“The reason this battle is so hard fought is that it pits two big spending constituencies against each other: banks versus retailers.”
Seasoned NC readers are well aware of the role played by corporate profiteering in exacerbating the inflationary forces of the past two and a half years, thanks largely to Yves’ reporting and analysis. As my former colleague Wolf Richter reported a few days ago, the total profits in US non-financial industries have more than doubled since 2019 while profits in the domestic financial industries are up by an eye-watering 45% year-over-year. In other words, corporate profits are surging far faster than inflation.
Another important, though oft-ignored, driver of inflation, particularly in the US, is the exorbitant swipe fees retailers must pay to banks and credit card processors to process each card transaction, much of the cost of which is then passed onto consumers. Most credit card interchange fees are set as a percentage of the total amount of each transaction, averaging in the US roughly 2% per transaction. As prices rise, so too do the amounts extracted in swipe fees. Higher swipe fees lead to higher consumer prices. Rinse and repeat.
This is a vicious cycle not only for retailers, for many of whom swipe fees are their second highest operating cost after labour, but also consumers, who end up paying higher prices. But it is a virtuous one for Visa and Mastercard, the world´s two biggest payment processors which together control over 80% of the US payment card market. Both companies reported double-digit annual revenue growth in 2021 and 2022 after a fall in revenue during 2020. Visa executives confirmed the positive effects of inflation, stating in earnings calls last year that the company is “a beneficiary of inflation” and that “net-net, inflation is a positive for us.”
On the Backfoot (Again)
But Visa and Mastercard, which started out as associations of banks that worked together to govern the networks, are now on the backfoot. In late August, the Wall Street Journal, citing sources and documents it had seen, reported that the card duopoly Visa and Mastercard were preparing to raise their swipe fees even higher. But after this caused a stink, even in the legacy press, Mastercard denied the allegations, stating it would not be raising interchange or network fees this Fall. For its part, Visa described the press coverage on the issue as “misleading”.
In March, the two companies paid $5.6 billion — a smallish sum for such behemoths — to settle an anti-trust case brought against them by 12 million merchants for charging “supracompetitive” fees — i.e., fees above what can be sustained in a competitive market — on payment card transactions. The Jack Dorsey-founded fintech firm Block is also suing them and their member banks for charging exorbitant fees as well as using their market power to sustain anticompetitive practices.
Capitol Hill is now taking a renewed interest in the issue. The Credit Card Competition Act, if passed, will require financial institutions with more than $100 billion in assets to offer at least two network options to process credit card transactions. One of those networks must be an option other than Visa and Mastercard. The hope is that the resulting increase in competition will lead to lower fees. The bill is supported by a bipartisan group of lawmakers as well as the Merchant Payments Coalition and small businesses from across the nation.
If the plotline sounds familiar, it is because we have been here before. In fact, one of the supporters of the bill, Dick Durbin, was behind the 2010 Durbin amendment that required the Federal Reserve to set a “reasonable” cap on the fees large banks could charge retailers for debit card processing and was passed as part of the Dodd–Frank financial reform. The Fed initially proposed a limit of 12 cents per transaction but, after consulting industry players, settled on a limit almost twice as high, of 21 cents.
On Friday, the Supreme Court agreed to hear an appeal brought by Corner Post, a North Dakota-based truck stop and convenience store, that contends that the Fed set its cap higher than the one Congress intended.
“Retailers are now paying twice as much as they should if the Fed had followed the law,” Stephanie Martz, National Retail Federation (NRF) chief administrative officer and general counsel, said in a statement. “If the Fed isn’t going to act on its own, the courts need to enforce the law.”
