Credit Card Economics: A Look at the Fees That You Rarely See

Dec 17, 2018

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As you work to avoid paying any extra cash for using your credit card and seeing the world, you’re probably well-versed in the language of fees. You’ve studied the best credit cards for eliminating foreign transaction fees. You’ve crunched the numbers to determine if that hefty annual fee is really worth it. You’ve read the fine print to avoid ridiculous resort fees. But do you know how the behind-the-scenes fees work when you insert your chip card or input the 15 or 16 digits of your number online? These fees are unavoidable, and to the average credit card user, they’re an unknown. The merchants who accept credit cards, though, think about these fees a lot.

“Many retailers have cited swipe fees as their second or third highest cost behind wages and employee health benefits,” the National Retail Federation’s (NRF) statement on swipe fees reads. “With retail industry profits averaging only about 2%, there is no room for retailers to absorb the expense, so swipe fees are passed on to customers in the form of higher prices.”

Small Fees, Big Business, Confusing Costs

Each time you use your credit card, the merchant hands over 2 - 4 percent of the transaction in fees. Image courtesy of Neustockimages via Getty Images.
Each time you use your credit card, the merchant hands over 2 – 4% of the transaction in fees. Image courtesy of Neustockimages via Getty Images.

According to the NRF, the average amount of these fees hovers around 2% of the transaction cost, but that amount can jump to 4% for premium rewards credit cards. Those single-digit numbers may seem small, but they add up. The NRF estimates that merchants fork over approximately $80 billion each year for them. The exact cost of the fees vary 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.

They aren’t the easiest to understand, either. The main bucket of fees is called interchange fees, which are paid out to the banks that issue the cards. I dug into Visa’s breakdown of interchange fees, which includes four different categories of card products and a range of merchant classifications. Take a look at Mastercard, and you’ll find the same type of complex formulas. I’m guessing Discover’s is similar, but its schedule of fees isn’t publicly available. 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 to appeal to more merchants earlier this year.

21 Foods Co. Supermarket stores and 5 gas stations have stopped accepting Visa credit cards, citing high fees for the ban.

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.

The Fight Over Fees

Consumers like you and me love using our credit cards, earning rewards 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 2x higher than others.

Plenty of business owners have pushed back against the fee structures with surcharges for using credit cards. While I understand the move, it passes the frustration on to the consumer who doesn’t really appreciate seeing a sign that indicates you’ll pay an additional 2.75% for using your card. These surcharges are common among smaller merchants such as non-chain convenience stores and barber shops. Earlier this year, Fred Williams at pointed out that these surcharges are popping up in more places. However, you shouldn’t see them in these 10 states where laws prevent businesses from adding them on to transactions:

  • California
  • Colorado
  • Connecticut
  • Florida
  • Kansas
  • Maine
  • Massachusetts
  • New York
  • Oklahoma
  • Texas

Earlier this year, Kroger-owned Foods Co. Supermarkets announced that it would no longer accept Visa-branded credit cards in its stores (the chain continues to accept Visa-branded debit cards; debit cards carry significantly lower fees). That move may be the beginning of a bigger movement among merchants.

Another report from AnnaMaria Andriotis at The Wall Street Journal carries a more troubling warning sign, with the claim that premium rewards credit cards — with those extra-high fees cited by the NRF — are one of the biggest sources of frustration for retailers. While businesses can’t pick and choose between which credit cards they are willing to accept, the story indicates that some big names such as Amazon and Target want the right to turn down certain credit cards. If that becomes a reality, maximizing credit card rewards will get more challenging. 

Featured image courtesy of Gary Friedman/Los Angeles Times via Getty Images.

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