“The reason this battle is so hard fought is that it pits two big spending constituencies against each other: banks versus retailers.”
Seasoned NC readers are well aware of the role played by corporate profiteering in exacerbating the inflationary forces of the past two and a half years, thanks largely to Yves’ reporting and analysis. As my former colleague Wolf Richter reported a few days ago, the total profits in US non-financial industries have more than doubled since 2019 while profits in the domestic financial industries are up by an eye-watering 45% year-over-year. In other words, corporate profits are surging far faster than inflation.
Another important, though oft-ignored, driver of inflation, particularly in the US, is the exorbitant swipe fees retailers must pay to banks and credit card processors to process each card transaction, much of the cost of which is then passed onto consumers. Most credit card interchange fees are set as a percentage of the total amount of each transaction, averaging in the US roughly 2% per transaction. As prices rise, so too do the amounts extracted in swipe fees. Higher swipe fees lead to higher consumer prices. Rinse and repeat.
This is a vicious cycle not only for retailers, for many of whom swipe fees are their second highest operating cost after labour, but also consumers, who end up paying higher prices. But it is a virtuous one for Visa and Mastercard, the world´s two biggest payment processors which together control over 80% of the US payment card market. Both companies reported double-digit annual revenue growth in 2021 and 2022 after a fall in revenue during 2020. Visa executives confirmed the positive effects of inflation, stating in earnings calls last year that the company is “a beneficiary of inflation” and that “net-net, inflation is a positive for us.”
On the Backfoot (Again)
But Visa and Mastercard, which started out as associations of banks that worked together to govern the networks, are now on the backfoot. In late August, the Wall Street Journal, citing sources and documents it had seen, reported that the card duopoly Visa and Mastercard were preparing to raise their swipe fees even higher. But after this caused a stink, even in the legacy press, Mastercard denied the allegations, stating it would not be raising interchange or network fees this Fall. For its part, Visa described the press coverage on the issue as “misleading”.
In March, the two companies paid $5.6 billion — a smallish sum for such behemoths — to settle an anti-trust case brought against them by 12 million merchants for charging “supracompetitive” fees — i.e., fees above what can be sustained in a competitive market — on payment card transactions. The Jack Dorsey-founded fintech firm Block is also suing them and their member banks for charging exorbitant fees as well as using their market power to sustain anticompetitive practices.
Capitol Hill is now taking a renewed interest in the issue. The Credit Card Competition Act, if passed, will require financial institutions with more than $100 billion in assets to offer at least two network options to process credit card transactions. One of those networks must be an option other than Visa and Mastercard. The hope is that the resulting increase in competition will lead to lower fees. The bill is supported by a bipartisan group of lawmakers as well as the Merchant Payments Coalition and small businesses from across the nation.
If the plotline sounds familiar, it is because we have been here before. In fact, one of the supporters of the bill, Dick Durbin, was behind the 2010 Durbin amendment that required the Federal Reserve to set a “reasonable” cap on the fees large banks could charge retailers for debit card processing and was passed as part of the Dodd–Frank financial reform. The Fed initially proposed a limit of 12 cents per transaction but, after consulting industry players, settled on a limit almost twice as high, of 21 cents.
On Friday, the Supreme Court agreed to hear an appeal brought by Corner Post, a North Dakota-based truck stop and convenience store, that contends that the Fed set its cap higher than the one Congress intended.
“Retailers are now paying twice as much as they should if the Fed had followed the law,” Stephanie Martz, National Retail Federation (NRF) chief administrative officer and general counsel, said in a statement. “If the Fed isn’t going to act on its own, the courts need to enforce the law.”
As happened in 2010-11, huge rivers of K-street money will no doubt flow from lobbies representing clients on both sides of the debate to lawmakers on both sides of the aisle. Back in April 2011, Yves summed up the process nicely, taking inspiration from Felix Salmon, Katie Porter, and Adam Levitin on the issue:
[T]he reason this battle is so hard fought is that it pits two big spending constituencies against each other: banks versus retailers, or as one Senator broke it down further:
The big greedy bastards against the big greedy bastards; the big greedy bastards against the little greedy bastards; and some cases even the other little greedy bastards against the other little greedy bastards
Rising Costs for All Consumers
In total, US businesses paid just over $160 billion last year in fees to process some $10.6 trillion in payments from credit, debit and prepaid cards, according to the Nilson Report. Of that, $126 billion was paid to process credit cards. The total value of fees was up 16.7% from 2021, even though purchases for goods and services tied to all card payments grew by only 12.3% year-over-year.
It is mainly small businesses, many already perilously close to the edge after two years of high inflation, rising interest rates, recurring supply chain crises and other nasty headwinds, that are bearing the brunt. While big box retailers such as Walmart or Costco have sufficient sway to negotiate better rates, smaller retailers end up paying the full whack. The impact is particularly harsh for businesses that depend on large volumes of small transactions.
