Credit card economics: A look at the fees that you rarely see

Editor’s note: This post has been updated with new information.

Points and miles enthusiasts use rewards credit cards for almost every purchase. When it comes to fees, many look for cards that eliminate foreign transaction fees, crunch the numbers to ensure the hefty annual fee is worth it and read the fine print to avoid ridiculous resort fees on hotel stays. However, one type of fee is unavoidable and often overlooked — merchant or "swipe" fees.

Stores that accept credit cards probably think about merchant fees a lot. And they've been in the spotlight lately, with something known as the Credit Card Competition Act threatening the world of credit card rewards we enjoy today.

Here’s why you, the everyday credit card user, should know and care about merchant fees.

Overview of merchant fees

According to the National Retail Federation, merchant or swipe fees average around 2% of the transaction cost; however, that amount can jump as high as 4% for premium rewards credit cards. Those percentages may seem small, but they add up.

The NRF says that swipe fees have grown from about $20 billion per year in 2001 to $172 billion in 2023 — though it’s worth pointing out that transaction volume has also increased over that time.

The exact cost of the fees varies based on several factors, including whether you’re using the card in person (fees for online, mobile, and over-the-phone transactions are more expensive for merchants), the type of business, the merchant’s annual sales volume and other elements.

"Swipe fees are most retailers’ highest operating cost after labor, driving up consumer prices by more than $1,000 a year for the average household and hurting retail sales because consumers buy less when prices go up,” the NRF’s statement on swipe fees reads.

But these fees fall into different categories and aren’t easy to understand.

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The main bucket of fees is called interchange fees, which are paid to the banks issuing the cards. Visa’s breakdown of interchange fees includes different categories of card products and a range of merchant classifications. Mastercard has a similarly complex formula.

American Express, which operates differently without any additional issuing banks involved, used to have notoriously high merchant fees, but the company made a big fee reduction in 2018 to appeal to more merchants.

In addition to interchange fees, the credit card industry is fuelled by a lengthy list of additional fees. These vary among the different payment networks, but they include assessment fees that apply to overall transaction volume, fees for processing a card issued in a different country and fees for data usage — the list goes on.

Related: Should I pay with a rewards credit card even if it incurs fees?

The fight over fees

It's easy to see why swipe fees can frustrate merchants. After all, it’s hard to accurately forecast your revenue if some credit cards carry higher fees than others. Some business owners are pushing back by passing the costs on to the consumer by adding a surcharge for credit card users.

These surcharges are not uncommon at smaller merchants, but that doesn’t make them any more palatable. Some merchants may feel their only options are to add credit card surcharges (some may frame them as cash discounts) or increase prices across the board, even for cash-paying customers.

Many states used to have laws to restrict surcharges, but court cases have challenged those laws. We’re currently down to two states where laws prevent businesses from adding surcharges to transactions: Connecticut and Massachusetts. Many other states have specific rules or limit the amount merchants can charge for these surcharges.

One corporation took it beyond credit card surcharges and instituted an outright ban on certain cards. In 2018, Kroger-owned Foods Co supermarkets stopped accepting Visa-branded credit cards, claiming excessive transaction fees. Kroger expanded the ban to the larger Smith’s chain in April 2019.

But by October 2019, Kroger had reversed its ban and began accepting Visa credit cards again. Other merchants may have noted Kroger's reversal and decided it wasn’t a viable strategy.

Of course, there are many benefits to accepting credit cards, regardless of the fees imposed on those transactions. It’s a catalyst for online shopping, and some studies have shown that swiping cards can play an important role in increased purchase amounts.

Legislation drafted to reduce fees

The topic of swipe fees has taken on new significance due to the aforementioned Credit Card Competition Act of 2022, which has been introduced to Congress multiple times and is currently stalled. The legislation aims to inject more competition into the industry and lower swipe fees while decreasing costs for merchants and customers.

In its current form, the legislation benefits consumers and businesses the most. But while credit card issuers and banks would certainly stand to lose, the result could lead to reduced credit card rewards.

Facing a loss of revenue from lower swipe fees, credit card issuers and banks could look to boost profits by increasing credit card annual fees or, in the worst-case scenario, eliminating credit card rewards. A trade group representing many U.S. airlines has come together and launched the Protect Your Points campaign to highlight the negative effects of the competition bill.

We at TPG are strongly against this bill and legislation, as it can directly affect your ability to earn and redeem valuable points and miles.

Bottom line

All merchants incur fees whenever a credit card is swiped to pay for a purchase, though the exact amount can vary based on several factors. As merchants attempt to find ways to reduce these costs, some of their decisions may negatively affect customers who pay by credit card.

This can make maximizing credit card rewards more challenging, as you must determine if the rewards you're receiving outweigh any additional fees merchants may be charging you for the privilege of paying by plastic.

Related: TPG: Protect Your Points