business news in context, analysis with attitude

The Hill has a story about US Senators last week "scrutinized Visa and Mastercard for raising swipe fees on merchants, costs that they say will be passed down to consumers amid surging inflation."

According to the story, "On April 22, Visa and Mastercard changed their interchange fees, which are tacked onto every credit card transaction to compensate issuing banks and pay for consumer rewards and anti-fraud measures.

"Visa reported cutting fees for most small businesses while Mastercard said it lowered fees on transactions below $5, but the changes still amount to a $475 million annual fee hike for merchants, according to an estimate from payments consultancy CMSPI. That’s a relatively small bump for retailers, which already paid $138 billion to accept card payments last year, according to the Retail Industry Leaders Association. 

"The changes prompted a lobbying blitz from big box retailers and their trade groups urging lawmakers to crack down on what they say are anti-competitive practices by Visa and Mastercard, which together control roughly 80 percent of the credit and debit market."

Which is why last week FMI–The Food Industry Association, the National Grocers Association (NGA) and the National retail Federation (NRF) all weighed in on swipe fees, which they said became more onerous as more people shopped online and used credit cards for virtually all those transactions.

From FMI:

"While the grocery industry is committed to serving all their customers, regardless of how they pay, the increase in card usage has several unintended consequences. Retailers pay processing fees to accept credit and debit cards as payments from their customers for goods and services. These processing fees are very expensive and include various fees, such as swipe and routing fees. In 2021, merchants’ card processing fees totaled $137.8 billion, up over 112% from the previous decade. Swipe fees are most retailers’ highest operating cost after labor and rent.

"The hidden processing fees negatively impact U.S. consumers – at an average of $700 a year for an American family. The $137.8 billion in hidden processing fees artificially drives up the price consumers pay for goods and services. Retailers are forced to incorporate these fees in their pricing decisions and sell items at the “credit card” price to cover costs. The impact disproportionally hurts lower income Americans, those who rely on cash, and those who do not have access to high credit card rewards. The current credit card market leaves lower income Americans paying for bloated credit card rewards they will never enjoy."

From NGA:

"For more than a decade, Visa and Mastercard have set not only their network fees – the costs associated with a credit or debit card payment being routed through their network – but the interchange fees that merchants pay to the issuers of the credit and debit cards with which Americans transact. Nearly twice a year, every year, these two card networks have instituted fee changes that, on net, almost always lead to increases in merchants’ costs. Case in point, this hearing comes on the heels of a net $1.2 billion increase in interchange fees and other merchant costs implemented by Visa and Mastercard in April 2022.

"Visa and Mastercard use their dominance over the U.S. card payment marketplace to set not only the fees associated with accepting card payments, but the rules and 'standards' that govern the rest of the participants in the marketplace as well. Unfortunately, the benefit of this duopoly has been one-sided. Visa and Mastercard profit margins continue to lead the S&P 500, and credit and debit card issuers continue to gain from central interchange price fixing. Merchants and American consumers, meanwhile, are left with increased costs and higher rates of fraud.

"U.S. merchants paid $137.83 billion in credit and debit card processing fees in 2021, a 24.3% increase from 2020 and more than double the amount paid a decade ago.1 U.S. merchants pay the highest swipe fees in the industrialized world, an average of 2.2%, but these fees can vary from 1-4% depending on the type of credit card a customer uses. Merchants have no ability to affect these costs. Even some of the world’s largest retailers do not have leverage to negotiate significantly lower swipe fees."

And, from NRF:

"Swipe fees are most merchants’ highest operating cost after labor, averaging 2.22 percent of the transaction amount for Visa and Mastercard credit cards. The fees drive up consumer prices, amounting to more than $700 a year for the average American family. As a percentage of the transaction, they go up as prices go up, creating a multiplier effect for already-soaring inflation.

"Swipe fees can be even higher for small retailers because they are based, in part, on transaction volume. Small retailers with a few dozen transactions per day pay a higher percentage than national retailers with millions of transactions. Fees are also higher for e- commerce transactions, which have become increasingly important for small retailers because of the shift to more online shopping since the beginning of the pandemic.

"Ongoing and unwarranted increases in swipe fees are especially damaging to small retailers. We have heard many stories from small retailers about the extreme challenges posed by the current payments system and Visa and Mastercard’s continuing monopoly. It is small retailers who are calling for swipe fee reform more than any other segment of our industry. They pay the highest swipe fee rates and have the fewest resources to fight back against global credit card networks and Wall Street banks. They want the card industry to compete the same as they do."

The retail organizations seem to have a sympathetic ear.

The Hill writes that "Senate Judiciary Committee Chairman Dick Durbin (D-Ill.), a longtime critic of the credit card giants, called for new rules to inject competition into the credit card industry and prevent 'unreasonable' fees during a hearing in which Visa and Mastercard executives answered questions about the swipe fees.

"'The credit and debit card systems are not competitive marketplaces,' Durbin said. 'It’s a sweetheart deal for the dominant networks, for the biggest banks and for certain cardholders who have ritzy rewards programs, but the average small business and the consumer, they pay the price'."

KC's View:

This is an argument that seems to be without end, with very little possibility of a resolution.  It is like the old African proverb about how, when elephants fight, the real loser is the grass.

In this case, shoppers are the grass.