Credit Card Fee Hikes

March 16, 2022

Mastercard and Visa are preparing to raise the fees– by around 0.05 to 0.10 of a percentage point—paid by merchants when consumers pay with credit cards.

The fee increases are expected to go into effect in April 2022. They had been scheduled to happen two years ago but were put on hold during the pandemic. Most of the increases will come from higher interchange fees, which are paid by merchants to the card-issuing banks when shoppers use cards. The fees go to the bank that issued the card.

Though mostly invisible to shoppers, interchange fees have been a consistent thorn in the side of merchants, especially as they have seen their costs go up in recent years amid the popularity of rewards credit cards, which often come with higher fees to offset the cost of benefits, such as travel rewards.

Visa and Mastercard set the swipe fee rate that the banks that issue their cards collect every time a card is used. Those banks – particularly the mega-banks with hundreds of billions (or trillions) of dollars in assets – normally compete on their fees and rates, but not on swipe fees. That lack of competition makes the fees unreasonably high and anticompetitive.

Particularly troubling is the fact that the largest portion of swipe fees are set as a percentage of the amount of a transaction, meaning the fees automatically rise every time other prices rise across the economy.

Swipe fees for Visa and Mastercard credit cards average 2.22 percent of the purchase price and totaled $61.6 billion in 2020, up 137 percent over the previous decade, according to the Nilson Report. When all types and brands of cards are included, processing fees totaled $110.3 billion in 2020, up 70 percent over 10 years.

Swipe fees mean merchants receive less than 98 cents on the dollar when customers pay by credit card, and merchants must set prices higher to make up for the loss. The fees amount to an estimated $724 a year for the average U.S. family. Further, credit card usage declined during the pandemic, causing fees to fall 15 percent to an estimated $55.4 billion in Visa and Mastercard credit-card interchange fees in 2021. They pass along at least some of these costs to the consumer in the form of higher prices. More merchants have started charging consumers extra when they pay with credit cards.

Visa may be lowering fees for online and in-store purchases at some small merchants with $250,000 or less in annual consumer credit-card volume. Some retail categories, like convenience or grocery stores, restaurants, and gas stations, will be excluded. Visa said this change will lower fees by 10 percent for more than 90 percent of American businesses.

In addition to the swipe fee increases, Mastercard plans to increase its Digital Enablement Fee, which is charged on all online transactions, to 0.02 percent from the current 0.01 percent. While that alone would double the amount collected across millions of transactions, Mastercard is also setting a minimum of 2 cents per transaction, bringing the total increase to an estimated $80 million on top of the swipe fee increases.

Mastercard will also increase fees on more than a dozen in-store purchase categories. Small and midsize supermarkets will pay higher interchange fees on most rewards cards. In-store general retail fees will also rise. Mastercard said it is lowering costs for all merchants with transactions below $5 as well as hotels, casual dining, daycare facilities and other sectors that were hit hard by the pandemic.

Mastercard also plans to bundle a variety of add-on services, which are currently charged separately, under this fee. That means beginning in April, merchants will be forced to pay for those services even if they do not want the services or currently use one of Mastercard’s competitors to provide the services. Mastercard’s digital enablement fee is not optional and will significantly increase processing fees for merchants large and small. This fee is being levied unilaterally without any merchant input. Merchants will now have to pay for the same service twice or stop working with a Mastercard competitor.

It is unthinkable for Visa and Mastercard to unilaterally implement these changes now—when inflation is high and gas prices are rising, not to mention the fact that most small businesses are still clawing their way back from the pandemic.