Each time you swipe your credit card to pay for coffee or groceries, the merchant pays about 2 percent in fees to the banks and card networks behind the plastic. And merchants aren't too happy about it. They recently accused credit card networks and issuers of unfairly overcharging them. But card companies argue that paying 2 cents on every dollar is a relatively small price to pay for the benefits that come from offering their customers the ability to pay without cash. The debate over these so-called interchange fees is heating up as lawmakers on Capitol Hill consider regulations that would restrict them.
While the details of the fees can get complicated, the basics are pretty straightforward, and they can affect how much you pay at the cash register. Merchants, including everyone from grocery stores to clothes retailers, usually pay between 1.6 to 2 percent of the purchase price each time a customer pays with a credit card. Most of that money goes to the bank that issued the card, partly to compensate it for the risk that the customer won't pay his or her credit card bill. (The store gets paid by the bank either way.) Merchants argue that those fees eat into their already thin profits, especially in the midst of a recession, and that they should be lower. The credit card contingent, meanwhile, says the fees are necessary for the card system to work as well as it does.
Where does all this leave shoppers? Here are the five things you should know about credit card interchange fees:
The fee pays for convenience. Card issuers "are providing a service, not just to cardholders but to merchants, and it's reasonable that there's a fee associated with that," says Ron Shevlin, senior analyst at Aite Group, a research and advisory firm. In other words, customers can walk into almost any store, anywhere in the world, and use plastic to fund their purchase. Retailers, in turn, are able to offer their shoppers a variety of payment options. Those perks require networks that cost money to run.
You're no t necessarily paying the fee—merchants are. That's why merchants are complaining so vocally about it. According to Hank Armour, chief executive of the National Association of Convenience Stores, interchange fees are merchants' greatest expense behind payroll and are more costly than rent.
There's some debate over whether or not merchants simply pass the cost directly on to consumers. One study of what happened in Australia after the government regulated interchange fees found that it was impossible to determine whether merchants passed on price reductions to customers, partly because prices are determined by so many factors. (The study was funded by MasterCard and performed by an independent economic consulting firm.) "There is absolutely no reason to believe merchants would lower prices if interchange fees were lower," says Adam Jusko, founder of www.IndexCreditCards.com.
Merchants, however, say shoppers are the ones who are ultimately paying for the interchange fees. "The average American pays $427 a year in hidden swipe fees," says Armour. If interchange fees were limited, then the savings would be passed on to consumers, he adds.
Interchange fees tend to be lower in other countries. A report recently released by merchants and retailers reports that fees in the United States are among the highest in the world—higher than the fees in Canada, Europe, and Britain. But Trish Wexler, spokeswoman for the Electronics Payment Coalition, which represents credit unions, banks, and card networks, says that comparison is misleading because while the interchange fee might be lower, the overall fee that merchants pay—known as the merchant discount fee—is average.
Fees on rewards cards tend to be higher. Card issuers fund the rewards they offer customers partially through higher interchange fees, says Shevlin. And because the use of rewards cards has grown so dramatically, interchange fees have effectively gone up, squeezing merchants' profit margins, he says. (Most merchants pay a blended rate for all cards, including rewards and nonrewards cards, according to the Electronic Payments Coalition.)
Fees also vary depending on where you shop. MasterCard has over 120 different rates for different categories of stores, explains Shawn Miles, head of global public policy for the company. Supermarkets, for example, pay one of the lowest rates, which they negotiated because their margins are so low. Online merchants, on the other hand, pay higher rates. Rewards cards come with slightly higher interchange rates, Miles says, but customers tend to spend more money on those cards, so they benefit retailers too. Visa's rates similarly vary by store and card type; the average interchange rate has held steady at 1.62 percent over the last decade.
The pending legislation could raise your fees. Several proposed bills would affect interchange fees by allowing merchants to charge customers extra for using credit cards, restricting use of plastic, or allowing merchants to collectively negotiate lower fees with card networks. Card networks and banks argue that if interchange fees were restricted, card issuers would be forced to raise fees in other areas. "You could see a reduction in the availability of credit cards and an increase in fees that are charged. . . . We do have costs that we need to cover, and those costs need to be addressed through the existing interchange process or though fees charged directly to the consumer," says Tim Keegan, chief financial officer at Wings Financial Credit Union in Apple Valley, Minnesota.
After Australia restricted interchange fees, the study funded by MasterCard found that annual fees charged on credit cards went up by 22 percent on standard cards and by 47 to 77 percent on rewards cards. "If you're no longer getting revenue from the merchant side, then cardholders will be paying for it," says MasterCard's Miles.
But if nothing changes, smaller merchants may decide to no longer offer credit card payment as an option, says Jusko. "For consumers to really be affected, though, one of the larger merchants would have to take a stand against fees by stopping the acceptance of credit cards," he adds.