Interchange Fees Catch Heat, and Are Defended, on Capitol Hill

At a Senate Committee on the Judiciary hearing on Wednesday (May 4), interchange fees — levied on merchants as credit cards are swiped, paid out to card-issuing banks — were both vilified and defended.

Depending on who was speaking, of course.

In a hearing that lasted more than two hours, senators grilled a half dozen witnesses from the payment networks and from banking and retail about the positive and negative ripple effects that the fees have on the commerce ecosystem.

Mastercard and Visa changed some of their interchange fees late last month. Visa cut fees for a majority of transactions; Mastercard lowered fees for payments below $5.

“The credit and debit card systems are not competitive marketplaces,” Senate Judiciary Chairman and Majority Whip Richard J. Durbin, D-Ill., said at the hearing.

“When you don’t have real competition, what happens?  You get higher costs and less competition,” he said. “And new, potential competitors get stifled.”  With a nod toward inflation, he noted that swipe fees have increased.

But executives from the payments networks — i.e., Visa and Mastercard — noted during the hearing that the swipe fees have increased on some transactions and lowered on others.

“When Visa and Mastercard raise interchange fees, banks want to issue more cards because they make more on each swipe. And Visa and Mastercard profit when there are more swipes, because they take their own cut, called a network fee, from the merchant on each swipe,” Durbin said in his prepared remarks. “But merchants and their customers take it on the chin.”

Competition and Innovation

Ed Mierzwinski, senior director of the U.S. Public Interest Research Group, said in his own testimony that banks are “happy with inflation,” because as, say, gas prices double, interchange revenues double, without any extra effort on the part of the banks themselves. Consumers, he added, “bear the brunt” of the higher prices as merchants are forced by payment networks’ rules to “bake the swipe fee costs” into their prices.

Linda Kirkpatrick, North America president of Mastercard, countered allegations of unfair  market dynamics by noting that  “Mastercard and Visa are each other’s most fundamental competitors within an extremely competitive and dynamic payments market.” And both companies jockey to take market share from one another, and each firm competes for merchant acceptance.

Bill Sheedy, senior adviser to the CEO at Visa, said that “Visa does not earn revenue from interchange fees. Visa’s revenue comes from fees we charge financial institutions who issue cards and process transactions over our network.”

And competition in the payments space is more intense than ever before, said Sheedy, “with major new players and technologies in use today, and on the horizon.” New and recent entrants include Paypal/Venmo, Square (Block), Affirm, Afterpay, Klarna and Zelle — and cryptos.  He said, too, that interchange price regulation means that card issuance is pressured, as are features and benefits that accrue to the end consumer.