Blog August 30th 2023

Estimates Show Upcoming Card Fee Hikes Could Cost U.S. Retailers Over $500 Million

Here, we break down the key changes that merchants need to prepare for in October 2023.

Christian Johnson

Senior Manager, Global Advocacy Manager

Get in touch Connect

Merchants were barely done quantifying the impact of the April card fee changes when news of a fresh set of increases hit their desks.

Even amidst regulatory scrutiny¹ and lawsuits from industry², initial estimates suggest the next round of card network fee increases could be one of the most costly yet.

The Background

Over the last 10 years, total U.S. merchant card acceptance costs have increased by an average of 9% annually – that’s approximately $9.4bn in additional cost burden every year (Figure 1).

Figure 1. Merchant Card Fees Over Time. Source: Nilson Report

Source: Nilson Report

As retailers were plunged into tumult during the pandemic, the rate of change only mounted. In fact, the average rate of YoY cost increase rose from 7% between 2013 and 2020, to 21% afterwards.³

Four-party card networks, who set both the network and interchange fees paid to accept every transaction, regularly update the fees merchants must pay to accept card payments. This April, those updates saw many merchants faced with increases to their fees when a customer entered their CVV, for example, or when a network token was updated.⁴

But just as the latest reports suggest the U.S. market could narrowly avoid a ‘hard landing’ recession⁵, the country’s retailers caught wind of another round of fee hikes.

Upcoming Fees: What to Expect…

…if you’re a digital merchant

The share of ecommerce in U.S. retail increased by 8% between Q1 2022 and Q1 2023⁶, suggesting that the observed shift in customer preferences toward online shopping is more than a flash in the pan.

January 2015 is when Mastercard first introduced its Digital Enablement Fee. Charged at 0.01%, it applies to all Card Not Present transaction volume.⁷ In April 2022, its billing structure was updated and the overall rate increased to 0.02% or $0.02 depending on transaction value.⁸ CMSPI estimates the annual cost impact of the fee to be $82 million, including offsets from previous optional standalone fees, such address verification and CVV checks, which were included in the new fee structure.

Based on industry sources, CMSPI understands that Visa is now planning to introduce a similar digital services fee of 0.0075% this October.⁹ We estimate that the new fee could cost U.S. retailers more than $154 million annually.

Although it is anticipated that the new charge – like the Mastercard fee – will allow merchants to avoid some others, such as fees for address verification and CVV2, our data suggests that its net annual impact could still reach upwards of $137 million.

… if you offer subscriptions

By 2026, the global subscription ecommerce market is expected to reach a size of $904.2 billion.¹⁰ Its growth has been accompanied by fees such as Mastercard’s Authorization Optimizer which, following a delay, will now be implemented in October. The $0.02 charge applies whenever a recurring transaction (e.g., a subscription or standing order) is declined due to insufficient funds and Mastercard suggests an alternative time for retrying the transaction – regardless of the retry logic the merchant has already built.

There has been some confusion in the merchant community over whether the new fee will apply to all declined transactions, but even if it only affects recurring payments then we estimate that merchants could face additional annual costs of $38 million as a result.

…if you accept cards at all

The network fees listed above are by no means an exhaustive account of the upcoming changes. Industry communications point to further increases to both Card Present and Card Not Present consumer credit interchange fees, as well as sector-specific hikes for travel and supermarket merchants, increases to international fees, and more.¹¹ Changes to some credit interchange fees alone are anticipated to increase merchants’ costs by $247 million annually based on our estimates, with commercial card fee increases estimated to add a further $80 million. The impacts will differ significantly by merchant, but CMSPI expects that almost all card-accepting businesses will be affected.

What can merchants do?

While advance warning of the above changes can be helpful to the merchants who have received it, many still consider network and interchange fees to be ‘pass-through’ costs: a non-negotiable result of doing business in 2023.

Others, however, are choosing to act.

For them, four steps can mitigate the immediate impact whilst protecting their future cost bases:

Audit

Audit the application of new or existing fees. While interchange and network fees are passed through to processors, their subsequent application to merchants is discretionary. This can lead to significant differences in the fee burden one merchant faces relative to another. Only by understanding the underlying cost can merchants ensure they aren’t leaving negotiable volume on the table, or falling victim to mischarges whose likelihood only mounts as fee changes are applied across billions of transactions.

Analyze

Analyze the business case for any services which are ‘opt-out’. It is crucial that merchants balance any potential benefits of a new service with transaction-level analysis of its monetary impact in advance, or risk implementing a sub-optimal solution without even realizing it.

Assess

Assess negotiation opportunities for the transactions where competition is greatest, especially given the Federal Reserve’s recent clarification regarding access to cost-competitive debit network rails online.12 Maximizing the options available for each transaction can create opportunities for both cost reduction and improved performance in the face of rising fees.

Advocate

Advocate through education, working alongside other merchants seeking long-term solutions to the payment cost problem. The U.S. already has a record of competition-based action to promote merchants’ freedom of choice over the debit networks they use. Known as the ‘no-network exclusivity clause’, CMSPI has observed that this action has placed consistent downward pressure on average costs to accept the transactions to which it applies.13 But today, that’s only a subset of debit transactions. Now, the Credit Card Competition Act has the potential to open merchant routing choice to four-party credit cards from covered issuers, representing an estimated $15 billion in annual savings opportunity for U.S. retailers.

Until merchants harness the data they need to take advantage of the competition they have, October’s bill looms.

CMSPI’s specialists work on hundreds of projects each year with household merchant brands, utilizing sophisticated data tools to analyze trillions of dollars of consumer spend and identify opportunities to reduce payments costs.