Bank card fees draw swipes from retailers seeking caps
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If John Michael Kubera had his way, we would all be carrying around piles of cash.
A few weeks ago, the Castle Shannon website consultant launched a site listing businesses that offer discounts for paying in cash. The idea is for merchants to pass along their savings from not having to pay interchange fees -- processing fees that businesses pay to banks every time a customer swipes a debit or credit card.
Under a settlement with the U.S. Justice Department in October, Visa and MasterCard agreed to eliminate rules that kept retailers from offering customers incentives to use cash instead of credit. (Some businesses, such as independent gasoline stations, had side deals allowing cash discounts even before the settlement.)
Swipe fees have been a sore spot between retailers and banks for years, but the battle has been heating up lately, fueled by the Federal Reserve's proposed limits on debit card swipe fees set to go into effect this summer.
On Wednesday, the National Retail Federation launched a 60-day media blitz with the slogan, "Stop letting the big bank card industry swipe our money," aimed at winning public support and ensuring that the swipe fee cap takes effect as scheduled in July.
Mr. Kubera got his website idea late last year after noticing an ad on the table at Whiskey Hollow Grill in Dormont offering a 5 percent discount for paying in cash.
"It was the first time I had seen anything like that," he said. "I figured why not put up a site saying here are all the businesses that offer a discount?"
He started by cold-calling about 1,000 businesses, mostly in the Pittsburgh area.
"Some laughed at me," he said.
"Some said, 'That's illegal.' " He told them it wasn't.
So far, Mr. Kubera's website, www.discountwithcash.com, lists 100 or so businesses offering cash discounts, about half within a 200-mile radius of Pittsburgh. The site invites consumers and businesses to submit stores.
He said he's not looking to make money on the venture -- listings are free and there are no paid ads. Someday, though, he said he might be able to sell a smartphone application that people could use to locate places that favor cash.
Although Visa and MasterCard no longer prohibit discounts for cash, some experts believe consumers' addiction to plastic will prevent the practice from catching on in a big way.
"I just don't think people are going to carry that much cash," said Bill Hardekopf, CEO of Lowcards.com. "It costs $60 to $70 to fill up your car. I honestly don't carry $70 with me every day. We have become a pretty cashless society."
The listings at discountwithcash.com favor small independent businesses, not surprising, considering that those are the types of businesses that pay the highest swipe fees.
According to the retail federation, swipe fees average 1 percent to 2 percent of the purchase price with debit cards, and 2 percent to 3 percent with credit cards.
The biggest retailers, including giants such as Wal-Mart, are able to negotiate the best deals with banks for the lowest interchange fees because of the large volume of business they do.
A spokesman for the discount retailer said this week that the company was not considering offering cash discounts "because we're sticking to our own price leadership program."
As Mr. Kubera pushes locally to make cash king, the battle between retailers and banks over plastic payments rages on.
Legislation enacted last year required the Fed to ensure that debit card swipe fees be "reasonable and proportional to the actual cost" of processing the transactions.
The Fed proposed capping the fee at 12 cents per transaction, starting this summer, replacing a formula that averages 1.14 percent of the purchase price.
The proposal touched off a firestorm of protest in the banking industry poised to lose billions of dollars a year in swipe fee revenue, although smaller institutions with less than $10 billion in assets would be exempt.
Legislation has since been introduced in Congress that would delay the caps for up to two years to allow for more study.
Merchants claim they need relief from swipe fees that have skyrocketed and are strangling profits. Because swipe fees are a combination of a flat fee, typically 5 cents to 10 cents, plus a percentage of the purchase price, retailers say they can actually lose money selling small-ticket items.
Financial reform did not affect swipe fees on credit cards, but the retail industry has said it plans to push for caps as soon as limits on debit cards are in place.
Swipe fees are a behind-the-scenes cost of business, but retailers and bankers say the public has a big stake in what happens.
Big banks and credit unions claim a projected 70 percent reduction in swipe fee revenues would force them to make up the shortfall by raising the cost of other banking services. That could include anything from eliminating free checking accounts and debit card rewards, to imposing annual debit card fees or even limiting the size of debit card purchases, which would steer consumers toward credit cards (and their higher swipe fees).
Changes have already begun. Pittsburgh-based PNC Financial Services Group is keeping free checking for now but is phasing out debit card rewards for free checking customers and is starting to charge them a fee if they use another bank's automated teller machine.
Banks also have started to push customers toward credit by upping their cash-back offers and airline miles programs.
"There are some pretty sweet deals" on credit cards right now, said Mr. Hardekopf of Lowcards.com, adding that the best offers target people with excellent credit. Chase, for example, is offering a $150 cash bonus for customers who sign up for the Chase Freedom cash-back card and charge $500 in the first three months.
On the other side, retailers argue that consumers indirectly pay for swipe fees in the form of higher prices and that a reduction in those fees would mean prices would fall.
If debit swipe fees are lowered this summer, retailers also would have an incentive to encourage customers to use debit cards instead of credit, possibly offering discounts and enhanced loyalty reward programs. At gas pumps, consumers could eventually see three prices: one for cash, one for debit and one for credit.
While that battle continues, Mr. Kubera is urging people to save money now by asking retailers for a discount for paying in cash. "Talk to the person at the register," he said.
At Whiskey Hollow Grill in Dormont, owner Victor Tome said his offer of 5 percent off for paying in cash, which he started late last year, cut the percentage of customers using credit from about 90 percent to 60 percent. His credit card swipe fees average about 4 percent of the purchase price, not 5 percent, but he decided to give cash-paying customers an extra break.
Meanwhile, Mr. Kubera's website has been experiencing some growing pains.
A search last week for cash discounts within 200 miles of Downtown yielded a list of 45 businesses. But the owners of the first two places contacted -- Christos Greek restaurant, Downtown, and Michelle's clothing store in Bloomfield -- said they do not offer cash discounts. Both said they were unaware that their businesses were listed on the website.
After researching the matter, Mr. Kubera said those listings were two of a handful of businesses provided by a telemarketing service he hired to help.
Among several other businesses contacted on the list, some seemed reluctant to commit.
"I don't normally give discounts for cash. It's not common," said a man who identified himself as the owner of Crystal River Gems at Fifth Avenue Place, Downtown.
Asked about a cash discount at Napoli's Pizza, Uptown, a man answering the phone offered coupons instead. After some back and forth conversation, he offered $1 off any pizza for paying in cash, a number he seemed to come up with on the fly.
Mr. Kubera said he wasn't surprised by the less-than-formal response.
"That's the nature of this discount. It's a new thing," he said.
"There are businesses that still think it's illegal."
First Published May 19, 2011 12:00 am