Marana, Arizona
If you’ve noticed the costs of accepting credit cards for your business have been creeping up year after year, you’re not alone. Credit card transaction fees, known as “swipe” fees, have been on a relentless upward march. But who exactly profits from these rising fees and why do they keep going up? This investigative report pulls back the curtain.
The Credit Card Transaction Fee Racket Explained
Every time you swipe your credit card, multiple parties take a cut of the transaction in the form of fees. The merchant bears the bulk of these fees, which are a percentage of the total purchase amount plus a flat fee. But the percentages and parties involved differ based on the type of card.
For a basic Visa or Mastercard credit purchase, around 1.5-2.6% goes to the card-issuing bank like Chase or Bank of America. Another 0.1-0.3% goes to the card network like Visa or Mastercard themselves. Finally, around 0.2% is taken by the merchant’s financial institution that settles the transaction.
So on a $100 purchase, the merchant could pay anywhere from $1.80 to $3.10 just to accept your credit card payment.
The Cut Taken by Payment Processors
Powering the behind-the-scenes infrastructure are payment processors like First Data, Global Payments, and WorldPay. These are the companies that connect merchants to the card networks and handle the data transmission and authentication of credit card transactions.
Interchange fees that go to the card-issuing banks are set by Visa and Mastercard. But payment processors build their own markup on top – averaging 0.15-0.5% or higher. The processors’ cut is where most of the steady fee increases get tacked on year after year.
Why Fees Keep Rising
The card networks like Visa and Mastercard insist rising fees are necessary to improve infrastructure, security, rewards programs, and new payment methods like contactless. Card issuers also want higher fees to offset risks like fraud losses.
But critics argue the increases – which totaled over $90 billion in fees paid by merchants in 2021 – are little more than profit-padding based on lack of competition. After all, Visa and Mastercard control around 80% of credit card purchase volume.
Who Profits Most?
The card issuers may get the biggest share per transaction, but analysts say it’s the payment processors that have capitalized most on rising fees by tacking on their own increasing markup year after year. Companies like First Data, Global Payments, WorldPay and others have seen their stock prices and profits surge over the past decade.
Meanwhile, small businesses and individual merchants absorb the higher costs year after year. Price increases that ultimately get passed along to all consumers in the form of higher costs for goods and services.
The card networks themselves like Visa and Mastercard also remain highly profitable Payment processors, but their revenues come more from data processing fees charged to financial institutions rather than the percentages of consumer transactions.
What’s Next?
With Visa, Mastercard and payment processors facing antitrust scrutiny and lawsuits alleging fee collusion, some relief for merchants on transaction fees could be coming. But it may require merchants meeting the payments oligopoly head-on through unified negotiating power.
In the meantime, swipe fees will continue siphoning billions from merchant revenues – costs ultimately borne by consumers through higher prices on everything we buy.
