Most small-business owners regarded the rising fees they paid to Visa and MasterCard as an unavoidable cost of doing business. Not Irvine photo processor Mitch Goldstone.
Contending that a price-fixing cartel was exploiting him and other entrepreneurs, Goldstone went to war in media interviews, blog posts and as a lead plaintiff in a giant class-action lawsuit, comparing the payment processors to drug pushers and to the railroads that profited at the expense of farmers.
What Goldstone calls his "Erin Brockovich moment" arrived with last week's $7.2-billion settlement with Visa, MasterCard and the banks that issue their cards after seven years of antitrust battles in federal court in Brooklyn, N.Y. The agreement will shift power to sellers of goods and services and could transform how — and whether — millions of Americans use their credit cards.
That's because Visa and MasterCard agreed for the first time to bargain with groups of retailers over fees, so small businesses can team up to gain leverage. The agreement also allows merchants for the first time to charge customers extra for using credit cards, so long as the charges reflect the actual cost and are broken out clearly for consumers to see.
That would drag the processing charges — formally known as interchange fees, colloquially called swipe fees — into the light, so consumers can finally see how costly they are to the businesses they patronize.
"If you ask customers what's an interchange fee, they'll say it has something to do with a freeway," Goldstone said. "And millions and millions of merchants just accepted it as a cost of doing business."
The interchange fees are complex as well as arcane. The latest version of MasterCard's online rate summary, current as of April, runs 131 pages.
The Federal Reserve last year cut debit-card fees from 44 cents to 21 cents per transaction. But credit-card fees run much higher, especially for popular rewards cards, averaging 2% of a purchase price and reaching 5% for minor purchases from small retailers — a cost most Americans have been blissfully unaware of.
Goldstone says the ability to bargain collectively will gradually bring down card costs for retailers, who in a competitive environment will pass along the savings to customers across the country.
Imposing credit card surcharges is trickier. For one thing, the practice is banned in 10 states including California, although the Golden State makes an exception for gas stations.
Assemblyman Mike Eng (D-Monterey Park), chairman of the Assembly banking committee, said a recent California Supreme Court decision that federal law preempts state laws dealing with credit cards means that courts could nullify the state ban on surcharges.
Eng said he hopes that Congress instead ignores parts of the class-action settlement and strengthens consumer protections for credit card users on the national level. The Dodd-Frank financial reform law "needs to be more explicit and should follow the California law to say under no circumstances can merchants pass on those interchange fees to the consumer," he said.
"I would like the California protections to be adopted federally," Eng said. "California has historically led the nation in consumer protection, and this makes sense."
Then there's the question of whether sellers even find it worthwhile to create a two-tier payment system. A previous Visa and MasterCard settlement with theU.S. Justice Departmentallowed merchants to offer discounts to cash customers, which has the same effect as a surcharge on credit card users. But few consumers appear to find the offer appealing.
Indeed, many retailers say credit cards are king these days, despite efforts by some jewelers, spa owners, movers and even dentists to entice shoppers to pay with cash.
Annie Williams, who runs the Silver Lake restaurant Bulan Thai, said credit cards are among her biggest expenses, with fees so complicated that "we don't know how much it's going to be until we get the bill."
The restaurant tried offering customers a 5% cash discount, but gave up this week "because it doesn't work," she said.
"I have to say, 95% of customers pay with credit cards," Williams said. "They think about the [reward] points that the credit card companies offer."
Anisha Sekar, vice president for card products at the personal finance site NerdWallet, said that despite such stories, she believes many retailers will at least experiment with charging separately for credit cards. It makes sense that the cost should be separate and transparent, she said, like the airline baggage fee that travelers can avoid by using carry-on luggage.
"If prices are going up because it costs more to transport meat, there's not a lot we can do about it. And it's shared equally by everyone who wants to buy meat," Sekar said. "But if you can break out the cost for using a credit card and can decide not to pay it [by using cash, a check or a debit card], then that's a different matter."
Goldstone thinks few merchants will impose surcharges but says the threat will force the card companies to lower their fees. "The balance of power is going to shift very fast," he said.
That would be a distinct contrast with the situation in 2005, when digitizing old snapshots became so cheap that his 30 Minute Photos shop slashed its charge to scan a picture from $5 to 15 cents.
Technology also was transforming credit card companies, with electronic transfers replacing manual imprint machines and carbon-copy receipts — yet the rates Goldstone paid the payment processors were rising.
"I kept asking Visa and MasterCard if they'd charge me less," he said, "but they wouldn't even call me back to discuss it."
Fees aside, his business has thrived, morphing from a 1,200-square-foot printing and processing shop to a digital archiving service, ScanMyPhotos.com, that operates nationwide using e-commerce and theU.S. mail.
Now that the interchange war is over, Goldstone says he will devote time to nonprofits, creating a foundation that will monitor the credit card industry and a group that will lobby small businesses to support President Obama.
He can't help gloating a bit about the settlement and its implied acknowledgment of his efforts.
"The best part for me," Goldstone said, "was the quotes in the announcements from Visa and MasterCard CEOs saying they want to work with businesses and consumers."