5 ways merchants are fighting card-swipe fees at the point of sale

October 22, 2023 9:00 PM

Payment card interchange, a major factor of the "swipe fees" that average about 2% of each sale, is in the news again as lawmakers and regulators react to claims that the pricing of card payments is unfairly controlled by card networks Visa and Mastercard.

The existing systems supporting U.S. swipe fees are coming under pressure from at least three directions on political and legal fronts, briefly described below.

But merchants are also using technologies and policies to offset the cost of payment card swipe fees, helped by the rise of faster payments, new approaches to merchant-funded rewards and new U.S. regulations encouraging open banking.

"Merchants surprisingly have a lot of levers to push and pull when it comes to controlling how much they pay in payment card interchange," said Eric Cohen, CEO of Merchant Advocate, a consulting firm based in Colts Neck, New Jersey, which counsels merchants on managing card-processing costs.

Sen. Dick Durbin, D-Ill., and Roger Marshall, R-Kan., are co-sponsoring the Credit Card Competition Act, which would give merchants a lower-cost credit card processing option by requiring banks with assets of $100 billion-plus to offer merchants a choice of two unaffiliated card networks that aren't both Visa or Mastercard.

Separately, the Federal Reserve plans to vote this week on revising debit card interchange fees the agency set more than a decade ago as part of the 2010 Dodd-Frank Act, affecting banks with at least $10 billion in assets.

On another front, the Supreme Court last month agreed to hear a case brought by a North Dakota convenience store challenging the statute of limitations for the Fed's Regulation II rule enacted in 2011 to implement debit interchange rates as a result of Dodd-Frank.

Visa and Mastercard argue that swipe fees cover the cost of payment card acceptance, technology and fraud. But card-network rules don't prevent merchants from exploring alternative strategies to reduce the effect of credit and debit card swipe fees. Here are five examples.

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Pay by Bank sprouts

Along with easing general banking and credit access, one of the visions of the global open-banking movement is to create trusted systems for consumers to pay merchants directly from their bank accounts, bypassing credit and debit cards and their associated fees.

The Consumer Financial Protection Bureau's open-banking plan announced last week paves the way for consumers to control more of their financial data and more easily share it with third parties—like merchants—for payments. The rise of the Federal Reserve's FedNow payments rail, along with The Clearing House's six-year-old instant-payments RTP network, further enhances these efforts.

In Europe, open-banking collaboration kicked off several years ago but broad general-merchant adoption for Pay by Bank commerce is taking time to develop. One of the fastest-growing use cases now is wholesalers using Pay by Bank to accept payments directly from trusted customers' business accounts.

Fiserv earlier this year signed a deal with Walmart to test and develop a Pay by Bank option for an undisclosed use case. And last week, JPMorgan Chase announced a pilot using Mastercard's open banking technology to enhance consumer options for paying bills like rent and utilities directly from bank accounts.

Participating merchants add Chase's "Pay-by-bank" service to their checkout pages and consumers can authorize payments using their banks' existing security protocols, including biometrics.

Observers say it's unlikely Pay by Bank will supplant entrenched credit and debit card payments anytime soon.

A decade ago, a coalition of U.S. merchants including Walmart and Shell Oil formed Merchant Customer Exchange to test a retail-centric mobile payments system called CurrentC that aimed to get consumers to pay merchants directly through their bank accounts. The effort fizzled after three years, in part because the participants—all retail competitors—struggled to agree on methodologies for managing payments, returns, security and rewards. These same issues will remain hurdles for any open banking system that aims to replace the existing entrenched credit and debit card system in the U.S., observers say.

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Accepting crypto

Consumers looking to bypass credit card rails and make a big-ticket purchase with cryptocurrency in the U.S. have a few options including CheapAir.com, the spaceflight company Virgin Galactic and now Italian carmaker Ferrari, which this month said its dealerships would accept bitcoin as payment for vehicles.

Ferrari introduced the bitcoin option in response to consumer demand from younger consumers who have accumulated significant amounts of crypto, the carmaker told Reuters. Ferrari also said crypto payments solve certain cross-border payment challenges including managing foreign exchange rates.

Other luxury product marketers, including jewelers and sellers of high-end watches, frequently accept cryptocurrency as an alternative to credit cards. (Tesla tried accepting crypto in early 2021 but the company ended the program within three months, citing a conflict with the high electricity demand associated with bitcoin mining.)

Most merchants selling big-ticket items like cars, art or exotic collectibles are unlikely to accept a credit card payment for the full value because of potentially high credit card fees and transaction limits. Merchants that do accept credit cards for big-ticket purchases — such as vehicles or vacation packages — typically charge the buyer a convenience fee of 2% to 3%, which compares to the swipe-fee the merchant would likely pay on such a transaction.

Bitcoin payments can be sent and received by merchants at very low cost, with bitcoin fees based on the wallet used or the amount of data involved. Crypto transactions are often faster because they're processed on the blockchain.

