How much should credit card processing fees be? A new bill says not so high

The first official shots have been fired in the war between major banks and electronic payments companies and merchants over how much retailers should pay for customers to use their credit cards and if those fees trickle down to consumers.

Disagreements between the two factions aren’t new, but it’s now at a fever pitch after Sen. Dick Durbin, D-Ill., and Sen. Roger Marshall, R-Kan., introduced late last month the Credit Card Competition Act of 2022.

The proposal aims to give Visa and Mastercard, the two largest payment processors respectively, more competition.  Mastercard and Visa account for about 83% of general-purpose credit cards, which the senators say essentially allows them to act as a duopoly and set the rates merchants pay them to process credit cards.

Consumers ultimately pay for all these fees in the price of the goods and services they buy, the senators argue. And in an era of 40-year high inflation, this is especially taking its toll on both consumers and merchants, they said.

What are interchange fees and who pays those credit card processing fees?

Every time you use your credit card to make a purchase, the merchant (brick-and-mortar or online) must pay a behind-the-scenes interchange fee to process that payment. Most of that fee goes to the bank issuing the card, but companies like Visa and Mastercard also receive a smaller fee for processing the payment through their networks.

Fees are charged as a percentage of the total sales amount in each transaction, but the percentage charged to each merchant varies. On average, though, fees run about 2%.

Factors that contribute to determining what percentage the merchant is charged include the type of merchant (department store, convenience store, gas station, for example), type of payments technology the merchant has, whether the purchase is made online or in person, or the type of card.

How does the consumer end up paying the fees?

Though the fee percentage doesn’t sound high, it adds up quickly, merchants say. Last year, Visa and Mastercard charged $77.48 billion in fees on about $3.49 trillion in credit card transactions, the senators said.

“The cost of credit card fees is our number three cost of doing business behind payroll and rent,” Patti Riordan, owner of Smoke Stack Hobby Shop in Lancaster, Ohio, said.

To mitigate that, merchants raise prices, especially now as high inflation eats into their margins, Bob Jones, owner of pool and patio product retailer American Sale in the Chicago area, said. 

“Retailers profit margins are about 2% to 2.5% which is about what the fee rate is too,” Doug Kantor, National Association of Convenience Stores general counsel, said. “So, retailers have no choice but to pass on the cost.”

That means all customers – whether they use a credit card or not – end up paying the price.

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Why are interchange fees so high?

It depends on whom you ask.

The senators and merchants claim it’s corporate greed, but Visa and Mastercard say it’s the cost of keeping consumers and merchants safe.

“If merchants are allowed to simply choose the cheaper credit card routing networks that haven’t invested in the latest security technology, consumer payment data would be vulnerable to foreign networks,” Jeff Tassey, Electronic Payments Coalition chairman, said.

Consumers choose Mastercard or Visa because “they know it’s safe and secure. If there’s no security, then there’s no value,” he said.

But Kantor said independent networks have better security and charge lower fees.

“This idea (that) there is a security issue really turns facts on its head," he said.

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What are Durbin and Marshall proposing?

The proposal would require transactions made with credit cards issued by the largest U.S. banks be able to be processed over networks other than Visa and Mastercard, and merchants would be able to choose the network they wanted to use. 

That means at least one option on every credit card purchase would have to be an unaffiliated competitor such as another credit card network or one of a dozen independent payment networks like Star, NYCE, or Shazam that charge lower interchange fees.

“We’re not asking for caps on fees,” Leon Buck, National Retail Federation vice president, said. "The more players there are, the lower the rates because they’ll have to compete for business. Right now ... no one can even negotiate the rates.”

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What about credit card perks?

Rewards are funded by the fees card-issuing banks receive from merchants. So, if fees are cut, rewards will follow, Tassey estimates. When the European Union capped fees in 2015, Capital One, RBS, and NatWest pared back rewards programs, he noted.

“One of the first things that would happen: Co-branded rewards programs would go away, and that’s a huge value to consumers and merchants,” Tassey said.  Many Americans see rewards as tax-free sources of income, and they incentivize consumers to spend more at retailers.

Businesses and blogs have also formed around credit card perks. Though banks buy miles from airlines to reward their credit card customers, for example, no one knew exactly how much miles were worth until major airlines secured financing by collateralizing those programs to stay afloat during the pandemic. It turned out, some of those programs were valued higher than the airlines’ market capitalizations at the time.

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How likely is it the proposal will become law?

Neither side’s putting odds on that, but it's clear the battle has officially started with a real proposal now on the table.

Merchants, who’ve worked years to bring this bill forward, brag they’ve defeated big banks and payments processors before. "And we can do it again,” Buck said.

In 2010, the Durbin Amendment (the same Durbin cosponsoring this plan) passed as part of the Dodd-Frank Act. It capped prices on debit interchange fees and mandated routing requirements for payment networks.

Consumer benefits from that amendment have been intensely debated. Retailers say it’s saved merchants and customers more than $9 billion a year on debit card fees, while opponents say these “government-mandated price controls” have only benefitted mega-retailers like Walmart and Best Buy that didn’t pass on any savings to consumers.

“We don’t count out Sen. Durbin. He’s a great tactician,” Tassey said. “But it’ll pass over my dead body.”

Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.  

This article originally appeared on USA TODAY: Credit card processing fees in focus as new bill aims to lower them