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Innovations and Payment Systems

Pandemic boosts cashless payments, potentially affecting card swipe fees

Visa and Mastercard have held off on planned swipe fee hikes during the pandemic

Summary

The rise of cashless payments means more use of credit cards, and there could be ripple effects for credit card swipe fees, and ultimately consumers, as a result of this shift.  

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The use of cash has been on the decline for several years, as consumers have taken to cards and other electronic payments. The COVID-19 pandemic has hastened this trend toward cashless payments.

The rise of cashless payments means more use of credit cards, as well as other noncash means of payment, and there could be ripple effects for credit card swipe fees, and ultimately consumers, as a result of this shift.

“Whenever more transactions move to plastic, retailers pay more in swipe fees,” said Leon Buck, vice president for government relations, banking and financial services at the National Retail Federation. “Higher costs for retailers ultimately mean higher prices for consumers. Consumers won’t see price increases overnight, but higher swipe fee costs ultimately must be taken into consideration in setting prices.”

Rise in cashless payments

According to the Federal Reserve Bank of Atlanta, in 2015 the number of cash payments in a typical month for consumers of all income levels was 18.65. By 2019, that was down to 14.70.

And as the pandemic took hold this year, the payment processor Square reported, “Seemingly overnight, an increase in online ordering, touch-free digital payment methods, curbside pickup and no-contact deliveries emerged as the new normal, all in the name of a safety-first approach to business.”

As a result, the percentage of cashless merchants using Square went from 8% on March 1 to 31% on April 23. Square defines cashless merchants as those for whom 95% or more of transactions comprise credit or debit card payments.

This comes about even though scientists find that transmission of Covid through bank notes “is low when compared with other frequently-touched objects,” as noted by the Bank for International Settlements.

See related: How COVID-19 is possibly leading the cashless revolution 

Social consequences of going cashless

The move to cashless payments has social consequences, as well as fallouts for credit card swipe fees.

According to the BIS, “A realistic assessment of the risks of transmission through cash is particularly important because there could be distributional consequences of any move away from cash. If cash is not generally accepted as a means of payment, this could open a ‘payments divide’ between those with access to digital payments and those without. This in turn could have an especially severe impact on unbanked and older consumers.”

In order to ward off such social consequences, as early as 1978 the state of Massachusetts – a pioneer in this regard – ruled that retail establishments cannot decline cash payments.

And since 2019, the cities of Philadelphia and San Francisco have mandated acceptance of cash payments. New York state has similar legislation pending.

Additionally, the Payment Choice Act of 2020 is a piece of pending federal legislation that aims to make it illegal for retail stores to decline cash as a payment method, post notices stating that they don’t accept cash payments or charge a higher price to anyone paying with cash.

See related: Will banning cashless businesses affect the credit card market? 

Cash payments subsidize cashless card payments

While the federal law would explicitly ban retailers from charging a higher price to those paying with cash, it seems those cash payments are being charged an implicit fee anyway since they subsidize the rewards that cardholders get, which are typically paid for with swipe fees.

Card issuers tend to use the swipe fees they get on card payments to give back rewards to cardholders. Those paying with cash don’t get such rewards and don’t get a lower price that reflects this lack of benefit flow to them.

The Federal Reserve Bank of Boston reported in a 2010 study that on average every year each “cash-paying household” paid $149 to “card-using households,” while each of the latter on average received $1,133 from cash payers.

What are swipe fees, anyway? The card networks, such as Visa and Mastercard, set these swipe fees on credit card transactions. If you make a $100 purchase, for instance, the merchant pays typically $2 in swipe fees and only receives $98 in revenue on the sale.

Of this $2, the lion’s share goes to the bank that issued the credit card, another portion goes to the card network and the merchant’s bank keeps a part. According to the Electronic Payments Coalition, the breakup is typically $1.60 to the card issuer, $0.25 to the merchant’s bank, and $0.15 to the card network.

See related: How to use cashless payment systems without overspending 

Visa and Mastercard swipe fees scheduled to rise

Using input from the Nilson Report, the EPC says that both Visa and Mastercard set their average swipe fees at 2.25% for 2019, down from 2.26% for 2018. However, this rate was up from 2.16% in 2012.

