When consumers use a credit card or debit card to make a purchase, banks charge merchants a “swipe fee” to process the transaction. The largest portion of the fee is called interchange and is charged by the banks that issue the cards. For credit cards, interchange averages about 2 percent but can be as much as 4 percent for some premium rewards cards, and varies according to a merchant’s card volume, type of card, type of transaction and other factors. Debit card interchange was also a percentage of the transaction until 2011, when it was capped by the Federal Reserve at 21 cents plus 0.05 percent of the transaction. While the cap applies to most debit cards, those from financial institutions with less than $10 billion in assets are exempt.
Officially known as the “merchant discount rate,” the swipe fee also includes a network fee charged by Visa, MasterCard or debit card networks (depending on which network is being used) and an “acquirer” fee charged by the merchant’s bank.
Why it matters to retailers
Applied to millions of transactions each day, swipe fees are many retailers’ highest cost after wages and employee health insurance and drive up prices paid by consumers. Swipe fees have grown from about $20 billion a year when NRF first began tracking them in 2001 to more than $100 billion a year. In addition, card industry contracts and practices long required that merchandise be priced at the card price – including the swipe fee – and made it difficult to either show the fees to customers or to offer a cash discount. Despite changes in rules, cash discounts are still difficult to offer and the fees are not shown on receipts or monthly bills. By NRF estimates, swipe fees cost the average U.S. household hundreds of dollars a year in higher prices and hurt retail sales because consumers buy less when prices go up.
NRF advocates for swipe fee reform
NRF has fought for fair swipe fees for more than two decades, saying the current system lacks transparency and competition and that banks’ cost of processing transactions has gone down as technology has improved. The card industry has refused to negotiate over interchange, and NRF has argued in court and before Congress that the way interchange rates are set violates federal antitrust law.
NRF’s biggest success came in 2010, when Congress passed the Durbin Amendment, which capped debit card interchange fees as part of the Dodd-Frank Consumer Protection and Wall Street Reform Act. The Federal Reserve implemented the cap the following year. In 2017, NRF defeated an attempt by banks to have the cap repealed.
Congress has never given final passage to a measure addressing credit card swipe fees, despite years of hearings and repeated introduction of legislation backed by NRF that would have required competition over the fees. Instead, credit card fees have been the subject of lengthy litigation that has yet to be resolved.
In December 2019, U.S. District Judge Margo K. Brodie approved a $5.54 billion class-action settlement in a lawsuit over Visa and MasterCard credit card swipe fees, but the settlement was appealed in January 2020 and remains in limbo. A settlement has yet to be reached in a portion of the lawsuit seeking to change the way Visa and MasterCard set the complex matrix of swipe fees followed by virtually all banks that issue their cards.
The settlement came in a lawsuit filed in 2005 by a group of small retailers without the involvement of NRF or most major retailers. An earlier $7.25 billion settlement of the case was approved by a different judge in 2013 but rejected by a broad cross section of the retail industry, with opponents saying it failed to adequately address how the fees are set. NRF and retail companies appealed that settlement, and it was overturned in 2016 by the 2nd U.S. Circuit Court of Appeals. In 2017, the Supreme Court refused to take up the case, letting the appellate ruling stand and sending the case back to trial court for the current attempts to reach a resolution.
When the current version was proposed in 2018, NRF said "significant changes" in the way swipe fees are set are “integral to helping merchants.” NRF called a monetary settlement alone inadequate without “ending the practices that lead to these anticompetitive fees.