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The Merchants Payments Coalition (MPC) has called on U.S. Congress to investigate Visa and Mastercard’s alleged anti-competitive dominance ahead of the card giants’ planned swipe fee increase in April.
In a letter sent to the House Financial Services Committee, the MPC calls the U.S. card payment system broken, which lacks “the fundamentals of a competitive functioning market.”
“The two giant card networks and their partner mega-banks routinely use their market power to stifle competition and charge merchants the highest swipe fees in the industrialized world,” the MPC said.
The letter was sent in the context of the financial committee’s hearing on inflation and ahead of proposed fee hikes by the card giants.
Costs of inflation
Most of the credit card swipe fees are set ad volorem, or a percentage of the amount of a transaction. This means that as inflation grows, so do the costs to merchants.
The MPC calculates that in case of a 7 percent inflation rate, an item previously sold for $100 now increases to $107, resulting in the parallel increase of merchants’ costs from an average $2.22 to $2.38.
Although merchants pay the swipe fees (referring here to specifically the interchange element of the overall merchant fee) to issuing banks via their acquirer, those fees are not set by the banks but by the card networks. This means that instead of the banks competing for merchant relationships by offering lower fees, Visa and Mastercard compete for banks by overbidding each other.
This pricing structure raises swipe fees that the MPC labels as “unreasonably high and anti-competitive.”
“It is difficult to imagine any other market in the U.S. economy in which two entities set prices for thousands of businesses that should be competitors,” the MPC said, adding that the “lack of competition or downward pricing pressure has resulted in out-of-control swipe fees and increases inflation throughout the economy.”
Visa swipe fee increases
Credit card fees have traditionally been comparatively high in the U.S. compared with other developed markets around the world. Although the Dodd-Frank Wall Street Reform 2010 established a cap on large issuers’ debit card interchange fees, it left the credit card market untouched.
The currency industry-wide average rate for Visa and Mastercard credit card transactions is estimated to be 2.22 percent of the price of the purchase, which is more than seven times the 0.3 percent for credit cards allowed in Europe.
Visa and Mastercard initially planned to raise their credit card swipe fees last April but halted those plans by one year under pressure from Congress.
Payments consultancy CMSPI now estimates Visa’s planned April fee changes will have a net impact of $145m of additional annual fees for merchants.
Mastercard service bundling and opt-out BNPL service
Parallel to these changes, Mastercard is also planning to implement various other fee changes next month.
In addition to an estimated $330m swipe fee increase, it also plans to double its digital enablement fee, which is charged on all online transactions, from 0.01 percent to 0.02 percent, with a minimum fee of 2 cents per transaction.
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 have to pay for certain add-on services even if they do not want them or 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,” the MPC warned.
“This fee is being levied unilaterally without any merchant input,” and will harm merchants, customers, and Mastercard competitors alike.
The MPC requests that the House committee “immediately investigate” Visa and Mastercard’s proposed April fee increases, emphasising it “is crucial for Congress to act swiftly and implement real reforms to bring true competition, transparency and equity to the U.S. payments market.”
The merchants’ group also criticised Mastercard’s planned buy now, pay later (BNPL) service, which will be added to newly issued cards, and merchants will need to opt out if they do not want to accept this form of payment.
The MPC claims most merchants are unaware of this new product, the extra costs associated with it, and how it could have an impact on their customers.
In addition, this programme “bypasses any competition, instead allowing banks to directly target individuals without clarity on how consumers will be selected and advertised to.”
These changes could add $330m additional annual fees for merchants, according to CMSPI.
Visa and Mastercard control 87 percent of the debit card and credit card markets, with Visa alone accounting for 62 percent.
U.S. credit and debit card processing fees totaled $110.3bn in 2020, and the MPC believes the moves would add a combined $1.2bn on top of this.
Competition in the credit and debit card industry
The MPC has continuously been calling out the credit and debit card industry over excessive fees or competition concerns.
The Durbin regulations, which implement the part of the Dodd-Frank Act that intended to restore competition in the debit card market, does not cover credit cards, where the majority of card fees in the U.S. exist, Callum Godwin, chief economist at CMSPI, told VIXIO.
However, even within the debit space, there are a number of situations where there are concerns about whether competition is working as intended.
For instance, in addition to setting a cap on debit card fees, the Durbin regulations allow merchants to choose from at least two unaffiliated networks when processing debit card transactions.
Although this practice has been adopted for card-present payments, some of the largest banks still do not enable routing for online transactions, which saw a 24 percent increase in 2020 as a result of measures implemented during the pandemic.
Many merchants do not believe double routing is being widely enabled by issuers for PINless debit, effectively limiting routing options for online debit card transactions, Godwin explained.
The Federal Reserve held a consultation between May and August to address this issue.
There are still some use cases, such as network tokenization, where merchant advocates would like the Fed to specifically clarify that routing options will be available, according to Godwin.
The credit card space, however, is a lot more complicated, he noted. It would require new legislation or an industry-driven volunteer initiative by credit card companies to enable competitive routing for merchants.
