November 02, 2022
Whether you’re buying Starbucks, IKEA furniture, or groceries from your local supermarket, there’s a good chance you’re putting it on plastic. Debit and credit cards have usurped cash in recent years – and Visa and Mastercard, which account for 80% of all debit purchases in the U.S., are the breadwinners of this industry.
That’s why Visa and Mastercard’s decision to raise interchange rates, which are otherwise known as “swipe fees”, was particularly controversial given sky-high inflation. The debit-credit duopoly originally planned a hike on transaction fees to take place over two years ago, which was delayed before the pandemic. Before then, transaction fees averaged 2.25% of purchases according to global trade association NACS.
However, in May 2022, both companies raised their respective interchange rates on credit and debit transactions. What that means is that it’s now more expensive for merchants to process your credit or debit card at checkout, which means they’re likely passing along those higher transaction fees to consumers in the form of higher costs of goods and services.
These higher swipe fees do have one benefit for consumers: they fund the rewards programs, banking services, and fraud coverage programs for millions of Americans. That’s right: those of you getting 2% cash back or thousands of miles per purchase can thank interchange for higher prices.
Ultimately though, these swipe fees have benefits for two groups of people: the credit card networks (Visa and Mastercard) and the issuing bank (whoever offers your credit card.) Both parties levy their own interchange fees to pay for those aforementioned nice things.
But particularly in the case of Visa and Mastercard, raising them might prove quite lucrative. The higher fees could generate an additional $1.2 billion in added fees this year. And consider that the swipe fees went into effect in the middle of Q2, a period which marked credit usage highs not seen in a decade. During that time, Mastercard saw its revenue rise 6.4% from the first quarter (to $5.5 billion) and Visa saw a 1.1% increase in revenue QoQ (to $7.2 billion.)
Related: Banks Continue March In Q2 Earnings.
That has frustrated scores of merchants, who won a $6 billion settlement in 2018 over allegations that Visa and Mastercard were engaged in price-fixing. This time through, Amazon and Disney have been the most vocal merchants – both settled out of court for an undisclosed amount.
Now, that frustration has boiled up to the capitol: a bipartisan coalition propose passing a bill which would require large banks to offer a secondary card network, likely smaller “lower-cost networks.” Analysts say that the proposed bill puts tens of billions at stake for large issuer banks and these plastic kings.
The Credit Card Competition Act of 2022 will see ample debate before it goes to a vote, but the lobbying around the bill will likely be substantial – merchants and trade organizations will likely lobby in favor of the bill, while large consumer banks and Visa/Mastercard-sympathetics will lobby against it.
Though competition will be the desired outcome if the bill is passed, another obstacle will lie beyond the President’s signature: actually creating competition. Venture firm Andreesen Horowitz (a16z) observes that there are a number of debit card networks, but few credit networks besides the big four – that’s Discover, American Express, Visa, and Mastercard. Odds are, new players will have to emerge to actually reduce interchange fees – which are already high at all four companies.