by Ben Dwyer A new bill intended to change how credit card processing fees are calculated has been introduced for the Washington, DC area. What is it, and could it come to your area?
What is the Fair Swipe Act?
The Fair Swipe Act, introduced by DC council member Charles Allen, would change the calculation of credit card processing fees. Currently those fees are calculated on the total bill or purchase. Instead, under the Fair Swipe Act, the fees would be calculated only on the subtotal. That is, on the amount prior to taxes and any added tips.
Both sales tax and tips increase the total bill of a purchase, but are not kept by the business. (Sales tax goes to the government and tips go to the employee or server.) Essentially, businesses pay more than their fair share when processing fees are calculated as a percentage of the total vs. a percentage of the amount of their revenue. As quoted in Forbes, Allen stated, “There’s no reason banks and large companies like Visa and Mastercard should profit from the required collection of sales tax and tips. They don’t help the business remit the sales tax or distribute the tip to the employee.” Allen is arguing that Visa, Mastercard, and acquiring banks don’t provide any service related to the tax or tips and thus should not profit from those line items.
The Act has gained support from small business coalitions who believe it corrects an unjust calculation of expensive swipe fees.
How are credit card processing fees currently calculated?
To better understand the Fair Swipe Act and possible savings, it’s important to understand how those fees are currently calculated. When your customer pays with their credit card, your business pays a fee comprised of three separate parts: interchange, assessments, and processor’s markup. For the purposes of this example, let’s just include all of those components together and assume an all-in credit card processing fee of 2%, similar to what businesses that use CardFellow to find their processor will pay.
Example Calculation
Let’s say you own a restaurant, and a diner racks up a $100 dinner bill. If you live in a state with a 5% sales tax, that brings the total to $105. If the diner leaves a 20% tip, the total is now $125. With the current structure, the swipe fees are calculated on that $125, meaning you’ll pay 2% of that even though your business only actually keeps $100 of it.
You’ll pay $2.50 in fees on this bill with the tax and tip instead of $2.00 without it. While 50 cents might not seem like much, it adds up over hundreds (or thousands!) of transactions. That’s especially true if you’re in a state or city with higher sales taxes, or have larger average transactions.
The Restaurant Association of Metropolitan Washington estimates that a full-service restaurant in the DC area could potentially save as much as $14,000 per year if swipe fees were eliminated from the tax and tip portion of the bill.
Benefits of the Fair Swipe Act
The primary benefit is lower processing costs without cutting corners. With credit card processing fees representing a significant expense for most businesses, lowering them has huge benefits. Many businesses face the challenge of raising prices to account for processing fees and risk reducing their competitiveness with larger competitors, or passing along the fees to customers that use cards and risking customer irritation.
Lowering fees without doing either of those things is an appealing prospect for small businesses.
Where the Act Applies
Right now, the Act only applies in Washington, DC. However, several states are considering similar legislation. Illinois passed a similar law (the Interchange Fee Prohibition Act), which was set to go into effect in July, but has since been challenged in court and is awaiting decisions. Other states with similar legislation may make adjustments based on the results of the Illinois case.
Be sure to keep an eye on this blog for updates.
Challenges of the Fair Swipe Act
The only real challenge of the Fair Swipe Act is that many credit card machines and POS systems may require updates to effectively handle splitting out taxes and tips to apply fees to just the subtotal. However, since many machines already have the ability to show taxes and tips as individual line items, such an update should not be overly difficult, if needed.
Opposition to the Fair Swipe Act
Opponents of the Act (primarily banks and credit card processors) point out that the current system is standardized and efficient. They argue that steps like excluding specific line items from fee calculations adds complexity that could lead to errors. Additionally, they argue that local or state laws that attempt to regulate swipe fees could violate federal laws.
Some also say that without financial incentive to process the entirety of a transaction (including tax and tips) processors will simply choose not to process that part of the transaction. That would mean that customers would pay the bill with their card and the tax and tip with cash. Or, opponents say, the processors may simply choose not to serve that area at all.
These warnings seem overblown – a processor that won’t service businesses at all would be cutting off their nose to spite their face. They would still receive money for processing the transaction, just not the portion of it for taxes and tips.
Lastly, a comment that comes up every time swipe fee reform comes up: facing reduced revenue from swipe fees, banks may react by raising other fees, potentially on consumers, or reducing rewards program benefits. These are certainly possible consequences, but haven’t always come to pass.
Other Ways to Lower Swipe Fees
The Fair Swipe Act doesn’t apply everywhere yet. But you can still take action to lower your credit card processing costs. Start with a realistic comparison of your current costs to the best possible rates available to your business. CardFellow offers a quote comparison marketplace where you can see real, fully-disclosed quotes from multiple processors. All quotes are broken down to show you exactly what you’ll pay and you can call us for expert, independent assistance. Best of all, it’s free and only takes a few minutes. Try it now!
