Is Charging Extra When Using a Credit Card Legal?

The use of credit cards has become an integral part of modern commerce, yet the practice of charging merchants additional fees for processing credit card transactions has been the subject of significant legal controversy.

The Swipe Fee Controversy and the Swipe Fee Litigation

The swipe fee controversy has raged for nearly two decades. Visa and MasterCard, two of the world's largest payment-card networks, have been widely criticized for the fees they charge merchants for processing credit card transactions, known as "swipe fees." These fees have been the focal point of a multi-billion-dollar legal battle known as the swipe fee litigation.

The Most Recent Proposed Settlement

In a recent development, Visa and MasterCard reached a proposed settlement of the swipe fee litigation that would have reduced swipe fees by at least 4 basis points for three years and capped fees at 2023 levels for five years. Additionally, merchants would have been given more discretion to steer customers to cheaper payment options. Despite these concessions, a federal judge refused to approve the settlement, leaving the matter unresolved.

Understanding Swipe Fees

Every time a consumer uses a debit card or credit card to pay for a purchase, the merchant is charged an "interchange fee," or swipe fee. This fee is set by Visa and MasterCard, who have a dominant market share and lack competition. This practice eliminates price competition among banks and results in merchants paying high swipe fees, averaging 2.24 percent, which can go up to 4 percent. Retailers and consumers pay these fees, which are estimated to total $170 billion annually.

The Honor All Cards Rule

Visa and MasterCard also impose the "honor all cards" rule on merchants, requiring them to accept all Visa and MasterCard credit cards without regard to the varying interchange fees. This rule further restricts merchants from encouraging customers to use other payment methods or offering lower prices for alternative payment methods. The emergence of digital payment methods, such as Google Pay and Apple Pay, has not changed this dynamic, as Visa and MasterCard have extended their "honor all cards" rule to digital wallets.

The Verdict: Courts and Legislative Actions

In 2005, a class action antitrust lawsuit was filed against Visa and MasterCard by 12 million merchants alleging that they had engaged in price fixing and charged excessive swipe fees. The litigation has been ongoing for 19 years and involves multiple settlements and appeals. In 2023, a proposed 30 billion dollar settlement was denied by a federal judge. Recent legislative proposals, like the Credit Card Competition Act of 2023, aim to introduce competition by requiring banks to include a second network on credit cards, increasing competition and potentially saving business owners and consumers billions of dollars annually.

Future of Payments: Technological Innovations

The swipe fee litigation has also spurred the emergence of alternative payment methods. Open banking, which allows third-party providers access to bank accounts, is gaining traction in the EU and Asia and may alter the competitive landscape in the United States. Additionally, electronic payment systems like Venmo and blockchain technology, backed by innovations in cryptocurrency, offer faster, more secure, and less expensive payment solutions, bypassing the need for swipe fees.