Nothing is free. Those rewards points you get on your credit card and debit card, the convenience of not having to carry loads of cash, purchase protections and the many other perks that come with using a card are far from free. Sure, you may pay for some of them through an annual fee or interest payments, but a large portion of them are financed by the merchant. How, you ask? In the form of interchange fees, which for some reason were quickly dubbed “swipe fees” by politicians back in 2010, when Congress passed a bill to regulate them. And though merchants pay them, ultimately they pass them on to you in the form of higher prices.
The Journey of the Swipe
You go into your favorite store to buy the must-have shirt that will be your party wear for the summer. Head to the register to pay, you pull out your credit or debit card and swipe or chip it in the machine. At that time the merchant is charged an interchange or swipe fee. It’s normally 1% to 3% of the cost of your new shirt, but some merchants are charged as much as 5%. If you buy the shirt online, via the store's website or its app, it might cost the merchant up to .5% more.
This fee may seem a little high, but the banks and payment processing companies, such as Visa and MasterCard, argue that when you swipe or chip your card the merchant is paid right away, but it will most likely be a minimum of 30 days—and possibly longer—before the credit card companies receive your payment. You may argue that the interest you incur as a result of holding a balance pays for that expense. However, according to the companies, interest alone doesn’t cover the costs.
As of 2018 merchants paid Visa and MasterCard $60 billion in swipe fees—up from $25.9 billion in 2012. The fees have averaged 23 cents for every transaction. For every $100 you spent, $4 of that has gone to credit card companies, even if you paid cash. In 2016, for the first time ever, credit card swipe fees exceeded the amount customers paid in overdraft fees: $33.8 billion to $33.3 billion.
The swipe fee is supposed to cover the cost of processing your credit card payment. However, for decades the Merchant’s Payment Coalition has put almost blind trust into their payment processors, with agreements that contained no verifiable data, allowing plenty of opportunities for merchants to get bilked.
It was U.S. Sen. Richard J. Durbin, Democrat of Illinois, who offered an amendment to the regulatory bill seeking to allow the Federal Reserve to set interchange rate fees while letting merchants set a minimum amount that a consumer must spend in order to use a card. It passed in May 2010. Finally, retailers could offer customers discounts if they paid by cash or other methods that don’t come with swipe fees. At the time, Durbin said, “By requiring debit card fees to be reasonable...small businesses and their customers will be able to keep more of their own money.”
However, credit card companies were concerned that the cap on swipe fees proposed by the Federal Reserve was only 12 cents. In late June 2011, after heavy lobbying by special interest groups representing the big banks, the maximum swipe fee was raised to 21 cents.
The total in swap fees retailers paid to credit-card companies in 2018.
The compromise left credit card companies breathing a sigh of relief, but merchants argued that the 21-cent cap would do little to help their bottom line while assuring that consumers wouldn’t see any price relief. Tellingly, a U.S. Government Accountability Office study found that when Australia lowered its credit card fees in 2003, it had no noticeable effect on the price of goods and services.
What has happened in the ensuing years is that merchants are paying less than they once were, but card companies now charge the maximum swipe fee on even the smallest transactions. Therefore, merchants that process those smaller transactions have seen costs go up.
In 2018 merchants suffered a disappointing loss when the Supreme Court ruled that businesses that accept American Express cards could not offer incentives to consumers to get them to use a card with lower swipe fees. Industry insiders saw the loss as a setback to the merchants’ larger ambition of taking on swipe fees in the form of legal action.
But in June 2018, a longstanding (since 2005) class-action lawsuit by merchants against Visa, MasterCard and some of the larger issuing banks alleging that the companies were colluding to set artificially high swipe fees was settled out of court. The defendants agreed to pay the merchants between $5.54 billion and $6.24 billion. It is unclear how the money will be disbursed, but on January 24, 2019, the U.S. District Court for the Eastern District of New York granted preliminary approval to the settlement. Final approval was granted on December 13, 2019, but on January 3, 2020, an appeal was filed.
The Bottom Line
Credit card companies argue that swipe fees serve the merchant by offering certain protections and instant payment, while merchants believe that the fees are much too high. What remains constant is that these fees are passed on to consumers each time they swipe or chip their cards.