Why the ‘swipe fee’ battle between retailers & banks is far from over
On Tuesday, a U.S. judge rejected a $30 billion proposed settlement to resolve an antitrust case against Mastercard and Visa over the rate of credit card transaction interchange fees. Retail lobbyists applauded the decision.
It points to one thing: The battle between banks and retailers over the costs of processing credit card transactions is far from over. Not only could the long-running federal court case over the matter head to trial, but there are multiple attempts to rein in the fees via state and federal legislation.
New York federal court Judge Margo K. Brodie said in a docket entry on Tuesday that “the Court finds that it is not likely to grant final approval to the Settlement and accordingly denies Plaintiffs’ motion for preliminary settlement approval.” The order detailing the exact reasons for the rejection will be available after the parties have had a chance to redact information, per a court order.
“It’s nice to have some momentum,” said Doug Kantor, a member of the Merchants Payment Coalitions, which opposed the settlement. “It definitely bolsters our case, and it shows the credit card industry does not understand the extent of the problem with their business model.”
The rejection of the settlement means the case could head to trial, though parties could attempt to reach another settlement.
The lawsuit first began in 2005, with plaintiffs alleging Visa and Mastercard were charging artificially high fees to retailers to process credit card transactions. Known as a multi-district litigation, the case encompasses multiple actions that were consolidated into the action in New York federal court. A prior deal was reached in 2016, though it was overturned by a federal appeals court. The most recent agreement had several key areas of proposed remedies — including limiting the number of basis points that Visa and Mastercard could raise swipe fees by.
Eric Cohen, CEO of payment processor negotiation service Merchant Advocate, said the settlement was expected to be rejected following a hearing earlier this month. He said the settlement would have done little to truly relieve store owners of the cost burdens of interchange fees. One proposed requirement in the settlement to limit the fees by four basis points, for example, would be about $400 on $1 million worth of transactions. “You’d never see that,” Cohen said. “If you really look at the industry, the reduction in cost may never actually reach the business owner.”
He also said the proposal didn’t attempt to address rates for future types of credit cards. Currently, cards with high rewards will carry a higher interchange fee. “It doesn’t say they can’t come out with new cards or rules, and that could increase fees,” he said.
The settlement debate mirrors the larger conversation around interchange fees. Merchants paid about $72 billion in such fees to accept Visa and Mastercard credit cards in 2023, according to Nilson Report. In turn, some retail advocates have criticized these so-called “swipe fees” as an exercise of monopoly power from big banks. Mastercard and Visa control the vast majority of credit and debit card transactions, and merchants argue that this dominance allows them to charge artificially high rates to process the transactions.
But credit card lobbyists, as well as other interest groups like America’s Credit Unions, oppose the law, saying the fees are a significant revenue source for financial institutions. The fees help fund popular credit card rewards and help invest in systems to keep financial data secure.
With the settlement off the table, groups that represent retailers like the Merchants Payments Coalition are pressing forward to find a way to roll back the fees via legislative action.
In Congress, the Credit Card Competition Act would require banks to offer two networks that businesses can process their transactions through as an attempt to inject competition into the fee market and drive costs down. The federal legislation has been sitting in Congress with bipartisan support, led by co-sponsors Sen. Dick Durbin (D-Illinois) and Sen. Roger Marshall (R-Kansas). It’s supported by retail groups like the Merchants Payments Coalition, National Retail Federation and Retail Industry Leaders Association.
Still, the issue is now starting to make its way into state legislatures. Illinois lawmakers earlier this year passed a law that would ban interchange fees on sales tax, to kick in by 2025.
Meanwhile, in Pennsylvania, the House Finance Committee approved a proposal that would eliminate interchange fees on sales taxes for debit and credit card transactions made in the state. That Democrat-backed proposal is opposed by financial interests like the Electronic Payments Coalition, who call out the proposal as a costly operation for small businesses to take on. “If this experimental bill becomes law, Pennsylvania small businesses will foot the bill for upgraded payment processing systems and be forced to transmit additional information about consumers’ purchases, EPC executive chairman Richard Hunt said in a statement.
But Kantor from the Merchants Payments Coalition said these proposals indicate interest in giving merchants — and consumers — relief from extra fees on top of transactions. Store owners could use their existing payment systems to exempt the sales tax from the fee — or file for reimbursement after the fact. “This isn’t going to impose anything on small business other than send a copy to their payment processor,” he said.
The Pennsylvania proposal must be approved by the House and Senate before heading to Gov. Josh Shapiro for final approval by the state’s budget deadline at the end of the month.