As happened in 2010-11, huge rivers of K-street money will no doubt flow from lobbies representing clients on both sides of the debate to lawmakers on both sides of the aisle. Back in April 2011, Yves summed up the process nicely, taking inspiration from Felix Salmon, Katie Porter, and Adam Levitin on the issue:
[T]he reason this battle is so hard fought is that it pits two big spending constituencies against each other: banks versus retailers, or as one Senator broke it down further:
The big greedy bastards against the big greedy bastards; the big greedy bastards against the little greedy bastards; and some cases even the other little greedy bastards against the other little greedy bastards
Rising Costs for All Consumers
In total, US businesses paid just over $160 billion last year in fees to process some $10.6 trillion in payments from credit, debit and prepaid cards, according to the Nilson Report. Of that, $126 billion was paid to process credit cards. The total value of fees was up 16.7% from 2021, even though purchases for goods and services tied to all card payments grew by only 12.3% year-over-year.
It is mainly small businesses, many already perilously close to the edge after two years of high inflation, rising interest rates, recurring supply chain crises and other nasty headwinds, that are bearing the brunt. While big box retailers such as Walmart or Costco have sufficient sway to negotiate better rates, smaller retailers end up paying the full whack. The impact is particularly harsh for businesses that depend on large volumes of small transactions.
In the end, most companies, both large and small, end up sharing at least some of the pain with their customers. That means that everyone, including consumers who don’t even use debit or credit cards, have to pay increasingly more for the products they buy due to the exorbitant fees charged by the credit card companies and their member banks.
“In general, these fees are just baked into the cost of everything we buy,” says Doug Kantor, who is general counsel for the National Association of Convenience Stores. “Even consumers who are cash-payers and maybe can’t even qualify for a credit card pay more for every good that they buy than they really should.”
Even more perverse is the fact that swipe fees are often substantially higher for cards offering rewards schemes, which are generally the preserve of well-heeled consumers. In others words, as a recent article in NPR notes, “lower income cash customers are effectively subsidizing the airline tickets, resort stays and other rewards that go to better-off card-users — a $15 billion-a-year transfer that some have described as Robin Hood in reverse.”
Blissfully Unaware
Many, if not most, consumers are blissfully unaware this is happening, but some business owners are determined to change that. British news website Unilad recounts the experience of Victor Garcia, who runs a chain of ice cream shops in Texas and often spends more than $25,000 in card fees a year. As the article notes, “it’s a lot of money to pay to facilitate the movement of money.” When Garcia tells his customers how much he’s spending, most of them, he says, are shocked:
Half of them say, ‘Gosh, I have no cash. I wish I did.’
“People don’t know. They just say, ‘Hey, I get points, so I’m going to use my card.'”
Another example from CNBC:
“We have a nice little sign in front of our register that says ‘Hey, credit card fees, they cost us a lot of money,’” Victor Garcia, longtime owner of Sol Dias [Ice Cream, in the Dallas metro area), told CNBC. “Last year they cost us $25,000. This year, they’re going to cost us close to $30,000. We’re just simply informing the consumer.”
According to Richard Hunt, executive chairman of the Electronic Payments Coalition, one of the bank lobbies fighting swipe fee reform, the fees are a price worth paying to have a seamless payment interchange system:
American consumers and businesses of all sizes rely on credit card payments to keep our economy running and interchange is what makes this system seamless, accessible and widespread. Merchants also benefit from credit card usage by receiving instant payments, transferring risk back to the credit card issuer, and credit card usage actually saves businesses money when you factor in the cost of handling cash payments.
What Hunt doesn’t mention is that swipe fees in the US are many orders of magnitude higher than in many other advanced economies, with the notable exception of Canada, as the financial consultancy firm CMSPI documents:
In Europe, for example, consumer credit cards are regulated so fees are capped at 0.30% per transaction. China and Australia have similar regulations resulting in average credit card interchange rates of 0.45% and 0.50% respectively. In Canada, while no regulation is in place regarding credit card fees, Visa, Mastercard have agreed to limit their fees on average to 1.40%. In the U.S., there are no fee constraints, voluntary card network agreements, or network routing competition on credit cards, making U.S. credit card interchange fees some of the highest in the world.
Cash, the Ultimate Rival
Imagine how high card fees could go if Visa and Mastercard’s were able to pull off their biggest coup yet — that of killing cash, their biggest rival!
