07/26/2013 08:42 am ET Updated Sep 25, 2013

Next Time You're on the Phone With Your Bank, Take a Minute to Gripe About the Swipe, Too


I rarely carry cash, and I am not alone.

Many Americans from coast to coast are saying goodbye to cash and hello to a debit card. I whip out my debit card for everything from a $1 candy bar to $200 in groceries. I am a serial debit card user, and not once has a merchant ever asked me to pay for the privilege of using a debit or credit card.

I wouldn't be shocked if they did, though. Banks and credit card companies are ripping off merchants right and left by requiring them to overpay for their customers to swipe their cards. Swipe fees -- the money merchants pay for every card transaction -- have tripled in the past decade. They are now the second highest expense for merchants, after labor.

Merchants eat about half of the costs of swipe fees, but the other half is passed along to you and me, the customers, in the form of higher prices. This means that even those people who pay with cash -- mostly lower-income people -- pay the price of swipe fees, too.

The point is this: Through a secretive, sneaky, back-door approach, banks that issue the cards, along with Visa and MasterCard, have figured out yet another way to suck money from our pocketbooks without our ever even knowing about it.

Periodically, Visa and MasterCard get together and agree to set the various fees associated with using a credit card. They own 80 percent of the credit card market, and they never undercut each other. While cardholders think they are the primary customers of Visa and MasterCard, in reality, they are not. The banks are. Visa and MasterCard want to make sure the banks that issue their cards are happy with their cut -- and why wouldn't they be since their transaction costs are extremely low and continue to decrease with technological advances.

Merchants have been fighting the credit card industry in and out of court as well as in and out of Congress to stop the fee hikes, but to little avail to date. The Federal Reserve estimates that it costs the banks about 4 cents a swipe on a debit card. Other estimates put the cost as low as 1 cent a transaction for credit cards. But banks charge merchants 24 cents a swipe for a debit card. Before Congress cut the debit card swipe fee in half in 2011, it was 42 cents a swipe. A credit card swipe costs merchants up to 4 percent of the charge amount. Four percent may not sound like a lot but it adds up to around $50 billion a year for banks and the credit card companies -- $30 billion in credit cards and $20 billion in debit. For a small business, the fees can wipe out or drastically reduce its profit margin.

Take, for example, a cup of coffee. If I go to a Mom-and-Pop coffee shop and buy a cup of Joe for $1.50 with a debit card, the owner pays the bank 24 cents for that transaction. He makes no money. More likely than not, he loses money. He'd be better off just giving the coffee away! Or moving his business to Europe!

Swipe fees in Europe are eight times lower than in the U.S., even though the cost to swipe a credit card or debit card in Boise is no different than swiping it in Paris or London. The European Commission recently proposed that Visa and MasterCard must cut their swipe fees even further in the EU, yet in the U.S. we continue to serve at the pleasure of the nation's biggest banks.

The swipe fee has just become another way for banks to clean up -- at the expense of small business owners and the average Joe, both still struggling to recover from a recession brought to us by... who else, banks.

So, the next time you're on the phone with Visa or MasterCard or your bank, trying to figure out the latest fee they've tacked onto your bills or checking accounts, take a minute and gripe about the swipe, too.

NOTE: In the spirit of full disclosure, one of my clients, the Merchants Payments Coalition, advocates on behalf of lower swipe fees.