Venmo, Zelle, Visa, Mastercard, and you: The fiery fight over the future of swipe fees

You may be accustomed to Venmoing your friends to split a check 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 opt to whip out your phone rather than your card, you could be an unwitting participant in a long-simmering and increasingly fiery fight over interchange fees, which has pit many merchants against banks and credit card networks.

That fight has evidently led at least some small businesses to lean into p2p payment platforms, according to survey data from Business.com. But there are some additional costs, according to Corie Wagner, the site’s senior editor of industry research, that may be pushing small businesses away from credit cards. “Besides a simplified fee structure, there’s the reduced equipment required to accept payments, and the systems that need to be set up can be too cumbersome [for business owners],” Wagner says. The most important thing, though, is that “it’s cheaper and easier,” she adds.

The survey data bears that out: A quarter of small businesses (defined as those with fewer than 100 employees) aren’t accepting credit or debit cards as a form of payment, mostly in an effort to avoid interchange fees, and 56% of smaller companies will accept p2p platforms because the associated fees are often lower than interchange fees.

Swipe fees take center stage

Interchange fees—also called swipe fees or transaction fees—average 2.22% of each transaction, according to the National Retail Federation. These fees do vary, though, depending on the specific credit card, and other variables. The fees are collected by the card-issuing bank, rather than the credit card network itself (like Visa or Mastercard), and are then divided up. Some of the revenue goes to the bank, some to the network, and some makes its way back to consumers in the form of rewards.

But during a stretch of high prices and rising interest rates, which have combined to put additional financial pressure on many small businesses, interchange fees have served as yet another pain point—one that merchants have grown increasingly vocal about, arguing that the costs are being passed on to consumers, further raising prices.

It’s caught the attention of some policymakers, too. Last month, Senator Dick Durbin, a Democrat from Illinois, introduced the Credit Card Competition Act, which would institute some changes to how transactions are routed in an effort to spur competition and lower prices. Effectively, the proposed amendment to the Electronic Fund Transfer Act would allow merchants to process credit card transactions over different networks. Durbin also spearheaded legislation regulating debit card interchange fees roughly a decade ago, which ultimately passed as a portion of the Dodd-Frank Act. That limited interchange 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 if any potential savings would make their way 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 the savings gleaned from the changes to debit card interchange fees, and there’s reason to suspect the same might happen if this new legislation were pushed through.

It could also upend many credit card rewards programs—something consumers likely wouldn’t take lightly.

‘It has really become out of control’

Interchange fees have become so heavily woven into payment infrastructure that even the sharp rise of p2p platforms has yet to register as more than a blip to the large, incumbent players in the industry, says Doug Kantor, the general counsel for the National Association of Convenience Stores. “The swipe fees merchants are paying are incredibly high,” he says. “Swipe fees on credit cards were up 25% last year, and up even more this year. It has really become out of control.”

Altogether, 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 that fees are increasing, 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, chairman of the Electronic Payments Coalition, a trade group that works with banks and other companies in the financial space, including Visa and Mastercard. “To support this effort, Visa and Mastercard lowered interchange fees this past April for most small businesses. Additionally, the digital payments marketplace is healthy, competitive, and innovative—cultivating mutually beneficial relationships that provide real value for small business owners and their customers.”

A source at a large, credit card-issuing bank tells Fast Company that interchange fees are relatively low, and that the growing total amounts collected through processing fees have much more to do with the fact that more and more people are using credit cards to pay for goods and services, rather than fee increases.

Merchant groups, credit-card networks, and banks have long been jockeying for positions in an effort to increase their cut from swipe fees, or at least lower their liabilities. With inflation being in the news, it’s opened up an opportunity to bring more attention to swipe fees, and also attach those fees to what end-consumers pay at the cash register.

In effect, merchant groups have been able to politicize it, to an extent, and have found that there are allies on Capitol Hill—many of whom aren’t eager to shy away from a chance to stick it to big financial institutions.

Bringing competition to credit

Though banks and other companies also exist in the payments ecosystem, two companies do tend to catch most of the ire of merchants: Mastercard and Visa. That’s largely because they’re the two most visible brands in the space, and because, combined, they hold the most market power. Fast Company reached out to both Mastercard and Visa for this story, but they declined to comment on the record.

Leon Buck, the VP of government relations, banking, and financial services at the National Retail Federation, estimates that the two companies control 80% of the market.

Accordingly, Buck and others say that numbers like those from Business.com’s survey should be taken with a grain of salt, because even though p2p payment platforms and others are growing, they’re still relatively small compared to companies like Mastercard and Visa.

The use of p2p platforms in lieu of credit cards “is limited to small businesses on a very small scale,” Buck says. “A lot of businesses are online-only, and they can’t afford to not use credit cards. Many businesses may have a preference to avoid cards, but they don’t refuse them.” Businesses that don’t or try not to accept credit cards can also put themselves at a competitive disadvantage, Buck notes.

Kantor, too, acknowledges that payment alternatives “can’t compete at all.” He points out that there’s also the issue that some p2p platforms still incorporate customers’ credit cards to complete transactions, which, again, rope interchange fees into the process. The only way around that would be for customers to connect a payment app directly to their bank account, and not all do.

For merchants and merchant groups, the timing may be right to try and bring the swipe fee fight to the public’s attention, but they face a steep uphill battle. Both Buck and Kantor, though, say that the payments space will benefit from an increase in competition, like the kind that Durbin’s bill aims to usher in. That, they say, is the only way to help control transaction costs for businesses.

“There’s potential for disruption in the market—the problem is that the duopoly [Visa and Mastercard] is so strong that it’s not been possible,” Kantor says, “and it’s a question as to whether it could happen without some sort of policy changes.”

Buck concurs: “We need more regulation, and we need legislation passed that actually brings competition to credit.”