Are Swipe Fees a Hidden Sales Tax on the Poor?

Let’s acknowledge that someone has to pay for everything.

When Visa and MasterCard impose a fee on credit and debit card transactions, retailers have to pass on their costs through higher prices. If you use a credit card, VISA and MasterCard generally charge between 1 and 2 percent of the transaction amount. With a debit card, the fees are lower. Using a card with miles or another rebate costs more. Using the card in an unusual location, such as a gas station, can also mean a higher swipe fee.

The VISA-MasterCard duopoly depends on a restraint against market forces. There is incentive for buyers (retailers primarily and consumers secondarily) to opt out and there is no real price sensitivity. It would seem that the benefits of seamlessness digital transactions would lead to lower prices, but in fact, the duopoly has been raising prices for some time. Retailers have little choice but to accept the fees. They cannot offer a discount to cash customers. Many retailers operate at very low margins. Grocery stores often operate with margins below 5 percent, for instance.

The system actually creates incentives for consumers to pay more. This is because people are attracted to the benefits of cards that generate higher interchange fees. Those dividend miles cards, U-Promise rebate cards, and cash back cards all stick retailers with a higher toll.

Guess who ends up paying the bill? The answer, according to a new study by the Federal Reserve Bank of Boston, is that cash paying consumers subsidize card users. The Fed says cash customers cross-subsidize the purchases of “swipers” to the tune of about $49 per year. Finding an average cost is problematic. The Fed says that households making less than $20,000 per year suffer a transfer of about $21 a year, whereas a high-income cash paying household pays $750 a year in additional retail costs that are borne by the “swiper” freebie.

Since cash consumers tend to be people that don’t have access to credit, it follows that this is another case of the poor paying more.

The possibility that swipers get a free ride is very relevant to the current debate surrounding the Durbin Amendment. Aside from the curb on debit card interchange fees, Durbin also allows retailers to offer a cash discount. VISA hates the Durbin Amendment. This might be why VISA shares were trading at $95 prior to the Durbin Amendment, and now sell for about for about $74.