A Comprehensive Guide to Understanding Swipe Fees and Why They Matter for Your Business
Like death and taxes, swipe fees are another of those unavoidables in life. If you’re accepting electronic payments from credit or debit cards, you’re paying for swipe fees. This applies whether it’s in-store, online, or even over the phone.
Swipe fees are the payments that go to card-issuing banks and credit card companies for their part in enabling your transaction. It applies to Visa, Mastercard, American Express, Discover, and all others.
While it’s unlikely credit card processing fees will ever cease entirely, they are under some scrutiny at present. And proposed changes could impact merchants and consumers. In this article, we will explore what swipe fees are and why they’re in the spotlight. Also, we will explore how they affect merchants and consumers.
What Are Swipe Fees?
Swipe fees are processing fees that go to the consumer’s card-issuing bank or credit card company. This fee can be somewhere between 1-3 percent of the total price. For credit card payments, the amount is higher, usually 2-3 percent. While debit card swipe fees are typically about 1 percent.
If you ask the banks and card issuers, these fees cover handling, fraud, and bad debt costs. From a merchant perspective, this is currently open for debate. We will expand more on this debate soon.
How Do Swipe Fees Work?
When merchants set up electronic funds transfer (EFT) systems, swipe fees will be listed in the pricing. These fees are often set high to cover all of the fees that come out of them. Within swipe fees are interchange fees, as well as network fees and acquirer fees.
Interchange fees (often referred to interchangeably with swipe fees) describes the fee between banks for accepting card transactions. While network fees are charged by the likes of Visa, MasterCard, and others. And the “acquirer” fee is charged by the merchant’s bank.
So let’s say a merchant has to pay 3 percent swipe fees for credit card transactions. If a customer makes a purchase of $100 using a credit card, $3 will be taken from the transaction. Most businesses would hope to be making regular transactions of this size, making these fees compound very quickly.
What Factors Affect Swipe Fees?
Calculating card swipe fees can get complicated. We discussed above that there are three main beneficiaries to be paid from swipe fees. Those are the customer’s bank, the customer’s card issuer, and the merchant’s bank. Within each of those, these fee structures have many variables.
For example, the merchant’s bank could have any number of their own fees within the total amount. The card issuers then also have innumerable fees. This can end up in the hundreds. However, merchants will usually only see the total. Or the three separate totals.
Card Swipe Fees Are Not Static
Because of the many variables within each of the swipe fee beneficiaries, these fees are not static. The transactions factors that affect them are:
Transaction type – Point of Sale (POS), card-not-present (CNP), and mail-order-telephone-order (MOTO) can all come at different transaction rates. The reason for this is that any card-not-present transactions are at a higher risk of fraud. The higher the risk, the higher the interchange rates.
Card type – Debit cards, credit cards, and rewards cards are also all charged at different rates. Debit cards are considered the safest; therefore, they attract the lowest fees – usually 1 percent. The card issuer sets credit card rates, so they could all be different – often between 2-3 percent. And rewards cards can go up to 4 or 5 percent.
Merchant size and sector – Interchange rates are essentially set based on the level of risk involved. Therefore, if a business is in a sector deemed risky, the fees will be higher. If they are in a secure sector or are of a size that demonstrates authority, the fees will be lower.
On top of those, Visa and Mastercard tend to change their fees twice each year based on changing interest rates. Although this has changed through the pandemic.
Why Do Swipe Fees Matter to Merchants and Retailers?
With cash very quickly phasing out, especially since the pandemic, swipe fees are mounting for merchants and retailers. After wages and employee health insurance, swipe fees are the biggest cost to these businesses.
According to Nilson Report, fees paid by merchants to card issuers have more than doubled between 2012 and 2019.
In just one year, from 2018 to 2019, the fees paid by merchants in the United States increased 7.3 percent. That rise reached $92.68 billion—all going to card issuers. In fact, 79.6 percent of the fees paid by merchants in 2019 were to card issuers for processing transactions. According to the Wall Street Journal, an estimated $53.6 billion of that went solely to major credit card issuers, Visa and Mastercard.
Credit Card Swipe Fees Are Under the Microscope
For a few decades now, there has been a lot of criticism directed at banks and card issuers over swipe fees. The reasons for this are numerous. Lack of transparency and lack of competition was the primary focus in the beginning. Now, as technology has exponentially improved, it’s unrealistic to suggest that processing costs the same as 20 years ago.