In the end, most companies, both large and small, end up sharing at least some of the pain with their customers. That means that everyone, including consumers who don’t even use debit or credit cards, have to pay increasingly more for the products they buy due to the exorbitant fees charged by the credit card companies and their member banks.
“In general, these fees are just baked into the cost of everything we buy,” says Doug Kantor, who is general counsel for the National Association of Convenience Stores. “Even consumers who are cash-payers and maybe can’t even qualify for a credit card pay more for every good that they buy than they really should.”
Even more perverse is the fact that swipe fees are often substantially higher for cards offering rewards schemes, which are generally the preserve of well-heeled consumers. In others words, as a recent article in NPR notes, “lower income cash customers are effectively subsidizing the airline tickets, resort stays and other rewards that go to better-off card-users — a $15 billion-a-year transfer that some have described as Robin Hood in reverse.”
Many, if not most, consumers are blissfully unaware this is happening, but some business owners are determined to change that. British news website Unilad recounts the experience of Victor Garcia, who runs a chain of ice cream shops in Texas and often spends more than $25,000 in card fees a year. As the article notes, “it’s a lot of money to pay to facilitate the movement of money.” When Garcia tells his customers how much he’s spending, most of them, he says, are shocked:
Half of them say, ‘Gosh, I have no cash. I wish I did.’
“People don’t know. They just say, ‘Hey, I get points, so I’m going to use my card.'”
Another example from CNBC:
“We have a nice little sign in front of our register that says ‘Hey, credit card fees, they cost us a lot of money,’” Victor Garcia, longtime owner of Sol Dias [Ice Cream, in the Dallas metro area), told CNBC. “Last year they cost us $25,000. This year, they’re going to cost us close to $30,000. We’re just simply informing the consumer.”
According to Richard Hunt, executive chairman of the Electronic Payments Coalition, one of the bank lobbies fighting swipe fee reform, the fees are a price worth paying to have a seamless payment interchange system:
American consumers and businesses of all sizes rely on credit card payments to keep our economy running and interchange is what makes this system seamless, accessible and widespread. Merchants also benefit from credit card usage by receiving instant payments, transferring risk back to the credit card issuer, and credit card usage actually saves businesses money when you factor in the cost of handling cash payments.
What Hunt doesn’t mention is that swipe fees in the US are many orders of magnitude higher than in many other advanced economies, with the notable exception of Canada, as the financial consultancy firm CMSPI documents:
In Europe, for example, consumer credit cards are regulated so fees are capped at 0.30% per transaction. China and Australia have similar regulations resulting in average credit card interchange rates of 0.45% and 0.50% respectively. In Canada, while no regulation is in place regarding credit card fees, Visa, Mastercard have agreed to limit their fees on average to 1.40%. In the U.S., there are no fee constraints, voluntary card network agreements, or network routing competition on credit cards, making U.S. credit card interchange fees some of the highest in the world.
Cash, the Ultimate Rival
Imagine how high card fees could go if Visa and Mastercard’s were able to pull off their biggest coup yet — that of killing cash, their biggest rival!
Both companies have played arguably the biggest role in demonising cash over the years. Mastercard began stoking the global public’s fear of cash as a vector of bacteria and disease seven long years before the emergence of the COVID-19 pandemic. In 2017, its CEO Ajay Banga, now managing director of the World Bank, called on global corporations to work together “to take cash out,” albeit not quite completely. In other words, to kneecap it. Ironically, one of the justifications Banga gave for whacking cash was that it is “expensive”. From Livemint:
Eighty-five percent of the world’s retail payments—person to merchant are in cash. It is 95% plus in this country [India] even after demonetization. It’s 80% in Japan. So it is not a developed country versus developing country thing. It is a huge open marketplace. And no one company can win it by itself. It is going to need lots of companies focusing on taking out cash because cash is expensive and cash is not useful the way it used to be.
It shouldn’t be zero. It’s got a role to play, it’s anonymous and people like anonymity, its fungible and people like fungibility. I am respectful of that but why should it be 95%. So who do I view as my competition? Cash. I don’t view another network, I don’t view Paytm, I don’t view Apple as competition. We are actually working with all of them. They all need our technology.
Times have changed since then. Both Mastercard and Visa may be earning record revenues but they are also facing rising challenges, not only from the US’ hugely powerful retail sector but also from financial technology companies. And perhaps even cash itself. After all, one of the best ways for businesses to reduce their credit card bill would be to encourage their customers to use physical money again. As the NPR article notes, “many business owners would love it” if their customers “stopped using [their] credit card.” The question is: would their customers listen?