Behind the $90 Billion Brawl Over Credit Card Swipes

(Bloomberg) -- Every time a credit or debit card is swiped or a website’s "buy" button clicked, a series of events moves money from consumer to merchant. The process costs retailers almost $90 billion in fees each year -- and banks, payment networks (such as Visa Inc. and Mastercard Inc.) and payment processors (such as First Data Corp. and Worldpay Inc.) fight intensely for a share of that. Now startups and other companies are seeking to siphon a portion of these fees, while retailers are coming up with ever-more-creative ways to lower the amount they pay.

1. What’s the fee when a card gets swiped?

What’s known in payments-industry parlance as an interchange fee is typically divided among multiple parties and usually amounts to about 2 percent of a purchase price for a credit-card transaction and 24 cents for one with a debit card. The U.S. has what’s known as a four-party system -- the consumer, the consumer’s bank, the merchant and the merchant’s bank. The networks, Visa and Mastercard, sit between the consumer’s bank and the merchant’s bank and send signals back and forth that allow money to securely pass between the two. In a typical transaction, proceeds are shared by the two banks and either Visa or Mastercard. (American Express and Discover run smaller payment networks that generally have higher fees, which those companies say are justified by higher-end client bases that spend more.)

2. Who pays the fee?

The merchant. The idea is that banks assume most of the risk by loaning the consumer the money for a credit-card purchase. And studies show consumers spend more when they’re using plastic instead of cash, which is good for the merchant.

3. What’s the case against the current system?

Retailers, restaurants, small businesses and other merchants say consumers end up footing the bill in the form of higher prices. These critics also say swipe fees finance the lavish rewards -- airline miles, cash back and the like -- that banks offer to wealthy credit-card holders, who in turn are usually willing to pay hefty annual fees for the privilege. The National Retail Federation says swipe fees "cost the average U.S. household hundreds of dollars a year in higher prices and hurt retail sales because consumers buy less when prices go up."

4. What are retailers doing about this?

They’re pressing lawmakers to cap interchange fees for credit cards, as was done several years ago for debit cards. And a decade-old lawsuit on behalf of 12 million merchants who say banks and card networks improperly fixed swipe fees is close to producing a multibillion-dollar settlement. Some retailers have created their own payment systems to help them lower the cost of accepting electronic payments. (Cumberland Farms, a chain of convenience stores and gas stations, has a loyalty program that allows the company to draw money directly from consumers’ bank account without running over the rails of Visa and Mastercard.) Kroger Co., the largest U.S. supermarket chain, is considering expanding a ban on Visa credit cards that one of its California subsidiaries is putting into effect.

5. How are startups getting involved?

Companies like Square Inc. and Stripe Inc. are entering the so-called merchant acquiring space by offering lower prices or better service to small businesses that accept electronic payments. Square’s dongle, which turns a mobile phone into a credit-card payment processor, appeals to some retailers because of the simplicity of its flat-rate 2.75 percent pricing system. Hungry for a slice of those interchange fees, at least 10 companies with names like Ollo and Avant have joined the credit card space since 2015, according to the payments consultancy Blue Leviathan.

6. Who else is jumping in?

Further shaking things up are Apple Pay and other so-called mobile payment offerings. And bankers always have their eye on China, where Alipay and WePay account for 90 percent of the mobile payments market. After dominating payments in the region, those two internet giants have gone on to explore other aspects of financial services, including deposit gathering and wealth management.

7. Do mobile payments incur swipe fees?

Yes, and they’re typically higher than the fees for credit cards. The rationale is that since the physical card isn’t present, the chance of fraud is higher. But retailers have been pushing Visa and Mastercard to lower the rates for mobile payments, arguing that their biometric features, such as Face ID on Apple’s latest phones, add a layer of security to these payments.

The Reference Shelf

• A look at what Amazon might be doing to lower its interchange expenses.
• Why China’s payment apps give U.S. bankers nightmares.
• A hint at how the Supreme Court feels about the payments system in the U.S.
• Visa and Mastercard are close to settling a years-long lawsuit over swipe fees.

To contact the reporter on this story: Jenny Surane in New York at jsurane4@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Laurence Arnold, Steve Dickson

©2018 Bloomberg L.P.