The hidden costs of credit cards
Points-and-miles enthusiasts use rewards cards for nearly every purchase. Many people look for credit cards that do not charge foreign transaction fees. They also crunch the numbers and make sure the annual fee is worth the cost. Stores that accept credit card probably consider merchant fees often. And they’ve been in the spotlight lately, with something known as the Credit Card Competition Act threatening the world of credit card rewards we enjoy today.
Here’s why you, the everyday credit card user, should know and care about merchant fees.
Overview of merchant fees
According to the National Retail Federation, merchant or swipe fees average around 2% of the transaction cost; however, that amount can jump as high as 4% for premium rewards credit cards. Those percentages may seem small, but they add up.
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The NRF says that swipe fees have grown from about $20 billion per year in 2001 to $172 billion in 2023 — though it’s worth pointing out that transaction volume has also increased over that time.
The exact cost of the fees varies based on several factors, including whether you’re using the card in person (fees for online, mobile, and over-the-phone transactions are more expensive for merchants), the type of business, the merchant’s annual sales volume and other elements.
“Swipe fees are most retailers’ highest operating cost after labor, driving up consumer prices by more than $1,000 a year for the average household and hurting retail sales because consumers buy less when prices go up,” the NRF’s statement on swipe fees reads.
But these fees fall into different categories and aren’t easy to understand.
The main bucket of fees is called interchange fees, which are paid to the banks issuing the cards. Visa’s breakdown includes different card categories and merchant classifications. Mastercard has a similarly complex formula.
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American Express, which operates differently without any additional issuing banks involved, used to have notoriously high merchant fees, but the company made a big fee reduction in 2018 to appeal to more merchants.
In addition to interchange fees, the credit card industry is fuelled by a lengthy list of additional fees. The fees vary between payment networks but include fees to process a card from a foreign country, data usage fees, and assessment fees. It’s difficult to forecast revenue when some credit cards charge higher fees. These surcharges may not be uncommon, but they are still unpalatable. Some merchants may feel their only options are to add credit card surcharges (some may frame them as cash discounts) or increase prices across the board, even for cash-paying customers.
Many states used to have laws to restrict surcharges, but court cases have challenged those laws. Connecticut and Massachusetts are the only two states that have laws prohibiting businesses from adding surcharges. Many other states have specific rules or limit the amount merchants can charge for these surcharges.
One corporation took it beyond credit card surcharges and instituted an outright ban on certain cards. Kroger-owned Foods Co. supermarkets stopped accepting Visa credit cards in 2018, citing excessive transaction fees. Kroger extended the ban to include the Smith’s supermarket chain in April 2019
But, by October 2019, Kroger reversed the ban and started accepting Visa credit card again. It’s possible that other merchants saw Kroger’s decision and decided to abandon the strategy. It’s a catalyst for online shopping, and some studies have shown that swiping cards can play an important role in increased purchase amounts.
Legislation drafted to reduce fees
The topic of swipe fees has taken on new significance due to the aforementioned Credit Card Competition Act of 2022, which has been introduced to Congress multiple times and is currently stalled. In its current form, this legislation is most beneficial to consumers and businesses. It aims at increasing competition in the industry while lowering swipe fees. But while credit card issuers and banks would certainly stand to lose, the result could lead to reduced credit card rewards.
Facing a loss of revenue from lower swipe fees, credit card issuers and banks could look to boost profits by increasing credit card annual fees or, in the worst-case scenario, eliminating credit card rewards. The bottom line
All retailers incur fees when a credit card swipe is used to make a payment. However, the amount can vary depending on a number of factors. As merchants attempt to find ways to reduce these costs, some of their decisions may negatively affect customers who pay by credit card.
This can make maximizing credit card rewards more challenging, as you must determine if the rewards you’re receiving outweigh any additional fees merchants may be charging you for the privilege of paying by plastic.
Related: TPG: Protect Your Points
