Opinion: A 50-State Swipe Fee Fight Will Hurt Consumers Nationwide

You could be forgiven if a recent court ruling about swipe fees in Illinois doesn’t immediately grab your attention.

But you may want to pull up a chair because it absolutely affects you. Because here’s a little secret: It’s not really about Illinois. 

It’s about what comes next. And what’s next is some 20 states that are on the sidelines, with legislation of their own, watching keenly to see what happens. 

That’s why the federal Office of the Comptroller of the Currency has weighed in with some alarm, now that the existing payment architecture is at risk of being blown up. 

It’s all about what merchants (and, directly or indirectly, consumers) are charged when it comes to credit-card transactions. Illinois passed legislation eliminating swipe fees on at least a portion of those transactions, involving taxes and tips. 

The motivation is reasonable, certainly from the consumer’s perspective: That such fees are excessive and need to be trimmed back.

But even though the proposed legislation doesn’t cover the entire transaction, it’s a clever wedge in the door. Once there’s an opening, watch out.

Not just taxes and tips could be in play, but eventually the rest of the bill as well. And not just Illinois, but every other state in the nation.

A recent federal district court ruling upheld the crux of the legislation, (which hasn’t yet gone into effect, but is slated to do so on July 1). A key point here: Who exactly is in charge?

In other words, are states within their rights to look out for the financial interests of their residents, and craft their own legislation about swipe fees? Or is this more properly a federal matter, covered by the National Bank Act?

This is precedent-setting stuff, which is why the OCC jumped into the fray with an amicus brief.

The federal stance: This is a national issue, and a pretty important one for the smooth functioning of financial machinery. In fact the Illinois bill represents “an improper and undeniable state interference with federally authorized banking powers that drive the nation’s economy.”

Here’s why: Let’s say the legislation goes forward, and other states quickly follow suit. At that point we’re looking at a potential 50-state patchwork of where swipe fees are allowed, and at what level, and for which particular slivers of the transaction.

That’s an obvious nightmare for data collection and regulatory compliance, for merchants and banks and payment networks. (Potential civil penalties: $1,000 per transaction!) The sums involved in managing it all — even for a single state — would be “staggering,” according to the brief.

Of course these financial institutions are hardly paupers, and it’s hard to feel too sorry for them.

But in an era when the economy is going through real trouble, and experiencing all sorts of convulsions — involving growth, employment, supply-chain bottlenecks, and stock-market swoons — this voluntary gumming up of the machinery of commerce is probably the last thing the country needs.

So here’s another idea: This case is obviously a pretty hefty negotiating club if organizations like the OCC and the Bank Policy Institute and the Consumer Bankers Association are all getting involved. 

So if it’s consumer costs you want to bring down, use the threat of that club to push swipe fees in a more modest direction. There is some precedent here: Major payment networks like Visa and Mastercard already arrived at such a pact just recently, agreeing to lower such fees by 0.1% for five years.

That’s the kind of collaboration that could bear real fruit, and generate win-win outcomes. States and consumer groups achieve a lighter burden on consumers, and banks and payment networks avoid the prospect of a balkanized system that sees existing national norms totally dismantled.

It could also help keep merchants in the fold, some of whom are going cash-only to avoid the typical 2-3% swipe charge eating into their slim margins. When they do, by the way, banks and payment networks lose too — in terms of missing out on all that highly valuable data about where users are spending their money.

Although the Illinois case has certainly opened up a Pandora’s Box, here’s one thing it is helping clarify: Where exactly this right to set swipe fees is coming from. They aren’t determined by the federal government, after all; they come from the payment networks, aren’t divinely inspired, and so can be changed if necessary.

A 50-state free-for-all, and all the regulatory and compliance and cost nightmare that entails, probably isn’t in anybody’s interest. Instead, there is room to work together here for a mutually beneficial outcome — and that’s exactly what both sides should explore.