The issue
When consumers use a credit or debit card to make a purchase, banks and card networks like Visa and Mastercard charge retailers a hidden “swipe fee” to process the transaction. For credit cards, the fees average just over 2% of the transaction but can be as much as 4% for some premium rewards cards. Fees for debit cards from the nation’s largest banks are capped by the Federal Reserve at 21 cents per transaction plus 1 cent for fraud prevention 0.05% of the transaction for fraud loss recovery, but cards from small banks are exempt. Together, credit and debit card swipe fees cost retailers and their customers more than $170 billion a year.
After years of quiet, this issue is back in the spotlight, with the Credit Card Competition Act introduced in Congress to address credit card swipe fees, the Fed proposing to lower the cap on debit card swipe fees, and merchants finally able to file claims for their share of a $5.54 billion settlement of a long-running class-action lawsuit over Visa and Mastercard credit card swipe fees. In addition, under a proposed settlement of a separate part of that litigation, the two card networks would have temporarily lowered credit card swipe fees by a fraction of a percentage point. But with swipe fees currently averaging 2.26% of the transaction, NRF said the proposed reduction “amounts to pennies on the dollar” and is continuing to lead retailers’ efforts to bring transparency and competition to the payments market. A federal judge largely agreed and rejected the proposal, calling it “paltry” and setting the stage for the case to go to trial.
Why it matters to retailers
Applied to millions of transactions each day, swipe fees are most retailers’ highest operating cost after labor, driving up consumer prices by more than $1,100 a year for the average household and hurting retail sales because consumers buy less when prices go up. Swipe fees have grown from about $20 billion a year when NRF began tracking them in 2001 to $172 billion in 2023, according to the Nilson Report. Despite recent changes, card industry contracts, rules and practices still make it difficult to offer a cash discount, meaning most customers pay the credit card price – including the swipe fee – regardless of whether they use a card or not. The issue has been exacerbated by the increase in online shopping since the COVID-19 pandemic because virtually all ecommerce purchases are paid for with credit or debit cards. Swipe fees are higher for online purchases than in-store purchases, and most buy online, pick up in-store and curbside delivery purchases are subject to online rates as well. And as a percentage of the transaction, swipe fees go up automatically as prices increase, creating a multiplier effect for inflation.
NRF advocates for swipe fee reform
NRF has fought for fair swipe fees for over two decades, saying the current system lacks transparency and competition and that banks’ cost of processing transactions has gone down as technology has improved. The card industry refuses to negotiate over the fees, and NRF has argued in court and before Congress that the way Visa and Mastercard set swipe fee schedules followed by virtually all banks that issue their cards violates federal antitrust law. NRF helps lead the Merchants Payments Coalition, a group formed to seek fair swipe fees.
More than a dozen years after Congress addressed debit card swipe fees, lawmakers have finally turned their attention to credit card swipe fees. First introduced in 2022, the Credit Card Competition Act was reintroduced in June 2023 in the Senate by Senators Richard Durbin, D-Ill.; Roger Marshall, R-Kan.; Peter Welch, D-Vt., and J.D. Vance, R-Ohio, and in the House by Representatives Lance Gooden, R-Texas; Zoe Lofgren, D-Calif.; Tom Tiffany, R-Wis., and Jeff Van Drew, R-N.J. Senator Josh Hawley, R-Mo., and Representative Jack Reed, D-R.I., have since joined as cosponsors.
Under current practices, Visa and Mastercard – which control 80% of the market – each centrally price fix the swipe fees charged by banks that issue their credit cards rather than the banks competing to offer merchants the lowest rates. They also block competition by restricting processing of transactions to their own networks. The new legislation would require that banks with at least $100 billion in assets enable credit cards to be processed over at least two unaffiliated networks – Visa or Mastercard plus an independent network like NYCE, Star or Shazam. American Express or Discover could also be the second network, but not networks controlled by a foreign government like China’s UnionPay. Banks would decide which two networks to enable, but retailers would decide which of the two to use. That means networks would have to compete over fees, service and security, with payments consulting firm CMSPI estimating that retailers and their customers would save over $16 billion a year.
