Photo: Getty Images/fcafotodigital
Are Visa and Mastercard’s swipe fees out of control?
The Merchants Payments Coalition (MPC) earlier this week sent a letter to the House Financial Services Committee calling on it and Congress to investigate what the trade association calls Visa and Mastercard’s anti-competitive dominance over the U.S. credit and debit card markets.
The group, which represents convenience stores, gas stations, grocery stores, online merchants and other retailers, said that the financial giants represent clear examples of the need for greater competition to fight inflation as called for by President Biden in his State of the Union address.
Visa and Mastercard combined represent 87 percent of the credit and debit card market and set the fees charged by banks on transactions made at retail.
“It is difficult to imagine any other market in the U.S. economy in which two entities set prices for thousands of businesses that should be competitors. That lack of competition or downward pricing pressure has resulted in out-of-control swipe fees and increases inflation throughout the economy,” according to MPC.
Visa and Mastercard are planning in April to raise interchange fees, aka swipe fees, charged when consumers use their cards. The card companies are looking to increase their charges, The Wall Street Journal reports, after having delayed doing so for two years in response to financial hardships visited on many businesses during the pandemic.
Merchants claim the fees act as an invisible tax on consumers as costs are passed through in the form of higher prices. Retailers receive less than 98 cents on every dollar purchase when a credit card is used, according to MPC. Merchants then have to set higher prices to account for fees, which cost the average American family $724 a year.
Visa and Mastercard counter that the fees help drive payment innovation and pay for fraud prevention.
“Our focus remains ensuring the safety and security of payments while balancing the interests of all parties,” a Mastercard spokesman told the Journal.
“The two giant card networks and their partner mega-banks routinely use their market power to stifle competition and charge merchants the highest swipe fees in the industrialized world,” MPC said, later adding, “It is crucial for Congress to act swiftly and implement real reforms to bring true competition, transparency and equity to the U.S. payments market.”
- Merchants Ask Congress to Investigate Visa and Mastercard, Citing Biden Call to Fight Inflation with Competition – Merchants Payments Coalition
- Visa, Mastercard Prepare to Raise Credit-Card Fees – The Wall Street Journal
- Visa, Mastercard Delay Credit-Card Swipe Fee Increases – The Wall Street Journal
Discussion Questions
DISCUSSION QUESTIONS: Is the current system for setting interchange fees anti-competitive? What needs to be done to protect the varied interests of consumers, merchants and the financial institutions?
Poll
Loading …BrainTrust
Brian Delp
CEO, New Sega Home
Richard J. George, Ph.D.
Professor of Food Marketing, Haub School of Business, Saint Joseph's University
We’re in a weird atmosphere of corporate price gouging and unprecedented corporate profits, against a backdrop of war-related inflation that is squeezing consumers. I wish I thought that Congress would step up to the plate…
There is little question that transaction processing fees dramatically impact the choices that retailers make, push down margins, and add non-productive inflationary pressures on the economy. From a technology perspective, the increasing connected-ness of commerce (and society, more broadly) should enable the creation of an alternative processing businesses. I fear that the market dominance of Mastercard/Visa may require government intervention and/or regulation. This might take the form of placing limits on services, caps on fees or, as was done with public utilities, setting profitability guidelines on the companies themselves.
This space is already becoming decentralized and will likely change dramatically over the next few years. Aside from other influencing factors like crypto, younger consumers are demanding new and more convenient payment options. PayPal is the most legacy of them, but other methods like Venmo and BNPL programs like Affirm (a digital version of layaway) will chip away at this hold.
The lack of competition in this market is a big problem for retailers. That said, it is a benefit for consumers as they don’t have to worry much about what cards are good where.
Yes, the current system of interchange fees is totally anti-competitive, but oligopolists have a way of killing themselves off. The entire financial services industry is in the midst of a radical transformation thanks to advances in digital technologies. Fraud problems? How about blockchain solutions? Payment innovation? The cryptocurrency folks are lapping the traditional credit card industry. Consumer demands for full transparency? Only going to increase over time. Reform is coming, and coming soon. The only question for Visa, Mastercard, Discover, and American Express is whether they are going to be on the bus or under it.
How did Visa and Mastercard get in the position they have? It has been the consumer’s choice. While the card companies are generating fees from the retailers, they are, more aggressively, handing them back to the users. 1 percent, 2 percent, 3 percent cash back, points programs, miles programs.
While there is also a minimum for each swipe, they tend to be so low against the purchase price that they are irrelevant. And let me be cynical for a moment. How many retailers are passing that 2 percent fee to the customer with a 5 percent increase in price?
Yes, swipe fees are egregiously high, and Visa and Mastercard’s dominance is unquestionable. The two giants have anticipated the changing landscape and are making investments in Fintech. Although their future power may not be as extreme as it is today, they will acquire new competitors, expand into adjacent markets, and invest in alternative financial payments such as crypto to protect their lofty positions. Under the guise of high inflation, they will increase their swipe fees as much as the market allows.
The cards/banks are offering bigger incentives to attract new users and protect their market share. Why should vendors/card establishments have to pay for the marketing costs of the cards?
The UPS/FedEx duopoly comes to mind, with its annual 5% cost hikes since the mid-1990s and fuel surcharges and residential fees that only go in one direction. The Post Office has been the only check on their rate-making power. Oligopolies will always attempt to bend the rules to their favor, regardless of the quality of service they provide, so if the free market can’t or won’t provide options, then government has to step in.
While the fees are are monopolistic, the dynamics of electronic payments are changing so rapidly that the market control of Visa and MC will wane. In the meantime, the impact on retailers, particularly independent retailers, is real and could benefit from some government intervention.
One could also advance the argument that competition is partly to blame for the high fees: issuers compete largely on (IMHO) lavish point and “rewards” schemes which, of course are passed on in the form of higher processing fees … ironic, indeed.
This is a huge challenge in light of it happening at the same time as major inflation. American Express fees are even higher by the way, though they have much smaller market share of swipes. Retailers should take advantage of the timing to launch or double down on private label or co-brand credit card Mastercard or Visa deals. Most banks will either eliminate or reduce the fee on the sales that happen with the card, which can be as much as 30-35% of sales with a mature program. Significant savings for retailers!