Updated on: January 13, 2023
Every purchase you make with a credit or debit card has an interchange fee baked in. These are the “swipe fees” that banks and credit card companies charge merchants to process card transactions. In the U.S., interchange fees average about 2 percent — often closer to 3 percent — of a transaction. That adds up. In 2021, merchants paid nearly $138 billion in swipe fees to banks and card networks, including Visa and Mastercard — an increase of more than 24% since 2020.
These fees bear little relationship to the actual cost of processing a transaction. In 2019, the Federal Reserve reported that the average per-transaction cost to card issuers is just 3.6 cents, a tiny fraction of the $2 to $3 swipe fee that a business is typically charged on a $100 sale. Technology is only driving these costs lower: card processing costs, according to the Federal Reserve, have fallen 54 percent since 2009. Meanwhile, interchange fees have soared and now are higher in the U.S. than in any other country.
Markets, not individual firms, are supposed to set prices. But the card market lacks competition, leaving price-setting power in the hands of just two players. Visa controls 60 percent of credit and debit card transactions, while Mastercard accounts for 25 percent. American Express captures most of the rest, and leads in certain sub-markets.
Absent competition, Visa and Mastercard can dictate rates to merchants. This means that a large cross-section of American spending is essentially subject to a monopoly tax imposed by two mega-corporations. Consumers and businesses pay more, while Visa and Mastercard reap the surplus and share gains with a small handful of big banks. Just four banks — Chase, Wells Fargo, Citi, and Bank of America — issue about half of all credit cards.
This monopoly rent-seeking disproportionately harms small business. While large corporations, such as Amazon and Walmart, have some leverage to negotiate better rates, independent businesses have little choice but to pay whatever the banks and networks demand. With more consumers relying on plastic, not accepting plastic is hardly a viable option.
Some small businesses report that swipe fees are now their highest expense after payroll — even though Visa and Mastercard add only nominal value to the goods and services these merchants provide. What’s more, swipe fees increase the cost of food and goods for the average American family by an estimated $900 a year, according to the National Retail Federation.
Policy Solutions: How Europe Capped Fees
In April of 2015, the European Parliament voted to cap interchange at 0.3 percent of a credit card purchase, and 0.2 percent of a debit card purchase. That’s about one-seventh of the average rate in the U.S. The law went into effect the following December.
When presenting the regulation, the European Union (E.U.) included strong language about the barrier to innovation that high interchange fees create and the tacit price gouging these fees allow. “Usually competition leads to lower prices since companies compete by offering lower prices than their competitors,” an E.U. document reads. “In the case of interchange fees, the opposite occurs.”
The E.U.’s Commissioner for Competition recently extended the cap to include international cards used by travelers in Europe. Card companies are now required to observe the European caps even when a card’s issuing bank and processing network are located outside of the E.U. This ensures, for example, that more of the dollars tourists spend actually go to local businesses, rather than to Wall Street. Additionally, the card companies must publish their fees and submit to close monitoring by antitrust authorities. The E.U. made explicit the small business stake in the matter of interchange regulation, noting that, under the law, the retailer’s interchange responsibility will be equal to or cost less to them than a traditional cash transaction would. And the E.U. isn’t messing around with compliance: they fined Mastercard €570 million for an interchange-related violation in early 2019.
The Durbin Amendment: Modest Caps on U.S. Debit Card Fees
In the United States, an amendment to Dodd-Frank in 2011 — the Durbin Amendment — directed the Federal Reserve to cap interchange fees on debit cards issued by large banks (defined as those with assets of $10 billion or more). Unfortunately, the cap was set too high following pressure from the financial lobby. The Federal Reserve initially proposed a limit of 12 cents per transaction, but ultimately set the cap at 21 cents, plus 0.05% percent of the total purchase price, plus a 1-cent fraud-prevention adjustment.
According to the Federal Reserve, the average interchange fee on a regulated debit card transaction today is 34 cents. While that is lower than the average of 44 cents prior to regulation, it is still a windfall for banks and cards when the true processing cost is 3.6 cents, a nearly tenfold markup.
Policy Solutions: Mandating Competition
In the U.S., policymakers moved closer to reigning in rapidly rising swipe fees. The Credit Card Competition Act of 2022, with bipartisan co-sponsors in the House and the Senate, would have banned Visa and MasterCard from forcing merchants to use their card networks to process payments. Under the bill, merchants would have access to alternative payment networks outside of the duopoly, offering needed competition that retail groups say would help reduce fees for stores and consumers.
While the bill did not receive a committee vote in 2022, advocates are hopeful the bipartisan legislation will gain more traction in Congress in 2023. “We are focused on the next session of Congress and look forward to seeing this pro-consumer, bipartisan bill become law next year,” Doug Cantor of the National Association of Convenience Stores told PaymentsDive.
Policy Solutions: Federal Regulatory Action to Ensure Competition
Even without new legislation in place, U.S. regulators took action to break the dominance of the payment network duopoly. In December 2022, the Federal Trade Commission ordered MasterCard to end what it called its “illegal business practices” of banning merchants from using competing payment networks when processing debit payments using MasterCard. Under the order, the company will have to provide competing card networks with MasterCard user information that will allow them to process debit payments, ending actions the FTC alleges MasterCard took to prevent merchants from processing MasterCard debit payments on rival networks and locking them into MasterCard’s debit card swipe fees.
The FTC brought the action under the Durbin Amendment of the 2011 Dodd-Frank Act, which banned exclusive payment networks. The Federal Reserve Board’s Regulation II, which implemented the Durbin Amendment, empowered the FTC to take action against such exclusivity schemes. “Congress directed the FTC to enforce this part of the Dodd-Frank Act and prevent precisely this kind of illegal behavior,” said Holly Vedova, the head of the agency’s Bureau of Competition. “We take this responsibility seriously, as demonstrated by our action today.”
More from ILSR on Interchange Fees and Credit Card Market Power:
- The Hidden Price of Cashless Retail — ILSR op-ed in Fortune (April 3, 2019)
- With Antitrust Ruling, Supreme Court Underscores Need for New Anti-Monopoly Movement — (June 29, 2018)
- Visa Wants to Rule How We Pay for Purchases. But Its Market Power Has a High Cost (August 14, 2017)
- 2019 Independent Business Survey — Finding that independent retailers spend 3 percent of their total revenue on swipe fees. A majority of them ranked the fees as a top public policy concern.
- E.U. Press Release: Antitrust Commission accepts commitments by Mastercard and Visa to cut inter-regional interchange fees (April 29, 2019)
- E.U. Factsheet on Interchange Regulation (June 9, 2016)
- Wall Street Journal: Purchases With Plastic Get Costlier for Merchants—and Consumers (February 15, 2019)
- 2017 Federal Reserve report on interchange fees on debit transactions — Latest available report in Federal Reserve’s biennial collection of debit interchange data.
- 2017 Congressional Research Service report on the regulation of debit interchange fees since passage of the Durbin Amendment.
- Federal Reserve’s homepage for payment systems, including Regulation II, the interchange regulation related to debit cards. Includes a schedule of fees on debit transactions, and associated biennial data and reporting.
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