Both companies have played arguably the biggest role in demonising cash over the years. Mastercard began stoking the global public’s fear of cash as a vector of bacteria and disease seven long years before the emergence of the COVID-19 pandemic. In 2017, its CEO Ajay Banga, now managing director of the World Bank, called on global corporations to work together “to take cash out,” albeit not quite completely. In other words, to kneecap it. Ironically, one of the justifications Banga gave for whacking cash was that it is “expensive”. From Livemint:
Eighty-five percent of the world’s retail payments—person to merchant are in cash. It is 95% plus in this country [India] even after demonetization. It’s 80% in Japan. So it is not a developed country versus developing country thing. It is a huge open marketplace. And no one company can win it by itself. It is going to need lots of companies focusing on taking out cash because cash is expensive and cash is not useful the way it used to be.
It shouldn’t be zero. It’s got a role to play, it’s anonymous and people like anonymity, its fungible and people like fungibility. I am respectful of that but why should it be 95%. So who do I view as my competition? Cash. I don’t view another network, I don’t view Paytm, I don’t view Apple as competition. We are actually working with all of them. They all need our technology.
Times have changed since then. Both Mastercard and Visa may be earning record revenues but they are also facing rising challenges, not only from the US’ hugely powerful retail sector but also from financial technology companies. And perhaps even cash itself. After all, one of the best ways for businesses to reduce their credit card bill would be to encourage their customers to use physical money again. As the NPR article notes, “many business owners would love it” if their customers “stopped using [their] credit card.” The question is: would their customers listen?
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We pay cash as much as possible. I have noticed in the last year or so that a lot merchants are posting a cash discount at the register. They are basically saying to the consumer, if you want to use your credit card you have to pay the processing fee. That’s ok with us since we almost always pay cash…
My small business will end up paying over $60k to those bloodsuckers this year. I really liked the sign put by the cash registers at the Dallas ice cream shops. I would add ” Every dollar we spend on these fees are dollars we can’t spend in our community supporting other worthy endeavors.”
Here in Chautauqua County, New York and Warren County, Pennsylvania, we are drifting towards a ‘more cash less credit’ economy. Part of the reason may be that we have lots of small businesses: fresh produce stands, small car repair shops, feed stores, non-chain restaurants and local breweries, hardware stores. The growing Amish population run very small businesses; hand-lettered signs at the turn-off to a gravel road, announce home-baked goods on Fridays and Saturdays, along with side-yard buildings that house bulk groceries (you want a 50 pound sack of flour or rolled oats or maybe stock up on canning jar lids and caps?) and they take cash only. Or a check, maybe.
The one-man auto shop where we take our aging auto, has just announced that it’s cash only. Other places have discreet signs announcing a 3% surcharge on credit card transactions.
We have gradually started to keep more cash on hand. I can’t believe I have begun carrying $100 bills! And the shops have no problem with accepting them and have change available. I just paid all cash for our annual half-lamb purchase: to the local farm and to the processor for cutting and packaging. At the local chain grocery, where we still go for milk, plus other staples, I pay with a debit card. Apparently, debit card purchases, using the authorized PIN, go through a different network and charge a lower fee.
Absolutely no doubt that these fees are way higher than cost, and these things should be regulated as utilities. But I couldn’t help thinking, if swipe fees are such an expense, why have some legislative bodies have felt the need to make it a legal obligation for shops to accept cash?
I’m a customer that has been listening for years. Except for very large purchases at places like hardware stores, it’s cash only for me. If a store doesn’t take cash, then I don’t do any business with them.
In fact I take great pleasure when purchasing anything in a store that fails to advertise “no cash”. I smile, say, “Sorry, cash is all I have.”, then walk away leaving everything on the counter. It’s a simple pleasure, and very satisfying, knowing that a cash transaction would have cost that particular company far less in handling that particular transaction.
> walk away leaving everything on the counter.
It isn’t the greedy bossman who who has to put everything back on the shelf. Just saying.
Job security…
Another cash person here…a couple of years ago I used cash for a $3000 purchase.
