Credit Card Economics: A Look at the Fees You Rarely See

Points and miles enthusiasts use credit cards that reward them on almost every purchase. When it comes to fees, many people look for cards that eliminate foreign transaction feeRun the numbers to make sure the large annual fee is worth it and read the terms carefully to avoid any pitfalls. resort fee when staying at a hotel. However, there is one unavoidable and often overlooked fee — the commercial or “swipe” fee.

Stores that accept credit cards probably think a lot about merchant fees. And they’ve been in the spotlight lately, with something called Credit Card Competition Act threatens the credit card rewards world we enjoy today.

Here’s why you, the everyday credit card user, should know and care about transaction fees.

Overview of commercial fees

According to National Retail FederationTransaction fees or card swipe fees average around 2% of the transaction cost; however, that amount can rise as high as 4% for premium rewards credit cardsThose percentages may seem small, but they add up to a lot.

The NRF says card swipe fees have grown from about $20 billion per year in 2001 to $172 billion in 2023 — though it’s worth noting that transaction volume has also increased during that time.

The exact cost of fees will vary depending on a number of factors, including whether you use your card directly (fees for online, mobile, and phone transactions are more expensive for merchants), the type of business, the merchant’s annual sales volume, and other factors.

“Swipe fees are the highest operating cost for most retailers after labor, adding more than $1,000 a year to the average household’s consumer price tag and hurting retail sales because consumers buy less when prices rise,” the NRF said in a statement on swipe fees.

But these fees are divided into different categories and are not easy to understand.

The main group of fees is called interchange fees, which are paid to card-issuing banks. VisaThe breakdown of interchange fees includes different card product types and multiple merchant classifications. MasterCard has a similarly complex formula.

American Expressoperates differently without any additional issuing banks involved, previously had notoriously high merchant fees, but the company significantly reduced its fees in 2018 to attract more commerce.

In addition to interchange fees, the credit card industry is driven by a long list of additional fees. These vary between payment networks, but include assessment fees applied to total transaction volume, fees for processing cards issued in another country, and data usage fees — the list goes on.

Related: Should I pay with a rewards credit card even if there are fees?

The war on tuition fees

It’s easy to see why swipe fees can frustrate merchants. After all, it’s hard to accurately forecast your revenue when some credit cards have higher fees than others. Some business owners are fighting back by passing the cost on to consumers by adding surcharge for credit card users.

These surcharges are not uncommon among small merchants, but that doesn’t make them any less acceptable. Some merchants may feel their only option is to add a credit card surcharge (some may consider them a cash discount) or raise prices across the board, even for cash customers.

Many states have had laws limiting surcharges, but litigation have challenged those laws. We are now down to two states Where businesses are prohibited by law from adding surcharges to transactions: Connecticut and Massachusetts. Many other states have specific rules or limits on the amount that merchants can charge for these surcharges.

One company has taken the issue beyond credit card surcharges to outright bans on certain types of cards. In 2018, Kroger-owned Foods Co supermarkets stopped accepting Visa-branded credit cards, citing high transaction fees. Kroger expanded the ban to its larger Smith’s chain in April 2019.

But by October 2019, Kroger reversed the ban and began accepting Visa credit cards again. Other merchants may have taken note of Kroger’s ban reversal and decided that it wasn’t a viable strategy.

Of course, there are many benefits to accepting credit cards, regardless of the fees applied to those transactions. That’s the catalyst for online shoppingand some studies have shown that card swiping can play a significant role in increasing purchases.

Draft law to reduce fees

The topic of card swipe fees has become more important because of the aforementioned Credit Card Competition Act of 2022, which has been introduced multiple times in Congress and is currently stalled. The bill aims to bring more competition to the industry and reduce card swipe fees while reducing costs for merchants and customers.

In its current form, the law benefits consumers and businesses the most. But while credit card companies and banks will certainly suffer, the result could be a reduction in credit card rewards.

Faced with lost revenue due to lower swipe fees, credit card companies and banks may look to boost profits by raising credit card annual fees or, in a worst-case scenario, eliminating credit card rewards. A trade group representing several U.S. airlines has banded together and launched Protect your points campaign to highlight the negative impacts of the competition bill.

We at TPG strongly oppose this bill and law because it could directly impact your ability to earn and redeem rewards. Valuable points and miles.

The last line

All merchants incur fees when swiping a credit card to pay for a purchase, although the exact amount can vary depending on a number of factors. As merchants seek to reduce these costs, some of their decisions can negatively impact customers. pay by credit card.

This can make maximizing credit card rewards more difficult because you have to determine whether the rewards you receive outweigh any additional fees that merchants may charge you for the privilege of paying with a credit card.

Related: TPG: Protect Your Score