According to a report from the WSJ, Visa and Mastercard are considering raising interchange fees on card transactions in the U.S. Visa and Mastercard generate most of their revenue from these small processing fees, and it could have implications for merchants and fintech startups.
When you pay with a credit or debit card, merchants pay a small fee to the bank that issued this card. Your bank then pays an even smaller fee to the company that operates the card network.
In most cases, card issuers and card networks are separate companies. For instance, Chase issues a Visa card, Chase gets an interchange fee on every card transaction, and Chase pays a tiny fee to Visa. Some companies also operate a network and issue cards themselves, such as American Express.
The WSJ says that Mastercard and Visa will raise their fees in April — Visa confirmed the change. While fees on each transaction are nearly unnoticeable, they add up quite rapidly. They generate a ton of revenue for Visa and Mastercard, and they represent significant costs for large merchants.
It could become a consumer protection issue as customers often end up paying higher prices because of those fees. While Visa and Mastercard mostly negotiate with financial institutions, those financial institutions still want a cut on interchange fees. That’s why those fees are passed on to the merchants.
Merchants take into account the fact that a large portion of their customers are going to pay with a card. They end up raising prices for everyone, even if you pay using cash, a debit card or a credit card.
Fees on credit cards are generally higher and are the reason why points and rewards exist. Banks attract customers with advantageous reward systems because they want to get your interchange fees. Interchange fees are also much higher in the U.S. than in Europe because there has been more fraudulent activity — the U.S. has switched to chip-and-pin cards years after Europe.
An increase in interchange fees could also affect consumer fintech startups. Many challenger banks have been relying on interchange fees as one of their revenue streams. That’s part of the reason why European fintech startups, such as N26, Monzo and Revolut, have been looking at the U.S. as a potential market. There’s an entire industry built on top of those interchange fees.
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