Already ten years ago, the first steps were taken to address the unwarranted cost of swipe fees. This came in the form of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In July of 2010, this Act was passed by Congress, and included within it was the “Durbin Amendment”.
The Durbin Amendment was specifically introduced to address swipe fee reform.
Written within the amendment, the Federal Reserve has the authority to review and reform transaction fees for debit cards. Their initial proposal of a 12 cent cap was met with heavy push back by credit card companies. As a result, in 2011, they made a compromise and settled on a cap of 21 cents. This applies only to debit card transactions.
Why Banks and Card Issuers Need Fees
Earlier, we touched on the role of banks and card issuers in the transaction process. They are responsible for authorizing the payment, distributing the right fees to the relevant parties, and taking on the risk.
Undoubtedly there are costs involved with these tasks. Even as technology has made payment processes smoother and more secure, there are costs involved in maintaining and improving these systems.
The question at hand, however, is whether the costs laid out by the banks and card issuers are truly as steep as they say. When the Federal Reserve tried to introduce the 12 cent cap, bank lawyers were quick to lobby against it. They have also tried to overturn the cap altogether in 2017. This attempt was unsuccessful.
Why Merchants and Lawmakers Are Calling For Reform
While all parties understand the need for fees, there is little clarity around how high they need to be. Merchants have long trusted that the fees put forth by processors are necessary. But with these fees multiplying into amounts compatible with staff wages, merchants fear for their livelihoods. And lawmakers have to wonder if these amounts are justified.
Effects of the 2011 Reform
Unfortunately for merchants, there weren’t greatly beneficial effects to come out of the reform. They were paying less on debit card transactions but more on everything else. Many argue that card brands just increased credit card fees and merchants’ costs increased.
What’s more, nothing has ever been done by Congress to address credit card swipe fees. Despite institutions such as the National Retail Federation (NRF) repeatedly pushing for hearings. These have been specifically to address competition over the fees.
Recent Legal Efforts on Swipe Fees
Further disappointment fell on American Express accepting merchants in 2018. Despite charging higher fees than most other credit cards, the Supreme Court ruled that businesses could not offer customers incentives for using another card with lower swipe fees.
In the same year, a class-action lawsuit was settled outside of court against Visa and MasterCard. The class-action had been standing since 2005, alleging that the two companies conspired to fix artificially high swipe fees.
The outcome of the lawsuit, finalized in December 2019, was to see Visa, MasterCard pay between $5.54 billion and $6.24 billion. This was to go to all merchants who used accepted Visa or Mastercard from January 2004. However, in early 2020 an appeal was filed, and it’s unclear how long that process will now take.
Although all of these outcomes seem rather subpar on behalf of merchants, change does look inevitable.
How Visa is Overhauling Its Swipe Fees
As reported by both Bloomberg and Forbes, Visa is making big changes to its swipe fees. They are significantly altering them more than any other changes in the last decade.
Following all the talk of lawsuits, one would imagine these changes are designed to be fairer to merchants. However, it looks more like a rebalancing of fees, where popular businesses will be charged higher rates. For example, Visa will be lowering rates for real estate and education businesses but increasing rates for e-commerce transactions.
For example, a card-not-present transaction worth $100, with a standard Visa card, would increase from $1.90 to $1.99 in swipe fees. Mobile transactions and premium cards are also going to attract increases in transaction fees.
Swipe Fees and COVID
At a time when consumers are encouraged to stay home and businesses are under immense pressure to operate online, card-not-present fee increases feel like an opportunistic assault on the vulnerable. Unsurprisingly, merchants and lawmakers have retaliated by revisiting attempts to prove that banks and card networks have violated antitrust laws.
The Future of Swipe Fees
While it’s unlikely that these fees will ever be obliterated, the fierce attention on them is certain to continue. Without reform, these fee increases will mean increases in product prices. Merchants will have to pass it on to continue to profit. It is then in the hands of consumers to decide if they’re willing to pay.
Lowering Your Swipe Fees
You can’t eliminate swipe fees completely, but you can lower them. If you’re looking to cut your credit card processing fees, get in touch with Payment Depot. We’ll review your statement and recommend ways to help you save.
As one of the top-rated credit card processors in the market, we’re able to save merchants $400+ a month in payment processing.