Introduction of the bill came after Durbin, who chairs the Senate Judiciary Committee, held a 2022 hearing on “Excessive Swipe Fees and Barriers to Competition in the Credit and Debit Card Systems.” Senators from both sides of the aisle questioned senior Visa and Mastercard executives on their swipe fee practices and heard from witnesses representing merchants and consumers. NRF submitted a letter citing concerns from small retailers and saying small businesses are hardest hit by the fees.
Separately, NRF is pushing to see that long-pending class-action litigation over Visa and Mastercard credit card fees goes beyond just a monetary settlement to also address the way the fees are set. Retailers who accepted Visa and Mastercard credit cards between January 1, 2004, and January 25, 2019, have until February 4, 2025, to claim their share of a $5.54 billion federal antitrust settlement that was reached in 2019 and upheld in 2023 by the U.S. Circuit Court of Appeals>.
While that settlement dealt only with monetary damages, a new proposed settlement announced in March 2024 would have required Visa and Mastercard to lower credit card swipe fees for specific cards and transactions by at least four basis points (0.04 of one percentage point) for three years and lower average rates by at least seven basis points for five years while capping fees at December 2023 levels for five years. But with swipe fees currently averaging 2.26% of the transaction, NRF said the proposed reduction “amounts to pennies on the dollar.” In June, U.S. District Judge Margo Brodie rejected the proposal, calling it “paltry” and saying Visa, Mastercard and card-issuing banks could “withstand a substantially greater judgment.” Trial has been set for October 2025 for two groups of retailers who opted out of the main class-action and a separate trial date could be set for the remainder of merchants. With the outcome of the litigation uncertain, NRF believes the Credit Card Competition Act is still needed to bring about meaningful and long-term swipe fee reform.
Meanwhile, the Federal Reserve has proposed that the 21-cent cap on debit card swipe fees set in 2011 be lowered to 14.4 cents per transaction. NRF welcomed the move as “a significant reduction that will save money for retailers and their customers” but said it doesn’t go far enough because the Fed found that it costs banks an average of only 3.9 cents to process each transaction. NRF filed comments with the Fed saying the methodology used to calculate the 14.4-cent rate is “detrimental to merchants and, ultimately, to consumers” and proposed a rate of 10.5 cents instead, with tiered rates based on banks’ debit card transaction volume as an alternative.
The proposal came a year after the Fed issued new regulations in 2022 confirming that retailers’ right to choose which networks process debit card transactions applies the same online as in-store. Both the cap and the right to network choice were established as part of the Durbin Amendment, a landmark law passed by Congress in 2010.
Similar to the pending Credit Card Competition Act, the Durbin Amendment required that debit cards issued by large banks be able to be processed over at least two unaffiliated networks, ending Visa and Mastercard’s longtime monopoly over processing. Together, the cap and network routing provisions have saved retailers and their customers more than $9 billion a year. But while routing choice quickly became standard for in-store transactions, the Fed found banks had enabled fewer than half of debit cards to be routed to networks other than Visa or Mastercard when used online. Under the new regulations, which took effect on July 1, 2023, banks must enable at least two unaffiliated networks regardless of where debit transactions take place and regardless of whether traditional cards, contactless cards or digital wallets are used.
NRF welcomed the clarification, saying the Fed “has declared once and for all that a debit transaction is a debit transaction no matter where it takes place.” The move came after NRF submitted a white paper to the Fed and the Federal Trade Commission outlining ”ongoing misconduct by Visa and Mastercard that inhibits merchant choice.”
In addition to the new regulations from the Fed, the FTC has reportedly investigated whether Visa and Mastercard’s tokenization of card numbers interferes with online debit card routing. In December 2022, the agency ordered Mastercard to share data that competing networks need to process online transactions made with Mastercard debit cards. NRF said the order “goes hand in hand” with the Fed’s ruling that debit routing choice applies the same online as it does in-store.