Debit and credit card swipe fees have been the subject of much debate lately, particularly with the recent announcement that the Federal Reserve is proposing new caps on debit card swipe fees. But what exactly are swipe fees, and who collects them? Here is a brief guide to credit card swipe fees and how they break down.
The term ‘swipe’ fees covers multiple fees, which merchants pay to the electronic payment processing networks when customers pay with a debit or credit card. For Visa and MasterCard credit card transactions, the two credit card networks charge a fee to process the transactions, but the largest percentage fees are charged by the card issuing bank.
Here are the main components of swipe fees:
Interchange fee: The term interchange fee typically is used interchangeably with swipe fees, but interchange fees are the portion of the swipe fee that goes to the card issuing bank. In this case, this mostly means the largest credit card issuers, such as Chase, Bank of America, Citigroup and Capital One, which control about 90 percent of all credit card accounts. Interchange fees are by far the largest component of swipe fees, with the average interchange rate in the United States currently at 1.79 percent.
There are more than 300 different types of interchange rates. The rate varies with type of credit card and the type of transaction. Premium rewards credit cards typically come with higher interchange fees than your basic credit card. In addition, credit card transactions considered more risky, such as those made online or via the phone, also come with higher interchange rates.
Assessments: This is the portion of swipe fee that goes to Visa or MasterCard. Visa and MasterCard recently raised their assessment fee to 0.11 percent of the transaction from previous levels around 0.095 percent.
Add-on or pass thru fee: This is the portion of the swipe fee that goes to the merchant account that processes credit and debit card transactions for the retailer. Depending on how the fee is calculated, it is sometimes referred to as interchange plus or interchange pass-through fee. This is fairly low, as little as 0.35 percent.
For Discover and American Express, the situation is somewhat different. These card issuers provide their own payment processing networks, and they are able to collect the full swipe fee minus the fee paid to the retailer’s merchant account.
The interchange fees are set by the credit card payment networks, and this is where things get sticky. Visa and MasterCard have an interest in keeping interchange rates as high as possible, because it helps them attract more card issuing banks. With no competitive pressure to bring interchange fees down, retailers are stuck paying high interchange fees if they want to accept credit cards.
Critics have argued that U.S. interchange fees are the highest in the world. Even as the cost of processing electronic payments has gone down, interchange fees have increased over the past years and now represent an estimated 70 percent to 90 percent of the fees merchants pay for credit card transactions. In 2005, Visa and MasterCard collected $30.7 billion in interchange fees for card issuers, an increase by more than 85 percent from 2001. Before the recent Fed proposal, Visa Inc. reportedly lowered debit card interchange fees in some European countries by 60 percent, while increasing U.S. debit rates by 30 percent.
Further, some credit card brands charge considerably higher interchange fees. Fees for Visa and MasterCard charges average 2 percent of the transaction value, while merchants pay 3 percent or more for charges on American Express cards, which have some of the highest swipe fees in the industry.
Following a mandate from Congress, the Fed’s recent proposal for caps on debit card interchange fees could limit these by more than 80 percent. Speculations are that credit card swipe fees might be next. The large credit card networks have recently come under scrutiny for restricting merchants from offering customers incentives to pay with other payment forms. In the fall, Visa and MasterCard reached a settlement with the U.S. Department of Justice for antitrust allegations; American Express is still involved in a civil anti-trust lawsuit filed by the DOJ.