Consumers’ Use of Cards Over Cash Hits Merchants

Visa and Mastercard plan to raise swipe fees for some purchases; retailers say the fees are a “hidden tax.”

February 25, 2021

ALEXANDRIA, Va.—In April, Visa and Mastercard plan to raise swipe fees for some types of credit-card purchases, putting an additional squeeze on restaurants and retailers struggling with other pandemic-related problems, reports the Wall Street Journal.

While customers have opted for online shopping during the pandemic, that growing trend is creating extra costs for merchants. Swipe fees, which merchants pay when a customer pays by card, are often higher for merchandise bought online.

The swipe fees are a perpetual source of contention between merchants and card companies. The charges are invisible to shoppers, but merchants often end up paying fees of about 2% of their customers’ credit-card purchases. The fees are established by the card networks, and merchants pay them to the banks that issue the cards.

Both Visa and Mastercard are expected to raise fees for many online transactions, and Mastercard will increase swipe fees when rewards credit cards are used to shop inside small supermarkets, according to a document reviewed by the Wall Street Journal. Visa is revising how it calculates fees for restaurants. Those that receive credit-card orders online could be more prone to fee increases. Many increases were supposed to kick in last year but were delayed because of the pandemic.

At the same time, Visa and Mastercard said they plan to lower some swipe fees, including fees on certain low-price transactions.

The use of cash has been declining in the U.S. for years, and merchants say COVID-19 has accelerated the shift. Even customers who shop in stores are shunning cash during the pandemic. Plus, consumers like to get credit-card rewards, and it’s convenient for them to not have to carry physical cash around.

Card-industry executives say swipe fees help cover costs for technical innovation and fraud prevention, adding that the chances of fraud are higher with online purchases. Fraudulent online card transactions, which can result in more costs for merchants, jumped last year, according to industry data.

While total retail sales, excluding cars and gasoline, increased 0.3% from March 2020 through January from the same period a year earlier, online sales jumped 57%, reports Mastercard’s SpendingPulse, which measures in-store and online retail sales across all payment forms.

The amount of Visa and Mastercard credit-card swipe fees paid by U.S. merchants dropped last year, down 17% to $44.4 billion, according to the Nilson Report. That was largely because people curbed credit-card spending on things such as travel and restaurants during the pandemic. Online consumer credit-card transactions accounted for a greater share of all card volume, according to CMSPI, a merchants’ payments consulting firm.

Companies are also paying more in debit-card swipe fees. Merchants paid $18.1 billion in Visa and Mastercard debit-card swipe fees last year, up 13% from the year before, according to the Nilson Report. Swipe fees on debit cards issued by large banks are capped by regulation, but card networks have broad discretion over fees on debit cards issued by smaller banks, which usually carry higher swipe fees when used online.

The fees have not gone unnoticed by state lawmakers. New bills in at least three states—Mississippi, Oklahoma and Tennessee—call for swipe fees to be assessed on sales before taxes, lessening the burden on merchants. The fees are currently assessed on the total sales charge, including taxes.

Third-party delivery services such as Instacart and Shipt can also result in higher swipe fees for restaurants and retailers. When consumers make purchases directly with a third-party delivery service, that company’s shopper often pays at checkout with a company card, which may charge higher fees.

In 2019, convenience retailers paid an estimated $11.8 billion in card fees, according to NACS State of the Industry data. For NACS members and retailers across the country, swipe fees are retailers’ second-highest operating expense behind labor, and NACS has battled the big card networks for years to reduce swipe fees.

Cards represented 73.2% of sales transactions at convenience stores, NACS SOI data for 2019 indicate. During the pandemic, cash sales have been down, which means more people are paying with debit or credit cards. A May 2020 NACS Consumer Survey found that the percentage of customers paying for gas by cash dropped from 21% to 14%, which may be the lowest it could go given how many consumers are shying away from handling cash in the current climate.

Card networks bar merchants from accepting some—but not all—of their credit cards. A merchant who accepts Visa credit cards can’t turn down premium cards that have higher swipe fees and are often carried by wealthier consumers. NACS is a plaintiff in the long-running merchant litigation against the card networks challenging their “honor all cards” rule and other practices on the grounds of antitrust violations. Roughly 63 merchants, including Amazon, Lowes, The Gap and Starbucks are suing Visa, Mastercard and card-issuing banks, claiming they collude to avoid competing over interchange fees. The merchants allege card fees are a hidden tax.