Both these networks had been scheduled to hike up their fee schedules earlier this year, but have held off while the pandemic continues to rage. The new schedule would reportedly hike up swipe fees on “card not present” electronic transactions to $1.99 from $1.90 on a $100 transaction.

Doug Kantor, counsel for the NACS, a trade association for convenience stores, said the proposed hike, particularly that for online transactions, will have the impact of increasing swipe fees “significantly.” He noted, “On average, swipe fees are larger than business’ profit margins. Consumers end up getting hidden fees that they pay on purchases without having a choice.”

However, an electronic payment trade group manager said, speaking on background, that swipe fees have remained “relatively stable over years.” With the new schedule, some merchants will pay a little bit more, and some less.

Although Visa and Mastercard set a default interchange rate for swipe fees, some merchants could negotiate more favorable rates with the card issuers. Card issuers U.S. Bank and American Express declined to comment on these issues, and JPMorgan Chase did not respond to an inquiry seeking comment.

NRF’s Buck also noted that “the growth in total swipe fees paid over the years has come more from the shift of transactions from cash to plastic rather than increases in the percentage charged, and the current increase in contactless payments will accelerate that growth.”

See related: Moving toward a cashless society with peer-to-peer payments

Are swipe fees too high?

The electronic payment trade group manager also noted that while rates could be a little higher for online transactions, retailers would not be able to conduct business today without electronic payments.

They “refuse to acknowledge the value” of such transactions, the manager noted, considering that they have gained more business while cutting down on their administrative costs and their fraud risk due to the security of e-commerce. This means that the “value to small merchants is huge” and “you have to pay for value.”

However, Buck said, “Retailers believe swipe fees should reflect the card industry’s actual cost of processing transactions rather than being treated by banks and card networks as a profit center. Current swipe fees are far out of proportion to those costs.”

According to James Issokson, a spokesman for Mastercard, the company does not earn revenues from the interchange rates it sets, which are the source of the payment system’s ability to protect consumers and merchants.

For merchants, the fees help guarantee payments for all transactions done on the network, irrespective of whether consumers ultimately pay their banks for the unsecured credit they availed of.

And for consumers, Issokson said, “Interchange provides the backstop against fraud known as ‘zero liability.’ If consumers are defrauded or their money is stolen, zero liability ensures they will have those funds restored to their accounts.”

He believes that “amid the pandemic, electronic payments are providing immense value that cannot be overlooked.” Visa did not respond to an inquiry seeking comment on this matter.

While the European Union and Australia have caps on credit card swipe fees, the U.S. hasn’t moved in that direction. According to NACS’ Kantor, the move toward such legislation would not be very easy in the U.S., considering that “it’s a political will problem.”

And NRF’s Buck said, “The card industry has lobbied heavily against all moves to bring swipe fees under control, and ironically they’re using the money collected from swipe fees to pay for their lobbying. Nonetheless, NRF plans to launch advocacy efforts in the next session of Congress in 2021 to champion this fight.”

See related: Visa, Mastercard reach $6.2B settlement with merchants over swipe fees

Cards aren’t the only form of cashless payments

Although consumers could be concerned about any potential fallout from a rise in swipe fees, there are also factors that could help contain this trend. For instance, some retailers, such as Starbucks and Dunkin’ Donuts, have their own proprietary apps that enable consumers to pay directly from their bank accounts. This trend could accelerate in the future.

Real-time payments are also gaining some steam, and that could be another force in containing swipe fees. Reed Luhtanen, executive director at Faster Payments Council, said, “The shift to digital channels is accelerating consumer demand for secure, easy-to-use faster payments. That trend has certainly been accelerated by the pandemic, and we expect consumers and businesses will increasingly lean on efficient, secure faster payments going forward.”

And for those who would like to get the benefit of paying in cash while avoiding subsidizing card payments, at least one payment processor, Payroc, also enables merchants to surcharge consumers who pay with a credit card, while not adding a surcharge for cash or bank payments.

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