Card networks such as Visa and MasterCard assess interchange fees (also known as “swipe fees”) when merchants process payment card transactions using their networks. These fees vary dramatically based on the nature of the card used to pay for goods and services. Debit card swipe fees in the U.S. may be as low as $0.25 and credit card swipe fees can be sixty times as high for the same transaction. The incremental fees paid for credit transactions unjustly fund rewards programs that benefit the rich at the expense of the poor.
In a time when social justice, inclusion and equity are key themes, this paradigm is no longer tenable. Merchants, economists, the Federal Reserve, and the Treasury Department have all recognized the egregious nature of the interchange/rewards dichotomy for years.
As far back as 2010, the Boston Fed published a public policy discussion paper titled “Who Gains and Who Loses from Credit Card Payments? Theory and Calibrations.” The regressive transfer of wealth driven by the U.S. interchange system is fully described and incontrovertible. In short, the “extra” interchange related to credit card purchases over debit card purchases predominantly funds rewards programs associated with those credit cards.
As noted by European regulators in their 2016 memorandum (which is equally relevant in the U.S. payment system), “Usually, competition leads to lower prices since companies compete by offering lower prices than their competitors. In the case of interchange fees, the opposite occurs … Interchange fees are, therefore, indirectly paid by consumers … In addition, cardholders are encouraged through rewards offered by their bank to use cards that generate higher fees for the bank.”
Even the card associations have admitted this fact. For example in Visa’s own 2017 “Open Letter from Visa to Cardholders and Merchants in Canada,” the company essentially agreed that both merchants, (as well as merchants’ customers), benefit by lowering interchange fees.
In 2019, Aaron Klein, former Treasury deputy assistant secretary for economic policy, has asserted that lower-income consumers subsidize wealthy consumers by helping fund credit card rewards programs that disproportionately benefit the wealthy.
In 2022 Senator Dick Durbin stated, “Credit card swipe fees inflate the prices that consumers pay for groceries and gas. It’s time to inject real competition into the credit card network market, which is dominated by the Visa-Mastercard duopoly.”
And in the same year over 1,800 merchants – large and small – wrote to congress asking that they remediate the existing system.
In 2023, CMSPI’s Chief Economist, Callum Godwin said, “Evidence suggests that interchange fees increase prices for all consumers, while corresponding benefits in the form of cardholder rewards are generally concentrated among wealthier consumers. In my opinion, the current system does not work well for merchants or lower income consumers.”
Everyone pays more.
Certainly, merchants agree that all customers, not just lower-income customers, pay more due to the supra-competitive interchange fees attached to every credit card purchase. Those customers who do not pay with credit cards pay even more than the wealthy who benefit from credit card rewards.
In 2010 this transfer equated to $24 billion, according to the Boston Fed’s Policy Paper. Surely this unjust transfer has grown significantly in the ensuing 13 years.
Variable pricing for credit and non-credit purchases is virtually impossible for merchants.
Although some smaller merchants can offer discounts for cash (or in some cases surcharge for credit transactions), it is operationally impossible for merchants with hundreds or thousands of products to do so. Complex acceptance agreements, compliance, disclosure, and operational processes make variable pricing a near impossibility for larger merchants.
Credit card interchange is foundational to a shift in wealth from the poor to the rich.
The transfer of wealth from the poor to the rich engendered by the interchange/rewards framework is a real-life “reverse Robin Hood” effect — the opposite of robbing the rich and giving to the poor – effectively the system robs the poor while providing windfall benefits for the wealthy.
A Viable Solution
A viable solution is to enact legislation that requires competition in the U.S. credit card ecosystem. The Credit Card Competition Act seeks to do just this. It does not (as some claim) eliminate rewards. Instead, the Act simply enables merchants to route credit card transactions over networks they choose and thereby increases competition.
Competition will demand that all participants in the system bear a fair share of costs and can earn their fair share of benefits in a “Next Generation” U.S. Payments System.
Merchants, Consumers and their representative organizations should be keenly focused on the anticipated re-introduction of the Credit Card Competition Act for the 2023 – 2024 congressional session. Only with a substantial grassroots effort will this bill stand a chance of passing given the Republican controlled house.
Nonetheless, this is an issue of significant societal importance that has too long been obfuscated by the global card networks and that deserves our best efforts. According to the National Retail Federation and industry analysts, “By adding competition to the processing of credit card transactions, retailers and their customers could ultimately save $11 billion a year or more… Durbin was the sponsor of a 2010 law that set similar routing requirements for debit cards that have helped save retailers more than $9 billion a year, and about 70 percent of that saving has been passed along to consumers… Unlike the Durbin Amendment, the new legislation does not place a cap on the “swipe” fees banks charge to process transactions.”
Author: Dean Sheaffer, Commercial Director, United States, Payments Consulting Network
Dean Sheaffer is a seasoned leader with 30+ years in the US payments space. Dean’s deep understanding of the traditional payment ecosystem is augmented by his focuses on emerging payments such as BNPL, Open Banking (A2A), cryptocurrencies and real-time payments. Dean advises CEOs of global corporates and Board members bringing true value and unique perspective to payments-related businesses across all payment verticals. Dean’s personal network with major US merchants and their trade associations is of significant benefit to many partners and clients.
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