be coming to a head.

Sources familiar with the investigation tell the Center for Public Integrity that the DOJ is close to taking the next step: filing a civil antitrust lawsuit. The sources say that Visa and MasterCard, at least, seem to be working toward a consent decree or settlement in which they agree to amend their business practices.

During a July 28 earnings call with investors, Visa chief executive Joseph Saunders said he met with DOJ officials “numerous” times. “Although the outcome is uncertain at this time, we are currently engaged in constructive negotiations with the department to resolve its concerns as it relates to Visa without litigation or payment of monetary damages and in a way that proactively addresses concerns in the covered litigation,” he said.

Visa and American Express declined to comment on the investigation. MasterCard did not respond to a request for comment. The DOJ said only that an investigation is ongoing.

And it’s not just the card companies that fear changes to interchange fees. A drastic cut in debit card fees would also hurt card-issuing banks, which get a big cut of the fees from Visa and MasterCard. New debit card fee regulations could cut annual interchange revenue at Bank of America Corp. by as much as $2.3 billion, the bank’s chief executive told investors in July.

Wexler, the industry spokesperson, said that merchants can already steer customers to debit instead of credit, or offer a discount to someone using a MasterCard instead of a Visa. The merchants, she said, want the freedom to steer customers from one card issuer–say, BofA–to another. This, combined with the Dodd-Frank, could be a disaster for smaller banks, she said. That’s because Dodd-Frank applies only to large financial institutions, with $10 billion or more in capital. Merchants then might favor cards from these big low-fee institutions at the expense of community banks, she said. The result: less competition.

Craig Wildfang is lead counsel for the class of plaintiffs suing Visa and MasterCard. Until recently, he said, Visa and MasterCard refused to share their rules on steering with merchants. Even now, he said, those rules are vague, and often applied in a more stringent fashion than the language would suggest. MasterCard, for example, says that merchants “may not discriminate” against any customer who wants to use a MasterCard.

“Generally speaking, merchants risk getting fined by the acquiring bank if they violate one of these rules, and they are never sure what they are allowed to do,” he said.

So what does all this mean for the consumer’s bottom line?

Card issuers say merchants are unlikely to pass along any savings from lower interchange fees, and that rewards programs that let a consumer pile up free airline miles or hotel points will go the way of the Brontosaur.

But retailers say competition will drive prices down for everyone. They say they are eager to offer discounts to customers who use low-fee cards. Use that savings, they say, to pay for your own flight to Spain.

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