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Paying for everyday transactions with a tap, swipe or tap of your card or phone is convenient. But it's not free.
In the United States, merchants paid a record $172 billion in processing fees to accept $11.2 trillion in card payments last year, according to a Nielsen report. The bulk of so-called swipe or interchange fees — about 79 percent — were from credit cards.
This week's landmark class action settlement wants to change that. Visa and Mastercard — the country's two largest card payment processing companies — have agreed to reduce fees merchants pay to accept credit card payments. Under the proposed deal — which must be approved by a judge — those fees would be reduced by at least 0.04 percentage point for a minimum of three years and a maximum of five years.
Retailers say the settlement will save them $30 billion over five years. But investors in Visa and Mastercard can rest assured. Their high-margin business model remains intact.
Visa and Mastercard set interchange rates, which can average between 2-4 percent of the transaction amount. But they only get a small slice of this. On a $100 purchase, for example, a store might pay a 2.5 percent — or $2.50 — fee to accept credit card payment. Of this amount, Visa or MasterCard, which operate the networks that connect cardholders with banks and merchants, may collect 20 cents. The lion's share of this fee — about $1.80 — goes to the bank that issued the credit card used. Another 50 cents is collected by the acquiring merchant, or companies like Block or Stripe that provide the store's point-of-sale service system.
The settlement did not specify for whom the interchange fees would be reduced by 4 basis points. Odds are that it will come from card-issuing banks like JPMorgan, Citigroup or Bank of America rather than Visa or Mastercard.
Banks have plenty of ways to compensate for lower interchange fees. They can make up for revenue shortfalls by raising annual card membership fees and interest rates, or rolling back rewards for cardholders.
Under the settlement, merchants are not required to pass on savings from lower fees to consumers. They can also charge consumers different rates based on the credit card they use. Credit card holders accustomed to luxury perks are in for a rude awakening. They end up paying for all of the card's points, miles, and cash back — one way or another.
pan.yuk@ft.com
