Visa and Mastercard control about 80% of credit card transactions in the United States, according to the National Association of Convenience Stores (NACS). The declining share of cashMoney in physical form such as banknotes and coins. More in the payments mix aggravates market concentration.
Every time a customer uses a credit card, retailers pay merchant or “swipe” fees, a significant portion of which includes interchange imposed by the two global card schemes. These fees cost businesses 1.5% to 3% per transaction. “Because credit card fees are a percentage of the total transaction cost, they multiply with every centFraction of a currency representing the hundredth of the unit of account. More of inflation. That is because there is no competition in the credit card market,” said NACS.
Visa and Mastercard argue the fees cover fraud prevention and innovation costs. “Our focus remains to ensure the safety and security of payments while balancing the interests of all parties,” said a Mastercard spokesman. The fraud argument is somewhat surprising. According to the Nilson Report (2021: 5), fraud losses in the United States amounted to $10.24 billion in 2020 compared to $9.62 billion in 2019. U.S. fraud was 10.89 cents per $100 in 2020 compared to 10.25 cents in 2019.
Lobbyists argue card payments help businesses reduce costs by eliminating “the substantial cost of counting, storing, safeguarding, and transporting cash,” said Jeff Tassey, board chairman of the Electronic Payments Coalition, a trade group of card networks and financial entities. The argument is open to debate. But how does it justify the spectacular increase in swipe fees? Credit and debit card swipe fees went from $20 billion in 2001 to $137.8 billion in 2021, according to the National Retail Federation (NRF).
The Visa-Mastercard duopoly “is bad for American consumers and retailers,” said The Economist recently. Swipe fees impose substantial costs on the U.S. economy at large.
While large retailers pass credit-card fees to consumers via price increases, many small businesses charge surcharging fees when consumers pay with credit cards. Surcharging was banned in many U.S. states until a roughly $6 billion settlementThe discharge of an obligation in accordance with the terms of the underlying contract. In e-transfers the settlement may take days, whereas cash settlements are instantaneous and irreversible. More in 2012. Since then, California, Colorado, Florida, New York, and Texas have lifted or modified surcharge bans.
Most states allow businesses to pass card swipe fees to customers, provided they disclose surcharges on visible signage and their websites. According to the Strawhecker Group (a payments consultancy), 2% of U.S. small businesses accepting cards set additional fees for credit card payments in 2016. That share rose to 5% in 2021.
Mastercard and Visa imposed a $1.2 billion increase in credit card swipe fees for most U.S. merchants in April 2022 for the first time since the beginning of the Covid-19 pandemic. The NSBA called the move “unthinkable [given that] inflation is high, and gas prices are rising, not to mention the fact that most small businesses are still clawing their back from the pandemic.”
Restaurants are billing “noncash adjustment” fees to cope with rising inflation, a tight labor market, and increased swipe fees.
But restaurants are not alone. Many other businesses are charging customers swipe fees.
As U.S. gas prices reached $5 per gallon this summer, Visa and Mastercard increased card payments’ hold limits at gas pump stations from $125 to $175. Many customers faced overdraft fees when paying with debit cards after the 40% increase. Others reached their spending limits when using credit cards.
The card networks’ performance in financial markets has thrived since their initial public offerings in the mid-2000s (see Graph 1). In 2021, Visa and Mastercard’s net margins reached 51% and 46%, respectively.
Graph 1. Visa (V) and Mastercard (MA) Share Prices, 2006-2022