By delaying their most recent set of fee increases, Visa and Mastercard have acknowledged that swipe fees are a burden on merchants struggling with the economic damage wrought by the COVID-19 pandemic.
They have also made it clear they intend to resume the increases as the economy improves. While besieged merchants are pleased to see the increases delayed, there should be no doubt that merchants not only want them withdrawn – they want fees dramatically reduced.
The pandemic has seen a massive shift from card present transactions to card not present transactions which carry higher interchange and largely shift the fraud burden to merchants.
Moreover, networks have facilitated a large conversion of issuers’ portfolios from old card products to premium card products that are more expensive for merchants to accept. The big banks dominating credit card issuance have enjoyed huge windfall profits by converting the bulk of their card portfolios from the old “basic interchange” products to the new “premium interchange” products.
In fact, interchange fees are only one component of the enormous cost merchants are burdened with for accepting Visa and Mastercard payments. In addition to merchant-paid interchange fees which get passed through the networks to the banks that issue cards, merchants are forced to pay third-party processing fees and network fees. U.S. merchants also bear costs to continuously upgrade their POS and cardholder data environment platforms as well as shouldering the lion’s share of the costs that come with doing business in the most fraud-prone card payments market in the world.
Swipe fees, the fees directly associated with payment card acceptance, are higher in the U.S. than in any other major industrialized nation in the world. One might expect swipe fees would actually have gone down over the years as the U.S. witnessed money-saving innovations like online processing of payments and other major technological breakthroughs. Sadly, the opposite is true – and the banks have no rational answer as to why swipe fees continue to rise year over year.
The unfortunate reality for merchants and their customers is that swipe fees have continued to increase because the payment card market is broken. Two of the most anti-competitive features of the broken payment card market are default interchange and the "honor all cards" policy.
Unlike most industries which typically experience competition as they grow, the card networks have essentially created a coalition that sets prices in the manner of OPEC which organizes oil producers with the goal of keeping oil prices high. The result is all banks charge the same fees to merchants for accepting their cards just like all OPEC members charge the same price per barrel of oil.
Merchants are forced to accept new card products bearing higher and higher fees because of the card networks’ “honor all cards” rules. Merchants would love to reject new products with higher price tags, but “honor all cards” will not let them do so.
