The highly anticipated interchange fee hikes by Visa and Mastercard are finally here. What a pandemic managed to delay has been given an estimated time of arrival: April 2022. This is bad news for merchants and consumers alike. Read on to learn why.
Impact for Merchants
Merchants pay to accept credit and debit cards at checkout so increased use by consumers means that costs will inevitably increase. What is less expected are the added operational costs set to be tacked on by card companies. The Wall Street Journal reports that heightened interchange rates, initially delayed by the pandemic, will result in merchants paying more every time a consumer uses a credit card at checkout.
Merchants typically pay 2-3% in interchange rates for consumer card purchases. The heightened rate of Visa’s card fees alone is expected to have a total impact of $475 million in total increases, adding to the $55.4 billion Visa and Mastercard collected in 2021. Increased swipe fees mean that merchants earn less on the dollar for every transaction, negatively affecting the bottom line. Many merchants are forced to increases prices, which ultimately hurts the American consumer.
The Merchant Payments Coalition has started a campaign to educate lawmakers on the increased swipe fees, citing that the two largest card companies that makeup about 80% of the market are ready to implement a $1.2 billion increase for swipe fees in April 2022. This comes a few years after a Nilson Report stated at total swipe fees were up more than 137% compared to the previous decade.
Impact for Consumers
Using a credit card is expected to become more expensive for consumers during a time when inflation is on the rise. The reason is two-fold: interest rates are expected to increase and credit card companies are preparing to raise merchant fees, a move that will inevitably be felt downstream by the consumer.
COVID-19 has accelerated the adoption of contactless and cashless payments—Research and Markets report that global cashless transactions are projected to grow at an annualized rate of 18% from 2020 to 2025. Additionally, with inflation at a generational high, more Americans are reaching for their credit card than ever. Although interchange rates aren’t known and considered by the average consumer, increased fees will result in $724 a year of additional spending for the average U.S. family.
The CFPB Takes a Stand
Rohit Chopra, Director of the Consumer Financial Protection Bureau (CFPB) who assumed office if 2021 has remained committed to transparent and competitive pricing for financial services products. In an interview with the Washington Post earlier this month he said, “When competitive forces work, costs go down, consumers are served better, and I'm not really sure that we totally have that in many sectors of banking.”
In an appearance on CNBC’s Closing Bell, Chopra criticized the giant card networks for raising fees during a time of inflation. “We don't have a competitive system," Chopra said. "Many businesses cannot survive if they stop accepting Visa and Mastercard. So it's something that we're looking at carefully and honestly at a time of inflation. It just doesn't seem like the right thing to do."
Trustly and the Open Banking Solution
The traditional payments system in the United States remains a duopoly resulting in unfair pricing, unhealthy competition, a lack of transparency, and ineffective regulation. While payments innovation has continued to progress, particularly during the global pandemic, there is still a huge reliance on the dominance of the card networks.
This system has detrimental effects on both the merchant and their consumers and is particularly concerning during a time of inflation. Trustly believes in the power of Open Banking, a system where merchants can move money between bank accounts in real-time, bypassing all the card networks and their associated operational fees.
Trustly is committed to a payments model that simultaneously helps merchants thrive and helps consumers reach or maintain their financial health goals. Our digital account-to-account payments system bypasses the middle man by linking some of the world’s most prominent merchants with their consumers, directly from their bank accounts.