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Philadelphia Business Journal: Banks decry proposed Pennsylvania legislation as $147M giveaway to big retailers

| Philadelphia Business Journal

By Jeff Blumenthal – Senior Reporter, Philadelphia Business Journal

Jun 17, 2024

Newly proposed legislation in the Pennsylvania House of Representatives would prohibit financial institutions from collecting hundreds of millions of dollars in fees on the sales tax portion of credit and debit card transactions.

Critics of the legislation, most notably banks and electronic payment companies, say it would add to the burden on small businesses and does not guarantee savings will be passed along to consumers. Proponents, led by retailers and merchants, argue that it is merely restoring fairness to the state’s tax system and lifting a heavy financial burden from small businesses.

The legislation, House Bill 2394, passed the finance committee last week by a party line vote of 14-11 with all Democrats voting in favor. It could go up for a vote next week in the full chamber, as the House is not in session this week.

Merchants are charged with an interchange fee, also known as a swipe fee, that is applied as a percentage of the transaction every time a customer pays by credit card. That includes state sales and use tax, which in Pennsylvania is 6% of the total purchase, a number that increases to 8% in Philadelphia.

The primary sponsors of the legislation, Reps. Greg Scott (D-Montgomery) and Steve Samuelson (D-Northampton), claim it would return fairness to Pennsylvania’s tax system by prohibiting swipe fees from applying to the sales & use tax portion of those transactions.

“Merchants are merely performing their state-mandated duty to collect and remit taxes and should not have to pay an additional cost to do so,” Scott and Samuelson said in a memorandum introducing the bill. “Relieving our local merchants of this undue financial burden can make the critical difference for so many businesses already operating on thin margins.”

Citing data provided by the Merchants Payments Coalition, Scott and Samuelson said swipe fees are most merchants’ highest operating cost after labor and must be built into pricing, driving up expenses for the average family by close to $1,000 a year.

But a statewide coalition of bank and credit union advocates say the legislation amounts to a $147 million “giveaway” to big box retailers with financial institutions, customers and small businesses bearing the costs based on state sales tax estimates for fiscal year 2025.

“What we’re really trying to do right now, as community banks and credit unions, is to explain that this is a cost of a system, and that this legislation is going to change the way we operate this system,” said Kevin Shivers, CEO of the Pennsylvania Association of Community Bankers.

Shivers said retailers are trying to portray interchange fees as a fee for the privilege of paying a tax and are using state legislatures across the country to try and reduce the amount of money they pay to use the electronic payment system. “They want to pay 97 cents for the dollar and the banks are going to have to absorb it because the interchange fee, that’s the on and the off ramp to the electronic payment system. And that goes through the issuing banks,” Shivers said. Shivers said when a customer has a problem with their credit card, such as a payment not going through or concern about potential fraud — they contact the financial institution, which incurs costs to manage electronic payment systems, in addition to the transaction costs that go from taking the money out of one account and depositing it into another.

“And so the argument that the big boxes have tried to portray in Harrisburg is that this is a fight between the retailers and the credit card companies,” Shivers said. “In reality, the portion of the transaction that they’re trying to go after here are a part of the cost that the financial services system pays to access the electronic payment system.”

Shivers said many small retailers do not have chip or tap card readers because the new equipment is too expensive and the older ones that read cards by swipes still work just fine. He said if the legislation becomes law, every business that accepts electronic payments is going to have to purchase new equipment.

“So you’re looking at significant costs for the average small business [and] it’s going to be five or six years before they finally are able to pay for the cost of that new system,” he said.

Retailers argue that they have seen an explosion in the amount of interchange fees they have paid over the past decade. Scott and Samuelson said that figure more than doubled over the past decade to a record $137.8 billion nationwide.

Shivers said that is true, but only because the number of electronic payments has gone up. He said larger retailers have been able to save money by having more self-checkout options and redeploying employees to other functions.

“The big boxes actually want to eliminate other forms of payment,” Shivers said. “They want to go to all electronic payment, because they have experienced a significant savings.”

While proponents of the legislation also argue that it would allow retailers to pass the savings on to consumers, Shivers said history shows that is not the case. He specifically cited an attempt by Congress to curb interchange fees through the Durbin Amendment of the Dodd-Frank financial reform act of 2010. Durbin directed the Federal Reserve to cap debit card interchange fees so they were “reasonable and proportional to the cost incurred by the issuer with respect to the transaction.” Banks with less than $10 billion in assets are exempt from Durbin.

There has been debate about the effectiveness and impact Durbin has had on consumers, retailers, and banks. Those who have called for the amendment’s repeal have cited a circumstance where larger retailers have not passed on the intended savings to consumers and instead raised rates in other ways. Financial institutions say that it has limited their ability to reinvest the money they earn from interchange fees into customer perks such as free checking accounts and rewards programs.

“We think there is evidence that should pose a cautionary tale for policy makers; they’re simply not going to [pass along savings to consumers],” Shivers said. “So you’re looking at higher costs for consumers, higher costs for small businesses. And the ones who really do win in this model are the big boxes.”

Similar legislation has already been introduced in more than a dozen states. Illinois became the first state to adopt such legislation last week when Gov. J.B. Pritzker signed a similar bill into law.
When and if the Pennsylvania House passes the legislation, it would move to the Senate for approval and, if it passes there, to the desk of Gov. Josh Shapiro.

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