“Rather than building on its success, the U.S. has allowed the card industry to recoup much of the savings meant to lower debit card costs for merchants and prices for consumers, and has done nothing to address the larger issue of credit card fees,” CMSPI Chief Economist Callum Godwin said. “It’s time to take a comprehensive approach to card fees that covers both debit and credit cards and doesn’t let the other end of the balloon blow up when one end is squeezed.”
U.S. Savings is Only Half its Share of Transactions
Regulators around the world have saved merchants an estimated $82 billion a year by putting limits on interchange, the main fee charged when a card is used, according to CMSPI’s 60-page Global Review of Interchange Fee Regulation. But the estimated $9.4 billion a year saved when the Federal Reserve capped U.S. debit card fees in 2011 represents only 11.5 percent of the total even though the United States accounts for a quarter of global card transactions.
Interchange for debit cards from the nation’s largest banks was cut roughly in half by the cap and is now limited to 21 cents per transaction plus 0.05 percent. But debit cards from banks with under $10 billion in assets were exempted, and interchange for those cards still averages around 50 cents per transaction.
Credit card interchange was also exempted and currently averages 2.25 percent with no cap, making up 80 percent of total U.S. card processing fees. An increase in Visa and MasterCard credit card interchange for most U.S. merchants, which was postponed because of the pandemic, is expected to take effect next year. The U.S. rate is already the highest among countries covered by the report except Venezuela, where rates can go as high as 10 percent for luxury goods. Most other nations have rates below 2 percent for credit and some charge no interchange for debit.
By contrast, interchange was capped at 0.2 percent for debit cards and 0.3 percent for credit cards in Europe in 2015. Doing so has saved EU merchants $10.4 billion year – 12.7 percent of the worldwide total of interchange savings even though Europe represents just under 12 percent of card spending.
Increases in Other Fees Offset Interchange Savings
Interchange, which is charged by the banks that issue cards to consumers, is the largest of the three components of the “merchant discount rate” or “swipe fees” paid by merchants for card processing. Visa, MasterCard and domestic or regional debit networks each charge a network fee, and merchant acquirers – the banks that work directly with merchants and process card transactions for them – also charge a fee.
Since 2011, network fees have risen about $4.2 billion in the United States, wiping out almost half of the interchange savings, based on figures in the report. And card issuers have offset an average 24 percent of interchange savings – about $2.3 billion –by reducing card rewards and increasing fees on checking accounts, according to the report.
In addition, merchant acquirers – who pay interchange and network fees on behalf of merchants and then pass along the fees to merchants – may have kept some of the interchange savings for themselves. The report cited a study by Ernst & Young and Copenhagen Economics that found acquirers “absorbed” 45 percent of interchange savings in Europe – about $4.2 billion in the United States if the same rate is true here. Holding back the savings is possible because acquirers impose highly complex and opaque charging structures on retailers that often blend interchange fees with network and acquirer fees.
The report questioned whether interchange fees are necessary, saying there is “no robust justification” for the high fees and noting that banks “generate sufficient revenue” from overdraft fees and interest payments to operate without them. Various card fees contribute to extraordinarily high profits in the card industry, with card networks reporting average operating margins of 52 percent, acquirers 36 percent and issuers 23 percent, compared with 3 percent for retailers.