You may be used to Venmoing your friends to split a bill at dinner. But what about using Venmo or Zelle to pay for a soda at a convenience store? Some merchants may ask you to do just that. But know that if you choose to pull out your phone instead of your card, you could be an unwitting participant in a simmering and increasingly fierce fight over interchange fees that has pitted many merchants against banks and credit card networks. credit.
That struggle has evidently led at least some small businesses to gravitate toward p2p payment platforms, according to survey data from Business.com. But there are some added costs, according to Corie Wagner, the site’s senior industry research editor, that may be turning small businesses away from credit cards. “In addition to a simplified fee structure, a small team is required to accept payments, and the systems that need to be set up can be too cumbersome. [for business owners]Wagner says. More importantly, though, “it’s cheaper and easier,” he adds.
Survey data bears this out: A quarter of small businesses (defined as those with fewer than 100 employees) do not accept credit or debit cards as a form of payment, primarily in an effort to avoid interchange fees, and 56 % of smaller companies will accept p2p platforms because the associated fees are usually lower than exchange fees.
Sliding Fees Take Center Stage
Interchange fees, also called slippage fees or transaction fees, average 2.22% of each transaction, according to the National Retail Federation. However, these fees vary based on the specific credit card and other variables. Fees are collected by the card-issuing bank, rather than the credit card network itself (such as Visa or Mastercard), and then split. Some of the revenue goes to the bank, some goes to the network, and some goes back to consumers in the form of rewards.
But during a stretch of high prices and rising interest rates, which combined to put additional financial pressure on many small businesses, interchange fees served as another pain point, one that merchants have increasingly turned on. more vociferous, arguing that costs are falling. is passed on to consumers, driving prices even higher.
It also caught the attention of some lawmakers. Last month, Sen. Dick Durbin, an Illinois Democrat, introduced the Credit Card Competition Act, which would institute some changes to the way transactions are routed in an effort to spur competition and lower prices. Indeed, the proposed amendment to the Electronic Funds Transfer Act would allow merchants to process credit card transactions through different networks. Durbin also spearheaded legislation regulating debit card interchange fees about a decade ago, which was eventually passed as part of the Dodd-Frank Act. That limited exchange fee amounts to 21 cents plus 0.05% of the transaction total.
While Durbin’s proposed amendment could eventually lead to lower costs for merchants and retailers, it’s unclear whether any potential savings would trickle down to consumers in the form of lower prices, opponents say. A report from the Federal Reserve Bank of Richmond found that the vast majority of merchants did not change their prices to reflect savings gained from changes in debit card interchange fees, and there is reason to suspect the same could happen. if this new legislation were pushed through. through.
It could also upend many credit card rewards programs, something consumers probably wouldn’t take lightly.
‘It really has gotten out of control’
Interchange fees have become so intertwined in payment infrastructure that even the sharp rise of p2p platforms has yet to register as anything more than an issue for the big, established players in the industry, says Doug Kantor, general counsel at the National Convenience Association. Stories. “The swipe fees merchants pay are unbelievably high,” he says. “Credit card transfer fees increased 25% last year, and even more this year. It has really gotten out of control.”
In total, merchants paid credit card companies more than $137 billion in processing fees (debit and credit) during 2021, according to the Nilson Report.
But while Kantor says fees are rising, others claim the opposite.
“Electronic payments have empowered small business owners across America to grow our economy and better serve our local communities,” says Jeff Tassey, president of the Electronic Payments Coalition, a trade group that works with banks and other businesses. in the financial space, including Visa. and MasterCard. “To support this effort, Visa and Mastercard lowered interchange fees last April for most small businesses. Additionally, the digital payments market is healthy, competitive and innovative, cultivating mutually beneficial relationships that deliver real value to small business owners and their customers.”
A source at a large credit card-issuing bank says fast company that interchange fees are relatively low and that the increasing total amounts collected through processing fees have much more to do with the fact that more and more people use credit cards to pay for goods and services, rather than increases of fees.
Merchant groups, credit card networks and banks have long been jockeying for positions in an effort to increase their slippage fee reduction, or at least reduce their liabilities. With inflation in the news, an opportunity has opened up to draw more attention to slippage fees and also attach those fees to what end consumers pay at the register.
Indeed, merchant groups have been able to politicize it, to some extent, and have discovered that there are allies on Capitol Hill, many of whom are not eager to avoid the opportunity to join the big financial institutions.
Bring competition to credit
Although banks and other companies also exist in the payments ecosystem, two companies tend to capture the majority of merchants’ ire: Mastercard and Visa. That’s largely because they’re the two most visible brands in the space and because, combined, they have the most market power. fast company He reached out to Mastercard and Visa for this story, but they declined to comment on the record.
Leon Buck, vice president of government relations, banking and financial services for the National Retail Federation, estimates that the two companies control 80% of the market.
Consequently, Buck and others say numbers like those in the Business.com survey should be taken with a grain of salt, because while p2p and other payment platforms are growing, they’re still relatively small compared to companies like Mastercard and Visa.
The use of p2p platforms instead of credit cards “is limited to small businesses on a very small scale,” says Buck. “Many businesses only operate online and can’t afford not to use credit cards. Many companies may prefer to avoid cards, but they do not reject them. Businesses that don’t accept or try to not accept credit cards can also put themselves at a competitive disadvantage, Buck notes.
Kantor also acknowledges that payment alternatives “can’t compete at all.” He points out that there is also the problem that some p2p platforms still embed customers’ credit cards to complete transactions, which, again, adds interchange fees to the process. The only way around this would be for customers to connect a payment app directly to their bank account, and not everyone does.
For merchants and merchant groups, the time may be right to try to bring the transfer fee fight to public attention, but they face an uphill battle. However, both Buck and Kantor say the payments space will benefit from an increase in competition, such as the kind that Durbin’s bill aims to introduce. That, they say, is the only way to help control transaction costs for businesses.
“There is potential for market disruption; the problem is that the duopoly [Visa and Mastercard] it’s so strong that it hasn’t been possible,” Kantor says, “and it’s a question if it could happen without some kind of policy change.”
Buck agrees: “We need more regulation, and we need legislation passed that really gives credit to competition.”