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

Mar 22, 2021

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


For points and miles enthusiasts, rewards credit cards are used for just about every purchase. And when it comes to fees, the only ones we, the consumers, often think about are foreign transaction fees, annual fees and resort fees.

So we make sure to have the best credit cards for eliminating foreign transaction fees, we crunch the numbers to determine if that hefty annual fee is really worth it and we read the fine print to avoid ridiculous resort fees on hotel stays. But there’s one type of unavoidable fee that a lot of consumers don’t give much thought to — the swipe, or merchant, fees. However, the merchants who accept credit cards probably think about these fees a lot.

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Here’s why you, the everyday credit card user, should be aware of and care about these fees, too.

In This Post

Small fees, big business, confusing costs

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

(Photo by Thomas Barwick/ Getty Images)

The NRF estimates that merchants fork over approximately $100 billion each year for them. The exact cost of the fees varies based on a number of 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 amount of sales and other elements.

“Swipe fees are many retailers’ highest cost after wages and employee health insurance and drive up prices paid by consumers,” the NRF’s statement on swipe fees reads. “By NRF estimates, 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.”

These fees aren’t necessarily easy to understand.

The main bucket of fees is called interchange fees, which are paid out to the banks that issue the cards. Visa’s breakdown of interchange fees includes different categories of card products and a range of merchant classifications. Mastercard has similarly complex formulas. American Express, which operates in a different manner without any additional issuing banks involved, used to have notoriously high merchant fees, but the company made a big fee reduction back in 2018 in order to appeal to more merchants.

In addition to interchange fees, there is a lengthy list of additional fees that fuel the credit card industry. They 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, fees for data usage — the list goes on.

In early 2020, Visa announced major changes to swipe fees that were set to take place later in the year. However, due to the COVID-19 pandemic, Visa decided to delay the changes, and they’re now set to go forward in April 2021.

The rate specifics are unknown, but, according to Bloomberg, fees will increase for merchants who process card-not-present transactions, such as online retailers. And fees will decrease for retailers in certain service-oriented industries, such as real estate and education, where Visa wants to compete against traditional payment methods like cash and checks.

The fight over fees

Consumers like you and me love using our rewards credit cards, earning points and figuring out how to maximize their value with transfer partners, but it’s easy to sympathize with merchants who are frustrated with these fees. After all, it’s hard to make a financial forecast if some cards (many of which are probably some of our favorite credit cards) carry a fee that is two times higher than others.

One way that some business owners have pushed back against these fees is by passing the frustration on to the consumer through surcharges for using credit cards. T

hese fees are not uncommon for consumers to experience, mostly at smaller merchants, but that doesn’t make them any more palatable. Some merchants may feel their only options are either to add credit card surcharges (some may frame it as cash discounts) or increase prices for all, even cash-paying customers. There used to be a fair amount of states where laws restricted surcharges, but court cases have challenged those laws. We’re currently down to just these four states where laws prevent businesses from adding surcharges to transactions:

  • Colorado
  • Connecticut
  • Kansas
  • Massachusetts

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, saying it was due to excessive transaction fees. Kroger expanded the ban to the larger Smith’s chain in April 2019.

But by October 2019, Kroger reversed its ban and once again began accepting Visa credit cards. Given the fact that Kroger eventually reversed the ban, other merchants may have taken note and decided that it wasn’t a viable strategy.

Bottom line

As merchants attempt to find ways to reduce their swipe fee expenses, some of their decisions may negatively affect customers who pay by credit card. This could make maximizing credit card rewards more challenging as we’ll have to determine if the rewards we’re receiving outweigh any additional fees merchants may charge for the privilege of paying by plastic.

Featured photo by Keisuke_N/Shutterstock

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