I mainly use my credit card for online purchases…perhaps a couple of times a year
I have one small bank account with a regular bank, but my primary financial institution is a credit union. Something I have noticed over the last three or four years is that my access to cash without paying a fee has significantly decreased. My credit union, and the credit union network they belong to, operates fewer ATMs. As they were low fee, I assume that the stores which held them did not choose to continue the contract when they expired. But more troubling is that when seeking replacements for former ones more and more I find that credit union ATMs charge a fee, even operated by my own credit union. It is significantly lower than those charged by other ATM operators, but it is still a cost. And going to the one operating branch is difficult.
I don’t know if this is connected, but I have to wonder if it is another way of discouraging the use of cash.
I wonder if retailers could generate a cash only campaign with their customers. They could also explain that they have to charge higher fees with people using cards to pay for the associated costs. That might give pause to people that insist on using their cards. I always use cash myself but that is more habit than principal. The thing is, corporate profiteering will always push fees and the like higher and higher as those corporation like Visa and MasterCard are always seeking to maximize their profit. They could back off their stock buyback schemes but we know that they won’t do that. So if there was a massive social media campaign for people to only use cash it might be interesting to see where the government will stand with that one, especially with old Joe’s history in Delaware.
The problem with the cash debate is that it occurs under capitalism.
How many people does one know who have ‘cash’ to lay out for groceries, baby needs, food, healthcare, rent, utilities and on and on.
Americans are broke.
The credit card is little more than a debt generator, and of course if you have no money, you will pay the vig..
Money, cash, should be a public utility but this cannot happen in an exchange economy called capitalism.
Yep, the rates go up and the service goes down, the monies are at more risk and the costs of criminals to store the money is achievieng astronomical levels.
Does anyone know anyone who voted for all of this?
I live alone, so I can’t speak to baby needs because I don’t have any.
But I pay cash for groceries, food, etc.
I pay for utility and phone bills by check which I send by land mail after I get my land mail bills.
So I am meeting day to day needs with cash or check.
I still use credit card for buying things from the black hat corporate perpetrators I cannot avoid.
I reduced severely my cash use, getting 1% back on my Chase credit card. Currently, merchants are prohibited to add card fees to the total, but a nice reform would be to make it OBLIGATORY, so when a consumers have a choice between “competing systems”, they do not take money from other consumers. Of course, handling cash has a cost too, perhaps merchants could choose how to charge for that. So debit, credit, cash etc. could compete fairly.
“…could compete fairly.”
One of the Prime Directives of Monopoly systems is to eliminate “fairness.” Why else work towards ‘cornering the market’ if not to enrich yourself and your “investors?”
As for that “card fee,” the financial system has myriads of ‘back room boys’ working away to circumvent any and all restrictions to their income stream.
Currently, Piotr who pays with credit card pays 1% less than Piotr who pays with debit card or cash. It used to be that merchants were giving discounts for cash, and some SMALL merchants still do, and that depends on agreements with merchants, I guess larger volume agreements have advantages but prohibit the discount. One merchant here offers cash discount, so I make occasional debit card purchase to have cash for that (ATM is further… and I am not inclined to eat Chinese food only). Because of monopolistic position of credit card cartels, the conditions they offer CAN be regulated. So we can be simply sad, or demand better regulations and be displeased when lobbying prevents them. Or pleased with politicians that bring it through.
Slim here. I just wrote a big-arsed check to book my spot with a local roofing company. Previous company wasn’t what I’d call the best when it came to long-lasting roofing.
Be that as it may, I am also increasing my use of cash. Matter of fact, I just paid cash for an excellent haircut and, a few weeks ago, duct cleaning at the Arizona Slim Ranch.
We use cash particularly with small businesses. We gladly used our Amex to pay large attorney fees in an IP litigation (they complained, but accepted paying the even higher 3% card-not-present fee). We’re still working off those points for travel. Sometimes cards are good.