Ferrari initially is working with BitPay to process car transactions in bitcoin, ether or USD stablecoin. Dealers will receive payment in local currency, with no need to manage crypto directly.

An assortment of general-market merchants including Burger King also accept crypto, although some early enthusiasts, including online marketplace Overstock.com and Microsoft, no longer do so.

FutureCard CEO Jean-Louis Warnholz touts an affiliate marketing program to fund card rewards.

Arielle Lewis

Merchant-funded card rewards programs

Merchants have long complained that in addition to shouldering the cost of payment card interchange, the existing system funds payment card rewards that solely benefit banks' loyalty programs while doing nothing for merchants' customer relationships.

A rising alternative in recent years is merchant-funded rewards programs, which build direct customer relationships with merchants. Major banks like JPMorgan Chase, Bank of America and Wells Fargo have long supported a type of merchant-funded card rewards program through card-linked offers from platforms like Cardlytics, which gives credit and debit card customers cash-back on card-linked offers. American Express has its own Amex Offers program, available to startups launching their own payment card programs.

Another example is FutureCard, a merchant-funded Visa-branded debit card launched last year by a startup through New York-based Piermont Bank. The card encourages environmentally friendly shopping choices by giving consumers 5% cash-back rewards for qualifying purchases.

FutureCard recently announced that card users can get 10% back in cash when they pay their household electric bill through Arcadia Solar, which funds the reward. "There's debit-card interchange built into our revenue model, but it plays a small role. Brands directly fund most of our card rewards through an affiliate marketing program," said Jean-Louis Warnholz, co-founder and CEO of Silver Spring, Maryland-based FutureCard.

Merchants are also seeing success with gift card-linked offers sold through banks and credit unions via platforms like Prizeout, a New York City-based digital gift card startup.

A growing number of dental practices charge 3% to accept credit cards.

Michael Nagle/Bloomberg

Surcharging, cash discounts on card payments

U.S. card network rules for years have allowed merchants to adopt surcharging and cash discounts policies to offset card-acceptance costs. Usage of these tools is limited, but it has ticked up slightly in the last couple of years with the rise in inflation, increasing retailers' cost burdens from credit card interchange. The rate of purchases where consumers were offered a discount rose from 1.8% of all cash transactions in 2015 to 2.9% of all cash transactions last year, according to the newest data available from the Federal Reserve Bank of Atlanta's annual survey of U.S. consumer payments.

"We started seeing more third parties offering software and products for merchants to adopt surcharging and cash discounts in the last three years," said Eric Cohen of Merchant Advocate.

For example, many dental practices this year began charging a 3% convenience fee for patients paying with a credit card, according to a blog published by the American Dental Association.

Many small businesses also charge a 3% fee for accepting cards, and others offer a cash-discount fee, which is calculated at the checkout when consumers are given the option to pay 2% to 4% less for using cash. Surcharging and cash discounting are most common at merchants in locations or selling commodities like gasoline that aren't price-sensitive, according to Cohen. Large merchants, and those in more competitive arenas, are less likely to introduce convenience fees and surcharges, he said.

"We advise merchants that it's better to renegotiate card-processing fees with their processor than to add a surcharge or a discount — especially if you're a restaurant because it's more likely to drive business away. Customers don't like getting hit by surcharges," Cohen said.

Kate Fitzgerald

Cash Only

Data from Pew Research Center found last year that 40% of U.S. consumers don't carry cash anymore, so it's no surprise that more than 90% of U.S. restaurants accept payment cards, and some restaurants in recent years have adopted a cards-only approach at some locations. One example is Gadzooks Enchiladas and Soup in Phoenix, Arizona, which stopped accepting cash last year, reportedly because cash transactions had become such an exception to the norm.

Some merchants that initially refused cash, including the Amazon Go store chain and Sweetgreen, a national salad chain, reversed their policies and began accepting cash after local lawmakers revived or introduced bills that require businesses to accept cash.

For certain restaurants and bars, a cash-only policy is key to their business strategy. Randy's Restaurant & Ice Cream, a busy diner in Scottsdale, Arizona, has accepted only cash and checks since it opened in 1981. Catering primarily to regular customers, the eatery's ban on cards — offset by nearby proximity to an ATM — doesn't seem to deter any business, according to its managers.

But the pandemic's acceleration of contactless payments increased pressure on other businesses that are finding it harder to maintain a hard stance against cash.

Lahaina Beach House, an oceanfront bar and restaurant in San Diego, steadfastly resisted accepting cards for more than 40 years after opening in 1982, requiring patrons to bring wads of cash to pay for burgers and margaritas on the beach. Last year, the company changed its policy and its bartenders and waitresses began accepting payments through hand-held payment terminals. "It's easier, it's faster," said a bartender who declined to be named.