Contributing to the high cost of credit

Swiping Fees

By Philip Mattera, director of the Corporate Research Project for the Dirt Diggers Digest

For the past two decades, groups of merchants have been suing Mastercard and Visa for charging excessive credit card processing fees, also known as swipe fees. That effort has now paid off with a tentative class action settlement that will reduce the fees by an estimated $30 billion over the next five years.

This deal is on top of about $6 billion the companies previously agreed to pay in damages. Together, the cases represent one of the biggest business litigation settlements ever.

As large as the amounts are, they are not putting too much of a dent in the profitability of Mastercard and Visa, which together rake in about $100 billion a year from merchants and together enjoy about $30 billion in annual profits.

The issue of swipe fees has come up in connection with the proposed acquisition of Discover, the perennial also-ran of the credit card world, by Capital One. In its announcement of the deal, Capital One claimed it would enable Discover “to be more competitive with the largest payments networks and payments companies.” It is making similar arguments in its filings with regulators to gain approval for the purchase.

While Capital One may not have caused as much grief as Visa and Mastercard, its track record shows it cannot claim to be the savior of consumers and small businesses. In 2012, for example, the Consumer Financial Protection Bureau fined the company $25 million and ordered it to refund $140 million to customers following an investigation of deceptive tactics used in marketing credit card add-on products.

Capital One has also paid out tens of millions of dollars in settlements in class action lawsuits alleging abuses such improperly raising credit card interest rates after promoting low rates and charging unfair overdraft and balance inquiry fees.

The largest penalties paid by Capital One have been in cases involving deficiencies in its anti-money-laundering practices. In 2018 it was fined $100 million by the Office of the Comptroller of the Currency for failing to file required suspicious activity reports.

In 2021 the bank was fined $290 million by the Treasury Department’s Financial Crimes Enforcement Network for doing business with check-cashing services known to be linked to organized crime in New York and New Jersey.

Capital One may not have accumulated penalties to the same extent as larger banks such as Bank of America, JPMorgan Chase, Wells Fargo and Citigroup, but its total payouts have reached nearly $1 billion.

If it succeeds in buying Discover, it will acquire a company with $275 million in penalties of its own. Most of that comes from a 2012 case in which the CFPB fined Discover $14 million and ordered it to refund $200 million to customers said to have been subjected to deceptive marketing tactics regarding credit card add-on products. In other words, practices similar to those for which Capital One was penalized that year.

The solution to excessive swipe fees will come not from allowing another player with a questionable record to join Visa and Mastercard in dominating the payments market, but rather through antitrust and other regulatory action restricting the predatory practices of that market.