Credit unions and banks don’t often see eye to eye, but the two industries have come together in Wisconsin to oppose legislation they say will hurt the state’s financial institutions.
At issue is pending legislation that would prohibit interchange on the sales tax portion of electronic payments. This would require card issuers, which typically see only the full transaction price, to implement new systems to separate or itemize every taxable sale.
A hearing on the proposal, known as Assembly Bill 587, occurred on Oct. 21 before the Wisconsin Assembly Committee on Financial Institutions. The legislation remains in committee and is not currently scheduled for a vote.
Opponents say the proposal would harm consumers and small businesses because it would lead to additional administrative costs and burdens for retailers, which would be passed along in the form of higher prices.
That group includes the two largest credit union and bank trade associations and the Electronics Payments Coalition. In a letter to the Wisconsin Assembly Committee on Financial Institutions, those groups and others said retailers would be required to create and implement new payments systems and operational mechanisms to ensure compliance. Those tasks would be both costly and burdensome, the groups say.
When a retailer makes a sale using a customer’s electronic payment card, the system that processes the transaction recognizes only the final purchase amount on which the merchant discount fee is based. The system does not distinguish between the price of the product or service and the price of the sales tax imposed, according to the letter.
The legislation would also make Wisconsin an “island” in a nationwide payment system.
“The unworkable nature of the proposal is emphasized by the fact that nearly 30 similar proposals to prohibit interchange on the sales tax portion of electronic transactions have been considered between 2006 and 2021 and none has passed out of the committee of original reference,” the letter states.
But proponents of the bill, including state Sen. Dan Feyen, a Republican from Wisconsin's District 18, said swipe fees cost retailers in the state $36.74 million in 2019 and $50.79 million in 2020.
“When talking with local businesses, we’ve heard that while they are happy to pay transaction fees for the usefulness and convenience of accepting credit cards, they dislike paying a fee on the tax money that is not theirs,” Feyen said.
But the association does not have an estimate of how much the legislation could cost the state’s credit unions, according to Brett Thompson, president and CEO of the Wisconsin Credit Union League.
“Paying the interchange fee on just a portion of the total transaction, as the bill proposes, is impractical and results in disproportional compensation for the protections and guaranteed payment provided by the credit union, for the full transaction amount,” Thompson said.
Paul Hoffman, president and CEO of the $1.1 billion-asset Monona Bank in Monona, Wisconsin, said interchange income has become even more important as a means to fund its anti-fraud measures. The bank’s systems provide the peace of mind for both consumers and businesses that their payments will be processed safely.
“It also will be difficult to craft unique interchange rules for certain types of transactions for just the State of Wisconsin,” Hoffman said. “It will be more expensive to implement for smaller financial institutions and disproportionately harm those institutions and favor the larger, national payment system players.”
The legislative proposal of separating the sales tax portion of a transaction from the purchase price has been proposed over 40 times in states across the country over the last 16 years without success because it is not practical in today’s electronic payment ecosystem and would hurt consumers and financial institutions alike, said Rose Oswald Poels, president and CEO of the Wisconsin Bankers Association.
Interchange fees are used to compensate banks and credit unions who issue credit and debit cards for the many services they provide to retailers and consumers, notably guaranteed immediate payment for the goods or services purchased and protection against fraud.
Taking away a portion of these fees directly harms financial institutions, forcing them to bear more of the financial burden to ensure a smoothly functioning electronic payment ecosystem for all involved, Oswald Poels said.
The idea examined at the hearing in Wisconsin is a technically unworkable proposal that would disproportionately hurt consumers and small businesses, according to Brad Thaler, vice president of legislative affairs for the National Association of Federally-Insured Credit Unions.
If the proposal were enacted, it would create new burdens on small businesses and consumer confusion, as they could find a system where sales taxes would have to be paid by cash or check in order to implement this policy, Thaler said.
“Thirty states have already rejected this idea in the last 15 years, and we hope Wisconsin will make it 31 by not acting on this proposal. NAFCU will continue to oppose unwise government intervention in the payments ecosystem in order to ensure that the payments system continues to work for credit unions,” he said.
But the National Association of Convenience Stores, which supports the bill, said swipe fees that merchants pay in the United States today are higher than in any other industrialized nation in the world.
The group’s general counsel, Doug Kantor, said the bill simply makes sense. “It treats merchants fairly and prevents them from losing money due to their service to the state,” Kantor wrote in a letter to the state Assembly Committee on Financial Institutions.
The interchange fee that card networks assess remained largely unchanged over the last 10 years, so the burden on retailers is very low on a per-transaction basis, Oswald Poels said.
“What has changed is the growth in the volume of transactions, but this incremental growth in the cost to retailers is simply the cost of doing business when accepting a card as a form of payment,” she said.