Only in America! Naturally, our entire electronic interchange system ought to be an extension of the Federal Reserve, and ought to be provided free of charge to all businesses that want to take electronic dollars. Instead a duopoly of payment processors hold a gun to the head of every American in the United States. What a brilliant racket, Visa and Mastercard controlling access to digital currency of the sovereign in the commercial arena. This is financial capitalism at its purest.
They did roll out FedNow a couple months ago to compete with ACH.
Isn’t the second-order effect of reducing credit cards fees that major retailers just compete all those cost gains away?
One thing holding cash back these days is how inconvenient the denominations are in the USA. A quarter 30 years ago would be worth $1 now, but dollar coins are rarely used. We also don’t have $2 coins, and the $2 bills aren’t used either. This means most small purchases between $1 and $5 require a huge amount of change (either from the purchaser or given back to them as change from a larger denomination). Meanwhile, the penny continues to be used, even though most people immediately toss them in the “take a penny, leave a penny” tray, or a jar, or even the trash rather than have their pockets weighed down.
It would be nice if we could get $1 and $2 coins in common use, and get rid of the $1 and $2 bills. And then also get rid of pennies. That would make it a lot more viable for consumers to use cash for everyday purchases.
Dollar coins are in common use in Ecuador, it was all about seigniorage and the idea that they would stay down there and not come back here, as is common with paper money.
https://www.kiva.org/blog/where-have-all-the-usd1-coins-gone-to-ecuador
How the ancients made coins before Gutenberg invented printing? They had to mint them, probably…
The last thing the rulers want is more cash and especially of higher denominations available in their market..
Look at India where large notes were simply removed from the economy (informal).
No, what is in store is electronic Central Bank Currency.
I live in the Global south and the money is old and dirty but there is no attempt tor replace it.
Why?
CBDC.
A matter of time.
Well . . . what if people were to start using $1 coins and $2 bills? There is no law preventing people from using them.
This is why nothing fundamentally changes. Competition always leads to monopoly, yet they refuse to acknowledge this and try to implement artificial competition again and again and again, as if the smaller payment systems could ever compete with the already established cartel.
So well said: competition always leads to monopoly and I would add as a consequence the last thing monopolies want is competition.
That and democracy which they have little to worry about at this moment.
The anti-trust populists understood this and that is why they wanted anti-trust laws to prevent monopolies from forming. Restoring competition over and over is like ” Indian Burning” a landscape over and over, to keep it productive. One may call that artificial, but it works as long as the competition-restorers, or the Indian Burners, keep at it.
In Thailand I never use a credit card. Almost every person and business can do transfer payments direct from one bank acct to the other; no fee. There are many many businesses that only take cash since there’s such plethora of one man/woman street vendors and such. Therefore, cash is a necessity since everyone at some point, usually frequently, does business with these small operators; often mobile, no shop other than their sam lor (3 wheeler).
Like everywhere else, Thailand is trying to reduce cash, so I’m unsure how it will resolve the many many cash only (and by necessity) vendors, likely some of whom don’t even have bank accounts.
In addition, transactions can be made by using mobile phone numbers. The payment goes from bank acct to bank acct same as a transfer (which uses both party’s acct numbers).
Also, transactions can be made by scanning a vendor’s QR code. With the exception of the very small one or two person businesses (such as the meatball seller on his three wheeled rig) every business offers the QR transaction option. Cross border QR payments are also possible within the ASEAN.
Obviously, there’s some concerns about privacy, but in this regard, no difference compared to credit card transactions. The ease of doing everyday transactions is the upside.
Obviously, most regular businesses accept credit card transactions, but these other convenient options are very popular.
While watching a show on a streaming service which has ads, I saw a fear mongering ad regarding this issue. It was framed as the government wanting to take away your airline miles rewards, cash back, points etc.
Of course there was no mention in the ad about how much this costs small businesses.
it is telling that with all their free cash, and all their credit card fee expenses, Big Tech (Amazon, Apple, Google) or Silicon Valley venture capital hasn’t dared intrude on the Visa/Mastercard duopoly (by creating their own network or buying Amex or Discover).
Yes, there are big infrastructure start-up cards….but the margins that Visa/Mastercard enjoy are worth it.
