The ongoing battle between retailers and credit card fees

Every time a consumer pulls out a credit card to pay for their purchase, the retailer must pay a credit card swipe or interchange fee. This amount, which is usually around 2-3% of the total transaction price, goes directly to the card issuing company. In the past decade, these percentages have gone up considerably, and retailers are not taking the changes lying down.

This adds up to an immense extra expense for merchants already struggling to remain profitable in today’s shifting markets. While the battle against them has been going on for a while, the courts have made a move recently to weaken the credit company’s position and possibly help businesses get out from under these excessive retail transaction costs.

The backstory: Why retailers struggle with credit card swipe fees

In the world of commerce, one primary goal of businesses is to keep costs down and profits high. While this helps them, of course, the real winners of this are consumers who buy the products. Every extra fee, charge, and expense adds to their purchase price in one way or another.

Credit card swipe fees, which have existed for decades, are legally the responsibility of the retail company. However, they do get passed on to buyers through higher product costs and direct charges. The credit card companies, of course, make out quite well in the end.

Legally, the companies that sell the products and services people pay for with credit cards are not allowed to directly pass them on to consumers. Also, they cannot suggest alternative payment options that end up costing less. In other words, businesses were forced to pay the fees even when there were better options for everyone.

In 2023, the Credit Card Competition Act got traction in the U.S. government. It promised to enhance competition and take some of the power away from the two big credit companies: Visa and Mastercard. Today, class action lawsuits against them also seek to reduce these credit card fees and get a break for beleaguered retailers.

And now: Credit card companies offer settlement, but no real changes

The attempts to force the companies to lower their fees began around 2005. And it wasn’t just a single case, but multiple attempts to make things fairer for retailers. Visa and Mastercard offered $30 billion and a very small reduction in these fees in March. In June, the judge rejected it, and most retailers are quite happy with the decision.

One of the major problems with the credit card industry at large is that these two companies have massive control over the whole thing. While other options exist, namely American Express and Discover, there’s no doubt that the top two corner the market. This gives them an unfettered ability to raise interchange fees, lobby for beneficial new rules, or make settlements that don’t really address the primary problem with the whole system in the first place. 

The length of time that merchants have tried to influence lawmakers to change things demonstrates part of that power. While the wheels of national justice always roll slowly, waiting years between settlement offers or legal changes does little to help retailers now.

What did the settlement offer and why wasn’t it enough?

Besides the $30 billion that would be split up among lawsuit participants, the two major credit card companies also made a few tiny concessions about the high fees. First, they promised not to raise the fees for five years. Second, they offered to reduce the fees by 0.04%.

If someone buys a $500 jacket, the fee at 2% would be $10. Under the settlement, it would potentially go down by 50 cents. That’s hardly a big savings or a weight off the shop’s shoulders.

Not only was the offered reduction incredibly small, the three-year hold on raising them did nothing about the overall level of control that the major credit card companies have. Brands hope, of course, to be around in six years, and who knows what will happen then?

The U.S. District Court judge Margo Brodie rejected the offer even though some smaller merchants approved it. Most did not, stating that the fees were still excessive and the alleviation temporary. This includes the Merchants Payment Coalitions group, with member Doug Kentor saying, “It’s nice to have some momentum” and going on to blame the credit issuers for lack of understanding about how their business model affects the brands they rely on for purchases and profits.

What are the next steps in the swipe fee battle?

The decision demonstrates an interest in finally doing something about the stranglehold that the two major credit companies have over the retail industry at large. Unless Visa and Mastercard change their tune drastically and immediately, the case will head to trial next. No matter what, it won’t be a quick and easy outcome. This case has, after all, been going on for almost 20 years.

Retailers across markets and with widely varied target audiences must already deal with so many expenses to stay open, operating, and profitable. With the recent downturn in the general economy and consumers’ reduced levels of expendable income, things like swipe or interchange fees only become more difficult to manage.

Conclusion

In the end, it all passes down to the consumers no matter what the rules about who pays and whether retail companies can suggest other payment options. It costs more to do business, and so they raise prices to keep up. This makes it more difficult to attract and retain a wider customer base, and can spell disaster for smaller, niche brands already facing huge competition.

The most acceptable solution would include both reimbursement payments after the fees are collected and a permanent reduction in the swipe fees to begin with. Whether that happens in the future or not still remains to be seen.

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