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Legal, Regulatory, and Privacy Issues

Visa and Mastercard halt swipe fee hikes for now, but future impacts likely

Tennessee proposal to exclude sales tax from swipe fee levies on hold, while Colorado awaits credit card surcharge legislation signoff

Summary

Visa and Mastercard have put off planned credit card swipe fee hikes for now, but there will likely be future repercussions in a changing payments landscape.

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Visa and Mastercard have temporarily put on hold planned hikes to their swipe fee schedules to provide some relief to retailers whose sales have been impacted by the pandemic.

But the hold-off is temporary and there could still be repercussions down the road for consumers.

The swipe fee issue, which involves the on-average 2% charges retailers pay on the sales they generate from credit card use, continues to be a contentious one. This fee goes to the card network processing the transaction, the card issuer and the bank of the retailer involved in the sale.

In a statement, a Mastercard spokesperson noted, “Mindful that some merchants are still facing unprecedented circumstances, and consistent with our earlier commitment to be thoughtful on the timing of implementation, we are delaying our previously announced interchange adjustments in the U.S. until April 2022.” Visa did not respond to a CreditCards.com query asking for comment.

See related: Visa vs. Mastercard: What’s the difference?

Durbin sees fallout from debit card swipe fee cap

It seems Visa and Mastercard had a change of heart after being contacted by Sen. Richard Durbin (D-IL) and Rep. Peter Welch (D-VT) earlier this year urging them to put the planned hikes on hold while noting that “your companies propose slamming struggling merchants, and by extension consumers, with fee increases,” which would hurt the ongoing economic recovery.

Among others, the planned hike would have pushed up the fee for “card not present” transactions, which have become very popular with the rise in online shopping during the pandemic by about 5%. The congressmen noted that while merchants have heavily relied on online transactions during the pandemic, the networks’ proposed fee hikes “would disproportionately affect online transactions.”

Durbin is associated with the “Durbin Amendment” of the 2010 Dodd-Frank Act that capped the swipe fees merchants paid on debit card transactions. According to him, merchants paid about $62.5 billion in swipe fees imposed by Visa and Mastercard in 2020.

“Those fees were far in excess of any reasonable measure of cost and far higher than what would have been charged in a competitive market,” Durbin said in a prepared statement.

He believes the cap on debit card swipe fees has cost Visa and Mastercard $8 billion—which they haven’t forgotten and could be hoping to make it up with the credit card swipe fee hikes.

Consumers are likely to pay

Those fee hikes are likely to be passed on to consumers, as merchants have typically factored swipe fees into their prices, according to Lance Nogle, the Credit Union National Association’s senior director for advocacy, payments and cybersecurity.

He said, “The interchange fee goes to cover a number of costs, including damages from data breaches which occur to a larger degree at the merchant level. With the development of the chip-based cards, the cost of replacement has nearly tripled from the cost of the older magnetic stripe cards.”

However, Lloyd Constantine, an antitrust attorney who has represented retailers in cases against Visa and Mastercard, says that U.S. merchants, and ultimately consumers, typically pay three to four times more than they would in other countries for more fraud-prone and questionably “comparable payment services,” considering that other countries have been quicker in using fraud prevention and reduction services.

And Leon C. Buck, Jr., vice president of government relations at the National Retail Foundation, noted, “The delay is welcome, but that does not mean it will be OK for Visa and Mastercard to go ahead with these increases next year. Swipe fees have been skyrocketing for years and need to be reduced, not increased.”

However, according to a spokesperson for the American Bankers Association, interchange fees do not impact consumer prices. She pointed to research from the Federal Reserve Bank of Richmond that didn’t find much evidence that merchants had reduced their prices, as they promised when lobbying for the law, following the Durbin Amendment’s enactment.

See related: Small-business guide to credit card merchant fees

Tennessee proposal put on hold

In the meantime, some states have been considering legislation that would exclude sales tax from swipe fee assessments. These include Tennessee, Mississippi and Oklahoma.

The Tennessee bill hasn’t gained traction this year, but retailers expect to take it up again in 2022, according to a news report. It seems in Tennessee, swipe fees just on taxes paid on credit card sales brought in more than $175 million in the 2019-through-2020 period.

NRF’s Buck noted that it costs retailers money to collect and forward sales taxes, and paying swipe fees on the amounts only serves to add insult to injury. He said, “If even one state stands up and recognizes that making retailers pay a fee on money they are collecting for the state is fundamentally unfair, it will be easier to convince other states to do the same.”

However, there are practical difficulties involved in implementing such legislation. According to Richard Gose, chief political officer at CUNA, “The ability to separate the tax from the sale is very difficult from a technology standpoint.”

For instance, gas has a fixed price but has a number of taxes included in the price. And local taxes factor into many states’ models. Thus, “The merchant’s bills are the same in these states, but the taxes collection and structure varies widely,” Gose noted.

And Drew Johnson, senior scholar at the National Center for Public Policy Research, said, “Policymakers who dive into the issue realize it’s a minefield, pitting small banks against small merchants, and it would require retooling the entire payments systems in some states.”

Colorado swipe fee surcharge legalization anticipated

In Colorado, however, a swipe fee-related legislation has advanced and is awaiting signoff from the state governor.

A number of states allow merchants to legally add swipe fees as a surcharge to those paying with a credit card. Colorado is looking to join that group with the pending legislation spelling out that merchants can add up to 2% in credit card surcharges to account for swipe fees. If the swipe fees assessed to merchants are lower than 2%, they can only surcharge customers the actual fees they incur.

Four states now have laws against credit card surcharges, and that number will dwindle to three (Connecticut, Kansas and Massachusetts) if the Colorado legislation is signed into law. Then, the Colorado law would take effect on July 22.

See related: Colorado to legalize credit card surcharges

Newer payment methods raise additional issues

The emergence of newer payment methods, such as digital wallets and fast payments, also has the capability to impact the swipe fee landscape in coming years.

There are also firms that act as middlemen and help facilitate credit card transactions. Plastiq, for one, accepts payments from small businesses that want to transact with merchants that don’t accept credit cards. It charges the purchaser a 2.85% fee and the merchant doesn’t pay any fee on the transaction. And Payroc, a payments processor, enables merchants to add surcharges to credit card payments alone (while not running afoul of various state laws on credit card surcharges).

The use of digital wallets such as Google Pay and Apple Pay could also have consequences. For one, it remains to be seen if card issuers will add on fees to offset the costs imposed by such payment methods.

According to antitrust attorney Constantine, “So far such wallets, while providing convenience, increase the use of credit and debit and, if anything, tend to raise the level of swipe fees both because of the blending of higher and lower swipe fees into a blended fee that is higher than the ‘average’ swipe fee that prevailed prior to the institution and deployment of the wallet.”

He noted that while the wallet service providers actually have “the size and sophistication and ability” to disintermediate the payment networks and thereby lower the price of payment services, they have not actually done so.

Such new payment methods could also play a role in any future litigation, such as that merchants initiated against card networks seeking relief on swipe fees since they introduce additional parties to credit card transactions.

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