Know the story already, but want the advice? Click here to scroll down to fee mitigation strategies for small businesses.
Businesses across America are experiencing a significant interchange rate increase from the nation’s two biggest card networks: Visa and Mastercard, with an estimated impact of $475 million in annual increases between the two companies.
For Visa, their continued success coming out of the pandemic is underpinned by an estimated $697 million in 2021 fee boosts (despite pledging to suspend increases). The credit card Goliath is imposing another $145 million in increases this year. The adjustments primarily target Card-Not-Present (online spending) transactions by 0.09% – 0.10%. Non-qualified credit cards (rewards, business cards, and downgraded transactions) will receive a 0.45% bump
Mastercard, after suspending increases amidst regulatory and merchant pressure in 2020 and 2021 is proceeding with an estimated $330 million in increases across 130 different categories, with more far-reaching consequences that include higher rates on in-store or ”card present” transactions. On average, these categories are increasing 0.08%. According to CMSPI (a payments advisory firm), Mastercard and Visa interchange increases are the largest recorded in a decade.
This is a really useful article that breaks down the changes: “US Card Swipe Fees are Changing in April – Is Your Business Prepared?” by CMSPI.
Merchants can expect a 0.03% increase in across-the-board wholesale fees for their Visa/MC/Amex payments mix.
The Response to the Visa/Mastercard Fee Increases
2021 reported strong net revenue results for Visa. The company beat out consensus estimates by $300 million to reach $7.1 billion in quarterly earnings. Visa CEO Al Kelly attributed this success to a major growth in e-commerce transactions and cross-border travel revenue. The story is similar for their rival Mastercard, who also beat forecasts for the same quarter. On top of the success due to the continued shift toward electronic payments, Visa and Mastercard are also benefiting from steep nationwide inflation that could see a 9% revenue increase at card networks and banks, even if their fees remained the same.
With these card payment organizations benefiting from the economic state of the country, the question is “Why now?”. On April 22, 2022, members of Congress wrote a letter to the leaders of Visa and Mastercard urging them to reconsider the rate hike – particularly in a market environment without real competition, branding them a “clear duopoly”. The writers made comparisons to the Chinese payments market, where interchange fees have been capped at .45% since 2016. They argue that both parties must be profitable or “would not be working so hard to convince the Chinese Communist Party to allow you to operate in China.”
Good News for Small Businesses
The impact of these fee increases are not spread evenly across American businesses, however. In March 2022, it was announced that Visa would be reducing interchange fees for small businesses by 10%, beginning April 2022. While unconfirmed by Visa, Reuters reported that “small business” is being defined as those with less than $250,000 in annual visa credit volume. The change would apply to both online and in-store customer transactions.
Not so great news: At this time, there is still a lot of uncertainty around this program. In addition, Visa alone qualifies small businesses for the initiative.
Mitigating the Effect of Fee Increases
Many small businesses will get a boost from Visa’s initiative, but will still feel the effect of Mastercard’s policy changes. But, for merchants utilizing a cost plus (or “interchange plus”, or “wholesale plus”) rate structure for their payment processing, there are some techniques to avoid the raise in rates – or perhaps credit card processing fees entirely. The two available options are credit card surcharging or cash discounting.
Credit Card Surcharging
The practice of adding a fee to a credit card payment at your business to absorb the cost of processing the transaction. This applies to credit cards only, not debit cards or prepaid cards. This is legal* (or anti-surcharging laws are unenforceable due to legal precedent) in all US states and territories except Connecticut, Massachusetts, and Puerto Rico. Surcharging in these states and territories remains illegal and Cash Discounting is the only option.
* Research the rules of surcharging thoroughly and provide any additional disclosures as required by state law.
Our advice: Whether surcharging is right for your business is down to you. Consider local and industry-wide competition, your product margins, and whether your customers would support a surcharge.
Make sure to follow the surcharging guidelines for each card brand:
Follow these rules:
- Notify your card brands by writing at least 30 days before implementing a surcharge
- Properly disclose surcharging through signage at your entrance and register, or on your checkout page. Make sure your customers are aware of it, and disclose as a line item on the receipt.
- You cannot profit from surcharging. The cost is the lower of 4% of the transaction amount or the cost of acceptance per transaction.
- No surcharging debit or prepaid cards
- Surcharge only at the card brand or product level (traditional card, business or rewards card).
For a more detailed breakdown of Surcharging, visit our resources.
Most commonly used at brick-and-mortar businesses, Cash Discounting is the practice of deducting the value of a transaction fee at your business when a customer pays in cash. This is legal in all 50 states. It is required by the card brands that you post prices for your goods as if the customer were to pay with a credit card, but you can extend your customers the option to be rewarded for paying cash with a small discount.
When it comes to payment processing, do you know what you’re paying for? Schedule a free consultation with one of our payments specialists to find out – and see if we can help you grow your business.