Square Sues Visa, Mastercard Over US Interchange Fees

July 19, 2023
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Payment processor Square has launched a court action against card giants Visa and Mastercard accusing them of fixing interchange fees.

  • Honour All Cards rules killed competition for merchant acceptance, Square says
  • Fintech firm says card brands set interchange fees too high

Payment processor Square has launched a court action against card giants Visa and Mastercard accusing them of fixing interchange fees.

In a lawsuit filed in the US District Court for the Eastern District of New York last Friday (July 14), Square alleges that Visa and Mastercard “have used a series of agreements and practices to fix prices, to avoid competition, and protect their market power”.

The fintech giant argues that a key pillar of these anti-competitive practices is the Honour All Cards rules, which require merchants to accept all Visa- or Mastercard-branded cards if they accept any of their cards.

According to the payment processor, these rules are the reason why banks do not compete for merchants’ acceptance of their credit or debit cards.

“Under these ‘all or nothing’ rules, issuers need not worry about losing business to a lower-cost competitor because all cards issued by every issuer must be accepted at the default interchange fee rates,” the fintech says in the complaint seen by VIXIO.

“Thus, if Square accepts a cheaper Visa or Mastercard standard general purpose credit card, for which it would pay substantially lower (but still supracompetitive) interchange fee, it must also accept a Visa Signature Preferred Card or World Elite Mastercard transaction, which bear higher interchange fees.”

As a result of that rule, issuers do not have to compete on price because merchants are forced to accept that issuer’s cards even if they are charged inflated prices.

Square processes card transactions for millions of typically small and micro merchants serving as the “merchant of record” for them. This means that Square stands in the shoes of the merchant for all transactions it facilitates on behalf of its customers.

As such, Square pays all the transaction-related fees, including the interchange fee, when a card payment takes place, and assumes financial responsibility for chargebacks and fees for network rule violations.

In return, Square charges its merchant customers its own fixed percentage fee for card-related payment services, which make up the majority of its revenue.

Square alleges card brands set interchange fees too high

Square also alleges that Visa and Mastercard have fixed the interchange fees and other debit and credit card fees at “artificially high levels”.

Interchange fees have been the target of several lawsuits and regulatory actions around the world.

Most recently, a US court ordered Visa and Mastercard to pay out $5.6bn to merchants in a landmark class action settlement that put an end to an almost 15-year legal battle concerning interchange fees.

Although issuers have the freedom to charge lower prices than what Visa and Mastercard set as default, they hardly ever do because they do not need to compete for card acceptance, Square says.

However, the interchange fee that merchants eventually pay depends on various factors, such as card type or merchant category, and Square argues that card networks took advantage of this complexity.

“As the number of interchange categories has increased dramatically, Visa and Mastercard have captured ever-greater margins through increased opacity and complexity,” Square claims in its complaint.

It goes on to argue that the fees are based on “elasticity of demand”, or the degree to which merchants in that segment must take their cards, rather than being tied to costs.

In general, it is estimated that the average credit card processing fee ranges between 1.5 and 3.5 percent depending on the type of card, while the average interchange for a debit card payment ranges between 0.48 and 1.19 percent.

By contrast, Square charges a standard processing fee of 2.6 percent plus 10 cents for in-person payments and 2.9 percent plus 30 cents for online payments, its website shows.

As a result, an increase in the use of premium cards which charge higher interchange fees will eat away at the margins of the processing fee Square charges its customers.

Square claims that the card brands’ inflated fees have forced merchants to raise retail prices, which leads to fewer sales for merchants and higher costs to consumers.

“High interchange fees are not necessary to fund competitive cardholder reward programs. Given the miniscule cost of transaction processing today, issuers pocket most of the interchange revenue as increased profits rather than distributing it in the form of rewards,” it goes on.

The lawsuit lists issuers, acquirers and Visa and Mastercard member banks as co-conspirators of the alleged anti-competitive rules.

VIXIO reached out to the parties involved but had not received a response by the time of publication.

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