Cumberland Farms projects its spending on card fees will hit $48 million this year. Senator Reed speaks on the Senate floor about the impact these fees have on Rhode Island businesses.

Senator Jack Reed (D-RI), a senior member of the Banking Committee, and a key supporter of the “swipe fee reform law,” voted to prevent credit card companies and big banks from restoring a “hidden tax” on consumers and small businesses.

“Today’s vote is a significant victory for Rhode Island businesses and consumers. We need to make these non-negotiable transaction fees more transparent and subject to the discipline of the free market system,” said Reed.

“Swipe fees” or “interchange fees” are costs banks and credit card companies charge small businesses and consumers each time a customer uses plastic to pay for a product.  Credit card companies like Visa and MasterCard earn over $16 billion annually from these fees.  “Swipe fees” started out covering the cost of processing a credit or debit card transaction, but have grown by over 300% in the last decade, even though processing costs have actually decreased.  

These costs add up and get passed on to the consumer.  The Food Marketing Institute estimates the average American family annually ends up paying more than $400 in “swipe fees” to banks and credit card companies.

Last July, Senator Reed helped author the Wall Street reform law containing the bipartisan “swipe fee” reform provision.  The law requires the Federal Reserve to set fair debit card fees.  As a result, starting July 21, 2011, the Fed plans to lower the fees that stores must pay banks each time a shopper swipes a debit card from the current average of 44 cents per transaction down to about 12 cents per transaction.

Small banks with less than $10 billion in assets are exempted from the new fee structure.

Earlier today, Reed spoke on the floor of the Senate about the impact the law will have on Rhode Island.  An excerpt of his remarks follows:

“Senator Durbin proposed this provision because businesses like in my home state of Rhode Island, Cumberland Farms, the old convenience store chain that I grew up with and the quintessential family-owned business, pays almost as much in these hidden fees as it earns each year in profits. These fees roughly equal their profit.

“Now, interchange fees for Cumberland Farms are their second-largest expense.  It's not the milk, not the gasoline, it's not a lot of things.  It is their second-largest expense.  Despite the fact that the total number of gallons of gasoline that they sold has remained flat, the interchange fees have increased 237% from $13 million in 2003 to a projected $48 million this year.

“Cumberland’s CEO calls this increase a “runaway train.”  When gasoline was $2 per gallon, interchange fees were about 3 cents per gallon.  Now that gas prices are about $4 per gallon, interchange fees have increased to 5 cents per gallon.  So, for the same 15 gallon fill-up, the hidden fees increased 63%.

“So the motorists, the local Rhode Islander filling up at the local corner gas station is paying 63% in their fees on top of increase in the price of gasoline.  The actual debit card services haven't changed.  But because the price of gas increased, the fees almost doubled.  That's a pretty good deal for Visa and MasterCard and banks.  Unfortunately as these fees continue to increase, the increase -- they increase gas prices, prevent investment, preclude new hiring.

“The convenience store industry reports overall it pays more in these fees than it's earning in profits. That's overall across the board, across the country.

“Here's another example: a very local company, very small business, Chocolate Delicacy in Rhode Island, it pays a swipe fee on every piece of chocolate sold when paid by debtor gift card which amounts to 60% of their purchases.

“The owner, Marie Schaller, said she feels she has no choice but to pay the fee.

“The growing swipe fees have meant a cutback in hiring for Marie.

“At the Beehive Café in Bristol, Rhode Island, a cup of coffee costs $1.75.  The swipe fee is 15 cents.  Because card fees are hidden and there is no availability to negotiate them, the owner said Visa and MasterCard inserted themselves into every single transaction that takes place equating to a tax on commerce.

“This is not free enterprise.  The small businessperson is trapped.

“When consumers pay for drinks with debit cards, 7-11 owners told me they lose money on every transaction.

“Why don't supermarkets, drugstore and other merchants negotiate to pay less?

“They really can't.  The fees are set by Visa and MasterCard and the card networks.  They have no bargaining power.  And most merchants are left with no choice but to accept the cards.  You can't play if you don't pay.”