Global payments processors, Visa (V.N) and Mastercard (MA.N) are gearing up to raise fees for many merchants accepting customer credit card transactions. A majority of these fee increases will target online transactions.
Details of the Fee Increase
- Timeline: The fee hikes are anticipated to roll out in October and April.
- Affected Transactions: The most significant surge in charges is for online purchases.
- Projected Impact: Consulting firm CMSPI informed the Wall Street Journal that these elevated charges would likely burden merchants with an extra $502 million annually.
This sum comprises:
- Over 50% attributed to network fees.
- The remainder is derived from interchange or swipe fees.
What are Interchange Fees?
An interchange fee is what a merchant pays to the card-issuing bank every time a consumer uses their card. Typically, any increase in these fees is passed onto consumers, as per regulatory insights. While card networks such as Visa and Mastercard set these interchange fees, the funds directly benefit the card-issuing banks. On the other hand, the card networks earn the network fees.
Historical Perspective
- Past Fees: U.S. merchants shelled out approximately $93 billion to Visa and Mastercard in credit card fees in the last year, a significant rise from $33 billion in 2012, as stated in the Nilson Report.
- Card Fee Dynamics: Notably, credit cards generally possess a higher interchange fee than their debit counterparts. As a result, many merchants opt to transfer some of these fees onto their customers by adjusting prices. In contrast, to evade these heightened credit card fees, several small enterprises offer discounts for payments made via cash, check, or debit cards.
Market Response and Future Implications
- Stock Market Movement: Visa and Mastercard’s shares have witnessed an upward trend. Specifically, Visa’s stock has risen by 18.5%, while Mastercard’s by 19%, year-to-date.
- Analysts’ Outlook: Wall Street maintains a Strong Buy consensus rating on both financial giants. Visa’s average price target hints at a 16% upside, whereas Mastercard’s projects a 12.4% increase.
- Changing Landscape: In the wake of escalating fees, it’s plausible that merchants and small businesses will increasingly steer their customers towards non-credit card payment methods. This could negatively influence card networks and the banks issuing the cards.
External Challenges
- Legislation: The Credit Card Competition Act, a bipartisan bill reintroduced recently, aims to elevate competition by promoting the use of alternate credit card processing networks, potentially granting merchants more authority in decision-making.
- Litigation: Visa and Mastercard are currently entangled in an antitrust lawsuit initiated by Block, Inc., alleging conspiracy to jack up interchange fees and curtail competition.
Company Stance
Despite the resistance and litigation, both Visa and Mastercard have defended their fee structures, asserting that the revenues primarily counterbalance the costs of fraud prevention, bolster security and innovation, and fund credit-card rewards programs.
Conclusion
The impending fee hikes by Visa and Mastercard are bound to reshape the dynamics of the credit card payment system, potentially impacting both merchants and consumers. How this move will play out in the broader financial ecosystem remains to be seen. For a detailed breakdown of the anticipated fee structures and further insights on how this might affect the global payments landscape, consider visiting the Wall Street Journal.
