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HIDDEN COSTS

Your no annual fee credit card is costing you $700 a year, US retailers say

A sign that reads "surcharge of 50 cents plus tax for all card transactions".
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That’ll be extra.
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Visa and Mastercard are increasing their credit-card swipe fees this month, setting off a backlash from retailers and lawmakers.

Most credit card companies don’t impose swipe fees on consumers, charging vendors instead. But shoppers end up bearing those costs, as vendors hike prices to cover the fees. The National Retail Federation (NRF), the country’s largest retail association, estimates credit cards cost the average American family $700 a year, an amount that will only grow with the new fees.

A bipartisan group of four US Congress members last week called on Visa and Mastercard to stop the hikes, which it calculates would net the companies another $1.2 billion. “Your profits are already high enough and any further fee increase is simply taking advantage of vulnerable Americans,” they wrote in letter.

It’s the latest kerfuffle in a long-running and contentious standoff between card providers and merchants. The change in fees were set to go into effect two years ago but were delayed twice over retailers’ outcry

Credit card use has surged due to ecommerce

The higher fees come as Americans have become more credit-card dependent. E-commerce sales, most of which are paid for with cards, exploded during the pandemic. US online retail sales are expected to hit $1 trillion for the first time in 2022, up from the $885 billion last year.

Even when shoppers venture to the store in person, they are less likely to reach for cash due to contactless payments and expanded in-store pickup options. Covid-19 has also made many people uneasy about bills and coins, even though science shows the risk of contracting the virus through cash is low.

More than half of consumers Visa surveyed at the start of the year said they expected to be cashless within the next decade, a quarter within the next two years, and 16% are already using only digital payments.

Credit card companies say fraud prevention justifies fee hikes

Over the past 10 years, swipe fees have more than doubled to $137.8 billion in 2021, according to the Nilson Report. The fees, which average 2.22% of transaction amounts for Visa and Mastercard credit cards, are most vendors’ highest operating cost after labor, according to the NRF.

The card companies say merchants get valuable services in exchange, including safer ways to transact compared to options like Zelle, and protection from online fraud, which has spiked.

Mastercard said it wouldn’t raise fees on merchants processing transactions below $5, as well as for businesses in some hard-hit sectors, including hotels and restaurants. Visa, meanwhile, said its rate increases are largely avoidable and only apply to incorrectly processed transactions. The rates are designed to maintain high data quality and integrity across our network to prevent fraud,” it said.

Visa, Mastercard dominate 90% of the market

But industry groups like the Merchants Payments Coalition say that by virtue of controlling the market—Visa accounts for 60% and Mastercard for 30%—those companies have the power to unduly inflate fees. (It’s a recurrent accusation: In 2018, a court sided with merchants in a class-action lawsuit that alleged the two credit card giants colluded with banks to inflate fees. The court awarded them $6.5 billion but the verdict was appealed and that case is still underway. )

“It is difficult to imagine any other market in the US economy in which two entities set prices for thousands of businesses that should be competitors,” the MPC said in March.

Credit card companies have also caught the attention of Rohit Chopra, director of the federal Consumer Financial Protection Bureau. “I don’t really think we have a competitive payment system,” he told CNBC. “Many businesses cannot survive if they stop accepting Visa and Mastercard so it’s something we’re looking at carefully.”

“I’ll say this: when prices rise in tandem by dominant firms that always raises red flags for regulators,” he added.

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