Changes to card network swipe fees could increase prices for consumers

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Visa and Mastercard brought forward their planned increases to swipe fees or credit card transaction fees in late April, despite protests from retailers. The card networks had suspended these increases since April 2020, due to the pandemic.

It appears that any increase in retailer costs as a result of an increase in swipe fees will likely be factored into prices and passed on to consumers as retailers try to recoup those costs. According to the Merchants Payments Coalition (MPC), a retail group that focuses on reforming the U.S. payments system, the average family pays more than $700 per year in higher prices resulting from swipe fees.

Swipe fees are the fees card networks charge retailers to process credit card transactions, averaging around 2% per transaction. For example, when you pay $100 for a credit card transaction, the retailer keeps $98, including $2 for the card swipe fee.

Most of this money goes back to the bank that issued the card in the form of interchange fees. The swipe fee also includes payment to the merchant’s bank and card networks, as well as any processors involved in the transaction.

Swipe Fee Changes

Visa and Mastercard argue that some of their swipe fee changes could actually reduce costs for retailers. According to a Visa spokesperson: “Everything the rate increases are largely preventable and apply to transactions that are sent to Visa with insufficient data, are incorrectly coded, carry increased risk, or are processed without using a Visa EMV payment token. These rates are designed to maintain high data quality and integrity on our network to prevent fraud.

Visa also cut interchange rates for “in-store and online consumer credit” by 10%, affecting more than 90% of U.S. businesses, the spokesperson added. This would apply to businesses with a Visa credit card sales volume of $250,000, which would affect businesses with up to $2.5 million in total revenue. He also pointed out that the swipe fee does not bring revenue to Visa, but helps cover network costs to ensure the security and reliability of credit card transactions.

And according to a Mastercard spokesperson: “Our goal remains to ensure the safety and security of payments while balancing the interests of all parties. Our changes include increases and decreases. We’re lowering costs for all merchants with transactions under $5, as well as hotels, casual restaurants, daycares, and other hard-hit categories that are now in recovery mode. »

Retailers disagree with swipe fee changes

However, retail groups are against the changes and do not see them as beneficial to retailers or consumers. According to a letter sent in mid-April by some members of Congress asking card networks to suspend their swipe fee increases, retailers paid $77.5 billion in Visa and Mastercard credit card processing fees for 2021 .

MPC executive committee member Doug Kantor dismissed the idea that smaller retailers would benefit from Visa’s fee schedule change.

“Visa is playing a PR game to distract from its fee increases,” Kantor said. “Only very small merchants would be eligible for this small change, and Visa will only extend the benefit to merchants who know about it and request it.”

Kantor also sees Mastercard’s intention to cut costs for some merchants hit hard by the pandemic as a “PR stunt” that will return “a few crumbs to merchants who will see higher costs anyway.”

Leon Buck, vice president of government relations for the National Retail Federation, views the concessions the card networks refer to as a public relations exercise that won’t really benefit merchants as a whole.

“If there are any decreases, they will only apply in narrow circumstances and will have little effect on the overall amount raised,” Buck said. “Saving a few million dollars for a few thousand merchants is a drop in the ocean when there are millions of merchants who collectively pay tens of billions of dollars in fees every year.”

And according to the Retail Industry Leaders Association (RILA), sweep fee changes will result in annual increases of $475 million. “These charges will add to the inflationary pressure faced by retailers, restaurants and all other businesses that accept credit cards, and the impact will be borne primarily by those who can least afford it,” he said. said Austen Jensen, RILA’s senior vice president of government affairs.

Cap on credit card swipe fees?

Charges on Debit card swipe fees are capped at 21 cents plus 0.05% of the transaction value (plus one cent for fraud protection costs), thanks to the Durbin Amendment of Dodd-Frank legislation , and it looks like some big retailers are asking Congress to also put in caps on credit card transactions as well.

However, some smaller retailers and commentators argue that debit card swipe fee caps have not benefited consumers and are against credit card swipe fee caps. According to remark By Dorothy Judy, Mayor of Parsons, W. Va. Large retailers have benefited from debit card caps but have not passed the savings on to consumers.

And smaller retailers have seen their swipe fees, which were lower before the cap, rise as banks try to make up for losses caused by the cap. These retailers, in turn, passed on the costs to consumers. Judy says a similar scenario would occur if credit card swiping fees were capped.

Banks will probably reduce credit card rewards if their swipe fees are capped, just like debit card issuers have. And the cost of credit would also increase for consumers, especially harm low-income consumers and minorities.

However, Visa and Mastercard may not have the final say on their swipe fee increases. Congress holds a May 4 hearing on card network swipe fees and “barriers to competition in credit and debit card systems.

In the meantime, MPC’s Kantor noted, “Merchants are unable to absorb the ever-increasing cost of accepting credit cards. Most merchants have no choice but to pass on some of the costs to customers in the form of higher prices for goods and services. Consumers don’t see these rapid increases in swipe fees, but they feel them all the time in higher prices. »

The bottom line

Two major credit card networks have made changes to the swipe fees retailers pay for card transactions. Although they maintain that some changes will reduce costs for small retailers, the retailer associations are not buying it. They say the swipe fee changes will end up hurting consumers with higher prices, as retailers pass on the higher costs. Congress is holding a hearing in early May to review credit and debit card swiping fees.

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