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Declining Cash Usage Highlights Costs of Payments Cards

Categories : Costs of cash versus costs of electronic payment instruments
February 21, 2022
Tags : Cash substitution, Costs of payments, Digital payments, Payments competition
The recent agreement between Amazon and Visa on card fees, highlights the increasing level of fees and the lack of competition in payments, as consumers have shifted away from cash during the pandemic.
Guillaume Lepecq

Chair, CashEssentials

This post is also available in: Spanish

In November 2021, Amazon announced it would stop accepting Visa credit cards issued in the UK, blaming the rising cost of merchant fees. An Amazon spokesperson said, “the cost of accepting card payments continues to be an obstacle for businesses striving to provide the best prices for customers.”

One might expect that the increase in card transaction volumes would lead to lower prices. The opposite has happened. In the case of the UK, since its departure from the EU, a regulation capping card issuers fees is no longer in place. As a result, card schemes have increased their fees by £150 million a year, to the expense of both the UK and European retailers. According to research by retail payments advisory firm CMS Payments Intelligence and the British Retail Consortium, some fees have more than quintupled.

Small Businesses are Charged More to Accept Cards

Last week, Amazon and Visa reached a global agreement, ending a months-long standoff. Amazon will continue accepting UK credit cards and has also dropped surcharge on Visa credit cards in Australia and Singapore. The details of the deal have not been disclosed. Visa chief executive Al Kelly had previously said Amazon’s negotiating tactics had been “odd” and “unfortunate.”

However, the vast majority of retailers do not have the option to negotiate with Visa. In The Guardian, Mike Cherry, the national chairman of the UK Federation of Small Businesses, said: “Small businesses are almost always charged more for card terminals than big corporates – so when online giants start throwing down the gauntlet, you know the situation is becoming critical.”

The Shift Away from Cash is Bad News for Merchants and Consumers

Leon Buck, vice president for government relations, banking, and financial services at the US National Retail Federation, wrote in Payments Dive, “The shift away from cash is welcome news for card networks and banks. But it’s bad news for merchants and their customers, who are paying more because swipe fees are being collected on more transactions.”

Buck argues that the shift is not driven by consumer choice alone. “With massive marketing operations – Capital One alone spent nearly $1 billion on marketing in the fourth quarter – the card industry has been trying for decades to privatize U.S. currency and convince the public that cards are the same as cash.”  In 2021, Visa spent over $1.1 billion – or 5% of its revenue – on marketing. In 2020, MasterCard devoted $657 million – or 11% of its revenue – to advertising and marketing.

According to the Nilson Report, merchants in the US paid $110.32 billion in 2020 in card fees, a 70% increase over the past ten years. “The fees – the highest in the industrialized world and most merchants’ highest cost after labor – have driven up consumer prices for years, equating to $724 a year for the average family, according to payments consulting firm CMSPI,” adds Buck. Furthermore, card fees are the most visible and tangible costs associated with card payments. There are far more other costs items, including card fraud, protection against fraud, data breaches, regulatory compliance, failed transactions, outages, and breakdowns.

According to the US Merchants Payments Coalition (MPC), the average swipe fee charged on Visa credit cards in the U.S is 2.22% of the transaction amount, four times higher than the UK average of 0.55%. In the European Union, regulation has capped the fee at 0.3%. The Merchants Payments Coalition represents retailers, supermarkets, convenience stores, gasoline stations, online merchants, and others fighting for a more competitive and transparent card system that is fair to consumers and merchants.

The MPC has urged Congress to protect small businesses against rising credit card fees as the House Financial Services Committee held a hearing last week on ensuring that small and minority-owned companies share in the nation’s economic recovery. “One area that impacts all merchants, particularly small businesses, is the cost of accepting credit and debit cards,” MPC said. “Credit card swipe fees have skyrocketed over the past decade due to the underlying lack of competition in the market. In fact, U.S. small businesses pay the highest swipe fees in the industrialized world, placing them at a distinct disadvantage to their global competitors.”

One way to ensure competition in a highly concentrated payments market is to ensure that cash remains accepted and widely used. It provides an alternative to digital payments systems: it guarantees access to safe central bank money and legal tender for everybody and ensures competition between providers.

This post is also available in: Spanish