Citing “unacceptably high fees,” online marketplace eBay will stop accepting American Express cards on Aug. 17, 2024. This is the latest battle in a years-long, multi-pronged fight over interchange fees — the fees that merchants pay card companies every time a customer pays with a credit or debit card.
Ultimately, I believe eBay’s anger is misguided, and that they are unfairly singling out American Express. For example, according to one of its Securities and Exchange Commission (SEC) filings, Amex’s average interchange fee is 2.28 percent — just the slightest bit higher than Visa and Mastercard’s 2.26 percent. While I suppose 0.02 percent can add up at scale, this argument isn’t really about 2 basis points.
eBay has an axe to grind, and they’re wielding it at Amex. The e-tailer partners with Mastercard on the eBay Mastercard, so their ire was unlikely to be sent in that direction. I’m not sure why Visa got off easy on this one, but they haven’t always been so lucky.
Past retailer credit card prohibitions
In 2019, Kroger banned Visa cards from many of its stores under similar circumstances (only to quietly rescind the ban a few months later). Kroger also has a co-branded credit card deal with Mastercard. Those tie-ups usually involve various forms of revenue sharing and lower processing fees when the retailer’s own card is used at its stores.
Additionally, Amazon threatened to stop accepting Visa cards in the United Kingdom a couple of years ago, again citing high processing fees. The companies reached a last-minute agreement to avert the shutdown. Interestingly, Amazon also had a UK-based credit card partnership with Mastercard at the time.
Oddly, I can’t think of a retailer ever banning Mastercard, but that’s probably just a coincidence. Visa, Mastercard, American Express and Discover are all major, reputable companies that charge essentially the same processing fees. The main difference is that American Express and Discover are both card networks and lenders, whereas Visa and Mastercard do not extend credit. Instead, they process credit and debit card transactions on behalf of banks (also known as card issuers): Bank of America, Chase, Citibank, Wells Fargo and so forth.
Mr. Durbin goes to Washington
Fighting interchange fees has been a central quest for U.S. Senator Dick Durbin during his decades in our nation’s capital. Back in 2010, he tacked the eponymous Durbin Amendment onto the landmark Dodd-Frank Act, which capped debit card interchange fees at 21 cents plus 0.05 percent of each transaction price, with an additional 1 cent per transaction for fraud prevention.
While Durbin and retailers hailed the cost-saving move, in the end, it was retailers who profited. The Federal Reserve Bank of Richmond found that a mere 1 percent of stores lowered prices after the Durbin Amendment took effect. Unintended consequences for consumers included reduced access to free checking accounts, fewer debit card rewards and higher ATM and overdraft fees.
For the past couple of years, Durbin and several colleagues have been trying to advance the Credit Card Competition Act. Unlike the prior debit card legislation, this wouldn’t explicitly cap credit card interchange fees. Instead, it would require that at least two card networks be enabled on each transaction and that merchants could choose which one to use (and the two networks can’t be both Visa and Mastercard, since Durbin is fond of calling them a duopoly that centrally fixes prices).
The major card networks are remarkably similar
While independent sources such as the Nilson Report verify that Visa and Mastercard combine for greater than 80 percent market share, the credit card market is still very competitive. American Express and Discover are worthy competitors, and Discover will actually become the largest U.S. credit card issuer if its merger with Capital One is approved by regulators. Also, if Amex is such a small potato, why does eBay care so much about its processing fees?
The truth is, all four major card networks charge approximately the same fees and are accepted in roughly equally high numbers throughout the country. And while merchants and their allies love to hate interchange fees, those fees haven’t changed much in recent years — at least on a percentage basis. They have, however, attracted outsized attention as inflation has led to higher prices and cash usage continues to dwindle.
Retailers are missing the mark
For these reasons, all of this smacks of cutting off a retailer’s nose to spite its face. Consumers spend an average of $95 per transaction when they pay with a credit card, the San Francisco Fed reports, compared with just $39 per cash transaction. Cash usage fell from 31 percent of payments in 2016 to just 18 percent at last check in 2022.
The Small Business Payments Alliance adds that the average transaction size increases by 10 to 15 percent once a business begins accepting credit cards.
Retailers would obviously love to pay lower card processing fees, but isn’t there a cost to that? If consumers end up spending less and/or taking their business elsewhere? Consumers, by and large, don’t like using cash all that much. And there are hidden costs to cash acceptance as well (including time spent schlepping to and from the bank, armored car fees, theft, etc.).
The Credit Card Competition Act
The Merchants Payments Coalition brings the discussion back to the Credit Card Competition Act: “Amex is just a symptom of the underlying problem,” says Doug Kantor, a member of the Merchants Payments Coalition’s Executive Committee and the general counsel for the National Association of Convenience Stores.
“Visa and Mastercard each centrally price-fix high swipe fees that are uniformly charged by all banks that issue cards under their brands rather than letting the banks compete for merchants’ business. That cartel pricing by the nation’s two largest card networks sets a baseline of high swipe fees. The solution is to pass the Credit Card Competition Act to bring competition to swipe fees and fix this broken market for all card brands.”
Unfortunately, the Durbin Amendment showed us that lower card processing fees lead to reduced rewards, since interchange fees are the dominant source of rewards program funding. Lower prices aren’t likely to ensue, either. But we might add diminished data security to the list, since passage could incentivize merchants to choose cheaper, lower-quality card networks that aren’t ready for prime time. The Credit Card Competition Act sounds friendly, but I fear it’s likely to be a wolf in sheep’s clothing.
The bottom line
The current system is best for consumers. Credit cards offer much better rewards programs and buyer protections than any other payment method. Paying in full avoids the one notable drawback (high interest rates). I don’t begrudge retailers’ ability to make a profit, but accepting credit cards is a necessary part of doing business in 2024. We’re not going back to a cash-first economy.
Have a question about credit cards? E-mail me at [email protected] and I’d be happy to help.
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