Every time you tap or swipe a credit card, the issuing bank, along with payment giants Visa or MasterCard, assesses the merchant a 2% to 3.5% fee — meaning it pays as much as $1.75 for every $50 purchase.
This hidden charge, known as a “swipe fee” or interchange rate, is never itemized on receipts at big-box stores. It covers transaction processing, fraud protection and — crucially — lucrative cash-back and travel reward points.
Businesses recoup the expense by raising prices or passing the cost to consumers as a “service fee.” That’s why nail salons, utility companies and diners are increasingly adding a 3% surcharge for paying with plastic, and discounting payments made with cash and apps such as Zelle.
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State and federal lawmakers are proposing legislation to curb these fees. They say households could save up to $1,200 a year by increasing competition among payment networks.
But economists and financial experts are sharply divided over whether curbing swipe fees will actually put money back in consumers’ pockets.
“A reduction in merchant fees does not automatically guarantee lower prices at the register,” said Ali Zane of Imax Credit Repair in California. “The actual outcome would depend on how competitive the market is and how businesses respond.”
Matt Twiford, managing director of Boston’s Pegacorn Group LLC, said many small businesses pay 2.4% to 3.5% per transaction to use third-party payment networks such as Stripe, Square, PayPal and QuickBooks. He said curbing swipe fees would give them more tools to negotiate costs closer to the 1.5% to 2% effective rates that large retail chains pay.
“Capping or reforming them could lower costs for consumers,” Mr. Twiford said.
Past efforts have yielded mixed results. A 2010 law spearheaded by Sen. Richard J. Durbin, Illinois Democrat, caps debit swipe fees at 21 to 24 cents per transaction, down from 48 cents, and requires large banks to expand debit processing networks to create more competition for Visa and MasterCard.
Federal Reserve researchers found the overall cost of new credit card fees and reduced services after the law took effect outweighed the marginal savings for most low-to-moderate-income households.
Many economists say such caps push banks to find new ways to pass along costs — and large retailers such as Target, Walmart and Amazon end up pocketing any savings.
“Reform would best be aimed at increasing competition among payment networks rather than simply having politicians determine what the ’correct’ fee should be,” said Peter Earle, head of research at the free-market American Institute for Economic Research.
Increasing competition
The Credit Card Competition Act, a bill pending in Congress, would require large banks to carry alternative payment networks on their credit cards. Unlike the 2010 debit law, it would not cap interchange fees.
President Trump and Vice President J.D. Vance endorsed the act in recent midterm campaigning, with the president pledging $1,200 in yearly household savings. Sen. Roger Marshall, Kansas Republican, is co-sponsoring the Senate version with Mr. Durbin.
“There’s no grand solution to costs,” Democratic strategist James Carville said of the bill. “But when you come up with minor things, it tells voters you’re paying attention, and they give you credit for that.”
An Illinois law banning interchange fees on the tax and tip portions of debit and credit card transactions is set to take effect in July 2027. It would cut interchange revenue by at least 10%, saving retailers and restaurants $120 million to $200 million annually.
Legal challenges have already narrowed it. In June, U.S. District Judge Virginia Kendall exempted national banks and some out-of-state banks, federal savings associations and card networks from the law.
On Sept. 22, Judge Kendall added federal credit unions, siding with the National Credit Union Administration’s argument that federal law gives it exclusive authority to set fees.
A recent report from the libertarian Competitive Enterprise Institute argues the Illinois law will hurt affordability. It cites research showing the 2010 debit cap led to fewer free checking accounts, higher service fees, reduced rewards programs and “little evidence of lower retail prices.”
“Government mandates to force down interchange fees would worsen affordability issues for Americans,” John Berlau, the institute’s finance policy director, said in an email. “For instance, issuers of credit cards that today do not have annual fees would probably institute them.”
But economist Siri Terjesen of Florida Atlantic University said the Illinois law could let businesses adjust fees based on market pricing, creating more transparency and payment options.
“Anyone who’s gotten their nails done has seen market pricing at work,” Ms. Terjesen said. “There is one price if you pay by card, and a lower price if you pay with cash or Zelle. The nail salon is basically showing you what the card actually costs, and customers can choose.”
Fiscal experts predicted the Durbin-Marshall legislation would have a better shot at reducing prices at least marginally because it requires more payment networks without capping swipe fees.
“Lawmakers will gut it so that it’s not as wide-reaching as it currently is,” said Cameron Botes, a former pro soccer player who founded the Tennessee tax advisory firm BizBud in 2020. “But something will get passed, and some of that money will start filtering back down to customers.”
Opposing views
Business lobbying groups have lined up behind the legislation, which the banking and credit industry opposes.
“Credit card swipe fees are one of the highest operating costs for small business merchants,” said Josh McLeod, director of federal government relations for the National Federation of Independent Business.
The Merchants Payments Coalition, a trade association of retail groups, notes that swipe fee revenues soared from $62.1 billion in 2010 to a record $198.25 billion last year, as more Americans used credit for most purchases.
“Affordability is big on everyone’s agenda this year, and there’s nothing Congress could do to lower prices faster than this legislation,” said Doug Kantor, a coalition committee member and general counsel for the National Association of Convenience Stores.
A spokesperson for the Electronic Payments Coalition, an association of banks, credit unions and card networks, said it’s more likely businesses would pocket the savings rather than lower prices.
“If Washington is serious about affordability, it should focus on the mega-stores setting prices at the checkout counter, not reward them with another government mandate,” the spokesperson said.
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