Credit card firms provide both consumers and businesses with a convenient way to handle payments that eliminates the need to deal with large amounts of cash all the time. Still, this service doesn’t come for free: not only can customers rack up large amounts of interest on their credit card bills, companies also must pay a fee for every transaction they make. These “swipe fees” can add up quickly. Last year alone, U.S. merchants paid $101 billion in swipe fees to the payments industry, including $72 billion in interchange fees with banks that partner with credit cards.

Needless to say, many American companies have long had problems with this arrangement, which often leads to inflated prices that merchants then get blamed for by consumers. As a result, a group of U.S. companies have been engaged in a class action legal battle against Visa and Mastercard since 2005 to place a cap on swipe fees. And after nearly 20 years of arguing, a recent settlement between the plaintiffs and the major credit card firms will finally impose some limits on fees charged by payment companies. Along with placing a ceiling on swipe fees that averages to about 2.26 percent, the settlement will also reduce these charges by at least 0.04 percentage points for at least three years.

These measures could end up saving American companies more than $30 billion over the next five years. “This settlement achieves our goal of eliminating anticompetitive restraints and providing immediate and meaningful savings to all U.S. merchants, small and large,” said Robert Eisler, a lawyer who worked for the plaintiffs’ side. Still, not every stakeholder in this story is impressed by the concessions made by Visa and Mastercard. “The settlement does nothing to actually bring competitive market forces to swipe fees or change the behavior of a cartel that centrally fixes rates and bars competition,” said Christopher Jones, a member of the trade groups the Merchants Payments Coalition and the National Grocers Association. “Instead, it tries to provide token, temporary relief and then allows the card companies to raise rates yet again.”

Questions:

1. What are “swipe fees,” and why do many American merchants have problems with them?
2. Do you think U.S. government regulators should place more restrictions on the merchant fees charged by credit card companies? Why or why not?

Source: Tara Siegel Bernard, “Visa and Mastercard Agree to Cap Their Swipe Fees in Settlement,” The New York Times, March 26, 2024.