Criticism of slight increase in credit card interchange fees is misguided

For the first time in a decade, Visa and Mastercard increase interchange fees retailers pay to process credit card transactions. Some merchants and The politicians react with anger, but I wonder what it is.

Rather than increasing interchange fees across the board, Visa and Mastercard are changing fees based on purchase category, with some increasing and some decreasing. While card networks acknowledge that the changes represent a slight overall increase, many businesses that have been particularly hard hit by the COVID-19 pandemic will actually pay lower fees. For Mastercard, this includes restaurants, hotels and daycares. Costs will also drop for Mastercard transactions under $5.

Unpack the opposition

Critics argue that retailers and consumers cannot afford the extra charges at the moment as they face high inflation and are still recovering from the damage the pandemic has inflicted on the economy.

“We urge you to withdraw your plan to increase credit and debit card fees for American business owners and hardworking American families,” writes four members of Congress in a recent letter to the CEOs of Visa and Mastercard. “As Americans face the highest rate of inflation in decades, your profits are already high enough and any further fee increases simply benefit vulnerable Americans.”

Jeff Tassey, Chairman of the Board of the Electronic Payments Coalition, offers this rebuttal: “The April adjustments will reduce interchange fees for most small businesses. This letter is proof that big box retailers don’t like it.

As a consumer myself, I also don’t like paying higher fees. But consider the alternative. Do we want to return to a cash-based economy? And shouldn’t card issuers and card networks be compensated for their important role in processing transactions and providing cybersecurity, fraud and other loss protection? I believe accepting credit cards (and debit cards, for that matter) is a necessary cost of doing business in 2022.

And consider the Durbin Amendment (part of the Dodd-Frank Act of 2010), which reduced debit card interchange fees just over a decade ago. Have retailers passed these price cuts on to consumers? There is no evidence that they did.

As Dan Berger, president and CEO of the National Association of Federally-Insured Credit Unions, puts it: “If lawmakers are so interested in helping American consumers, why haven’t they looked at merchants’ inability to pass on the savings to consumers that were promised in the Durbin Amendment? Several studies have shown that consumers did not benefit of this failed policy.

What does this mean to you

In many ways, this is a fight between banks and retailers, and consumers are caught in the middle. An unfortunate and likely unintended consequence for consumers that stems from the Durbin Amendment has been a massive reduction in debit card rewards. Lower swipe fees meant that there were no longer enough savings to support these programs.

Before you accuse me of going “boo-hoo” for banks, I recognize that credit cards are an extremely profitable business. Banks win both ways, as about half of cardholders pay interest each month (an average of 16.38%). And even when cardholders pay in full and avoid interest, issuers profit from the interchange fees that merchants pay (these average 2.22%, according to the Nilson report). Many consumers also pay other fees, such as annual fees, late fees, foreign transaction fees, etc.

However, rather than fighting the system, I think it’s best to embrace it. I also don’t want anyone paying 16% interest. If you have a balance, focus on paying off your debt and strive to join the many credit cardholders who make their cards work for them. I bring in somewhere between $1,500 and $2,000 in cash in a typical year without paying a dime in interest. It’s free money in exchange for purchases I would have made anyway.

On the other hand, some people are probably better off avoiding credit cards until they have consolidated their finances. This is why there is a saying in the industry that credit cards are like power tools: they are potentially very useful but also dangerous in the wrong hands.

The United States has the richest credit card reward programs in the world. If interchange fees were capped at lower levels, as is the case in most other developed countries, these rewards would be much less generous. Would consumers benefit from lower prices? I seriously doubt it.

The benefits of card payment

Merchants love to hate interchange fees, citing facts like interchange being their second biggest expense after labor. On the other hand, there is plenty of evidence that buyers spend more when using cards because parting with money is more painful and also because most people don’t have much money on them anymore. Additionally, with e-commerce playing an increasingly important role in retail, cash is not a feasible option online.

“Electronic payments play a vital role every day and have proven even more valuable since the start of the pandemic,” a Mastercard spokesperson explains. “And that’s why we see merchants encouraging their customers to use electronic payment methods because of the significant value they receive in return: a safe and convenient experience and guaranteed payment. As people lead increasingly mobile digital lives, we seek to help merchants provide their customers with the best choices and shopping experiences possible. »

I agree, choice is so important. I believe businesses that respond to these fee increases by making it harder for their customers to pay by credit card will suffer. Added surcharges for using credit not appealing to consumersand not accepting the cards risks losing them to competitors or limiting their spending.

The bottom line

While these increases can certainly add up on a large scale, it’s not like interchange fees go from 2% to 10%. We are talking about small fractions here. It’s a simple fact that things cost more over time. All businesses must raise their prices at some point, including card networks and retailers.

I think the real issue is perception, which will be determined by how merchants pass on these increased costs. I think setting up a separate line item for card processing fees is sticky. Would you like to pay extra to subsidize the merchant’s heating and cooling costs? No. The vast majority of consumers want to see a price and determine if it’s fair or not, that’s capitalism in a nutshell. Just submit a single price, please. And don’t mess with my credit card rewards.

Have a question about credit cards? Email me at [email protected] and I’d be happy to help.