John Kavanaugh
Esquire Club owner John Kavanaugh says high fees are costing him thousands of dollars per month. Photo by Steve Apps/State Journal

After enjoying a cocktail and fish fry at the Esquire Club, most customers pull out the plastic when the check arrives.

Which is fine with supper club owner John Kavanaugh, who realizes that checks and cash are disappearing about as fast as smoking sections in restaurants.

What Kavanaugh doesn't like, however, are the fees that cards issuers tack onto those electronic transactions. He estimates paying $2,000 to $3,000 a month in interchange or "swipe fees."

"I can't take my plight to my customer; he's not going to feel sorry for me," says Kavanaugh. "But in my mind, we're paying money to get our money."

It's a lot of money, according to the Wisconsin Restaurant Association, which says swipe fees -- generally 2 or 3 percent of each transaction -- have risen 300 percent since 2001. The group also reports that credit card companies, along with their issuing banks and credit unions, collected some $48 billion in swipe fees last year. Bill Hardekopf, a consumer credit analyst, says that debit card charges have now surpassed credit card charges.

By some estimates, swipe fees are the largest component of the various fees that merchants pay for the privilege of accepting credit cards. It hits smaller businesses harder, since giant retailers like Walmart or Walgreens can typically absorb the costs due to their larger sales volume.

This long-brewing unhappiness over swipe fees has now found its way into the sweeping financial reform bill working its way slowly through Congress. New rules included in the 1,500-page measure would put limits on debit card fees and allow merchants to offer discounts for customers paying with cash, something specifically prohibited in most agreements between merchants and credit card companies. (Credit card swipe fees are not included in the reform bill since, it is argued, these fees cover the cost of what's technically a short-term loan.)

Consumer and retail groups are cheering the proposed rules, calling it a victory against unfair banking practices. The measure directs the Federal Reserve to ensure that debit card interchange fees are "reasonable and proportional" in relation to the actual processing costs.

"The bill gives the Federal Reserve authority to ensure that debit-swipe fees are fair and allows merchants to avoid unfair card-network rules that prohibit them from offering discounts for cash or to suggest lower cost forms of payment," says Ed Mierzwinski of the U.S. Public Interest Research Group in a statement.

Merchants could set a $10 minimum for transactions, for example, something they technically can't do now without penalty from card networks. These provisions, reform advocates say, will enable small businesses to bring their interchange costs under control and pass the savings on to consumers

But banks are opposing any changes in the swipe fees rules and have found an unlikely ally in one of their long-time political adversaries — the nation's credit unions.

Madison-based Credit Union National Association (CUNA) has even emerged as a leading voice of opposition to the financial services reform package, saying the swipe fee provision is onerous enough that the entire bill should be scrapped.

It was not an easy position for CUNA to take, given that credit unions have long been regarded as putting people before profits. CUNA is the largest credit union advocacy organization in the United States, representing nearly 90 percent of America's 7,700 state and federally chartered credit unions.

But in a letter to Congress, CUNA President Dan Mica says including a limit on debit card fees "upsets the carefully constructed balance that the bill has achieved" and would cause credit unions and their members considerable harm.

Under the proposed changes, card-issuing banks and credit unions — along with credit card companies themselves — stand to lose $5 billion to more than $10 billion annually, according to the trade journal Payments Source. It estimates new interchange rates might be 25 percent to 75 percent lower than present levels.

And those lost fees could have a serious impact on credit unions, which have a limited ability otherwise to generate income because of their non-profit status. Credit unions say they depend on swipe fees to offer perks like free checking to its members. The fees also help offset the cost of security system upgrades needed to handle the soaring volume of electronic transactions.

The House did include some swipe fee relief for smaller banks and credit unions in its version of the bill, which was passed in late June but won't be considered by the Senate until July 12. The legislation excludes credit unions and community banks with assets of less than $10 billion, all but three credit unions in the entire country.

But Mica says that exclusion is meaningless because of the complicated way interchange fees are calculated. He says it would eventually include all cards and cut into that income stream for credit unions because there is no mechanism to ensure that there will be a separate fee system for large and small issuers.

Eric Skrum, a spokesman for the Wisconsin Bankers Association, agrees that the legislation is flawed and says debit card fees had nothing to do with causing the financial crisis.

"This provision has no business being in a financial regulatory reform package and shows how Congress allowed the legislation to degenerate into a vehicle for special interests to achieve long sought-after policy objectives that have nothing to do with addressing the root causes of the recession," he says.

But Doug Kantor, a Washington, D.C. attorney with the Merchants Payments Coalition, says that swipe fees definitely belong in the bill and are part of helping Main Street get back on its feet.

"What it's going to do is help local business," he says. "In some cases, these fees are the second biggest expense after rent."

Nobody has to tell that to Kavanaugh, whose restaurant at 1025 N. Sherman Ave. goes back more than 60 years.

"I haven't followed (the financial reform bill) that closely but I'm glad they're trying to do something," he says. "All I can say is none of these bank guys are going to heaven."