The three largest credit card processing networks are preparing to increase their fees later this year, and this action could trigger a domino effect affecting banks, merchants and consumers. A report published by the Wall Street Journal on February 15 indicates that the increase could happen as early as April 2019, and it will be related to specific payment processing costs known as interchange fees.
When shoppers use credit or debit cards to make payments at point-of-sale terminals, interchange fees are absorbed by merchants and paid to the banks issuing the cards. Payment networks such as Discover, Visa and MasterCard turn around and charge banks for credit card processing services; these are fees that will also go up as reported by the WSJ. It should be noted that this planned increase is aimed directly at merchant banks, which are major financial institutions that manage large accounts for retailers such as Amazon, Costco, Walmart, and others.
Although individual merchants will not be directly impacted by the increase, such actions tend to feature a trickle-down effect that eventually reaches cardholders and shoppers in general because fees and costs are passed on all the way down the retail consumer chain. A neighborhood Chinese food restaurant, for example, may choose to warn diners that they will be expected to pay a little more if they reach for the plastic in their wallets, but it may be easier to just increase prices across the entire menu regardless of whether payments are made with cash, debit or credit.
As the situation stands, up to 2.5 percent of the prices on retail good and services paid for by American consumers are used to cover credit and debit card payment processing fees; in recent years, however, consumer advocacy groups around the world have been pushing to lower such fees. In Europe, for example, both MasterCard and Visa have agreed to charge less interchange fees when shoppers use cards issued outside of the region. In Latin America and the Caribbean, some business owners inform shoppers that card transactions end up being more expensive, thus prompting a significant consumer segment to prefer using cash.
In jurisdictions such as New York, state law may force merchants to post notices about a two-tiered payment system, one with a surcharge for payments made with cards and another one without it for cash transactions. Whatever the outcome of the planned fee increases, the major networks will always manage to profit. In 2018, MasterCard posted net income figures close to $6 billion, and Visa’s income was more than $10 billion. Depending on how much the fee increase comes out to be, merchant processors will have to figure out how to price their services in a competitive fashion.
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