Visa (based in SF)-Mastercard (based in suburban NYC) are protected by powerful friends in DC.
I’m really at a loss as to why there aren’t more credit card companies. Given that these companies aren’t really lending their own money, get paid back with interest from “good” customers, and sell the debt that “bad” customers don’t pay back for pennies on the dollar, it’s basically a license to print money. I suspect your final sentence has something to do with it – politicians protecting the monopoly for their donors in the financial world.
I flew from DC to Boston with a no-luggage ticket. I had a small, carry-on suitcase with me. The airline asked me to pay. I told them that cash was all I could do. They didn’t know how to deal with that and asked me to wait. When the other passengers were out of sight, I was allowed to board without paying a dime. Remember, business doesn’t like a scene. That’s our weapon.
Here in NZ there is a trend to using more of the old EFTPOS card (linked to a savings or current account, no charges) to make electronic payments and avoid Visa/MasterCard fees. This is because vendors seem to be increasingly adding on the Visa/MasterCard fee at point of sale, giving customers the option to avoid it. My hairdresser is an example. Seems a much fairer way of doing things.
Here’s a related issue. Not only do these credit card companies rake it in from both set transaction fees and a percentage of the sale from merchants on top of interest from the customer, as far as I can tell they also knowingly profit from fraudulent or simply mistaken transactions. I could be wrong about that last bit, but here’s an anecdote that has stuck in my craw for years.
A sketchy potential customer called my company with a $10K order and we suspected he had stolen the card. We called AMEX to check and they told us the card was OK, so we charged the card and shipped $10K worth of product. Couple days later AMEX contacts us to tell us the card was in fact stolen and they would be doing a $10K chargeback to credit the real cardholder’s account. Telling us the card was OK when it really wasn’t was bad enough, but on top of that, due to the merchant fees deducted, we had never received $10K to begin with – there was only about $9,700.00 deposited to our account after the initial charge. So AMEX made the cardholder whole while pocketing $300 or so in fees off a transaction they 100% knew was fraudulent.
It’s possible I’m mistaken here – I have pored over CC statements in the past trying to figure out what fees were deducted from a given charge, or if fees were ever refunded, and it can be nearly impossible to tell. However while processing a different charge, my company once accidentally entered the 6 digit invoice number instead of the three digit invoice amount and the charge actually went through. Needless to say this customer was not happy being charged over $400K and we immediately refunded the card and charged the correct amount. But a $400K charge racks up a fee of over $10K – I called AMEX to explain the situation and they did credit our account for that large fee, which makes me believe they would not have had I not been aware of the situation.
I’d be very interested if anyone has more information on this. If I’m right though, this sure seems like yet another class action lawsuit waiting to happen against these bloodsuckers.
>“lower income cash customers are effectively subsidizing the airline tickets, resort stays and other rewards that go to better-off card-users — a $15 billion-a-year transfer that some have described as Robin Hood in reverse”
I know a “reverse Robin Hood” who made a lot of money as a commercial real estate broker, stopped working a regular job in 2007 before the GFC. Also had collected several houses as investments, and gradually sold those off.
Now, this persons “job” is gaming the system with a huge stack of rewards cards. Nothing is ever purchased that doesn’t come with a massive discount and/or reward.
If the “credit card agreements” ( or whatever they are called) which merchants have with credit card companies to be permitted to take their cards forbid the merchant from offering a discount for cash purchases, then the merchant dare not offer such a discount.
But if those “card agreements” don’t forbid the merchant from offering a cash discount on the price of something, then the merchant could very well offer such a discount. If the swipe fee is two per cent, then the merchant could offer a one per cent cash discount, putting the buyer one per cent ahead and the merchant one per cent ahead, and leaving the credit card company out entirely.
If merchants were to start doing this, they would encourage and facilitate a leaderless mass defection from credit cards and boost the use of cash against the Cashless Society Conspiracy at the same time.
Just imagine if every restaurant in America were to offer a 1% cash discount from the price of a meal.