Visa/Mastercard: US market slow to diversify credit card processing

America is home to some of the highest credit card processing costs in the world. These interchange — or swipe — fees average 1.8 per cent per transaction in the US, according to payments consultancy firm CMSPI. That is about six times more than in the European Union, where fees are capped at 0.3 per cent for credit card payments.

All those swipes add up. Last year, US merchants paid $126bn in processing fees on about $5.7tn worth of credit card transactions, according to Nilson. Visa and Mastercard benefit greatly because the two dominate the US card payment network. They handled nearly 80 per cent of credit card transactions in the country. Operating margins, at 57 per cent for Mastercard and 67 per cent for Visa, are among the highest in the S&P 500.

Merchants have long complained that they pay too much in fees. In response, US lawmakers will revive efforts to create more competition among credit card networks. A new bill — nearly identical to one proposed last year but which stalled — will require banks with more than $100bn in assets to allow merchants to route payment made on cards they issue on networks other than Visa or Mastercard.

Yet the two get only a small slice of these fess. Credit card banks collect the bulk of the swipe fees. They in turn use the money to fund perks for cardholders, including cash back and airline miles.

Smaller networks can offer merchants lower fees. But lower fees mean lower profits for banks. They would probably cover any revenue shortfall by raising annual card fees and rolling back rewards. Consumers will end up paying one way or the other.

Then there is the issue of network security. Routing debit transactions is different to credit card transactions. The latter are secured by the network to prevent fraud. Introducing smaller players and novel technologies could create hacking vulnerabilities. While this may explain any inertia to change networks, if Europe can manage this shift so too can the US.