Democrats’ search for culprits and profiteers amid decades-high inflation turned to the credit card industry Wednesday with a hearing on transaction fees charged to merchants.

In response to soaring inflation, Democrats have accused companies of raising prices disproportionately to increase profits amid demand and supply-chain bottlenecks. Visa Inc. and Mastercard Inc. came under fire at a Senate Judiciary Committee hearing for raising the transaction fees charged to merchants accepting their credit cards. 

Senate Judiciary Chairman and Majority Whip Richard J. Durbin, D-Ill., said the “interchange fees” face too little competitive pressure and that increases are hitting consumers and businesses when they can least afford it.

“We’re facing inflation. And the last thing the American people need is a higher swipe fee. I wish both companies had resisted the urge to make some money when they can,” he told representatives from Visa and Mastercard. The Consumer Price Index showed an 8.5 percent annual inflation rate in March, the highest annual pace since 1981, according to the Bureau of Labor Statistics.

Merchants accepting credit card payments are required to pay a fee on each transaction. Credit card companies set the fee, but the proceeds are passed on to banks issuing cards as an incentive. Merchants paid $84.2 billion in swipe fees on Visa and Mastercard transactions in 2020, according to a Nilson Report study.

Visa and Mastercard representatives at the hearing denied raising interchange fees across the board, saying they had increased fees on some transactions while lowering others.

However, witnesses representing retailers said the changes on balance had resulted in higher fees. Laura Karet, CEO of Giant Eagle Inc., a supermarket chain based in Pennsylvania, said the changes will cost the chain an additional $1.3 million a year.

Durbin said the fees are structured to avoid competitive pressures in a market already dominated by just two companies. Interchange fees are set by credit card companies, charged to merchants and paid to banks. Merchants aren’t able to negotiate with credit card companies on the swipe fees, and banks have little need to since they benefit from them, he said. 

“When Visa and Mastercard raise interchange fees, banks want to issue more cards because they make more on each swipe. And Visa and Mastercard profit when there are more swipes, because they take their own cut, called a network fee, from the merchant on each swipe,” Durbin said. “But merchants and their customers take it on the chin.”

Inflation exacerbated the impact of the fees on merchants and, by extension, consumers, Durbin said. 

Interchange fees are typically a percentage of the transaction cost, usually 1 to 3 percent. As prices go up with inflation, swipe fees do too, Durbin said, pointing to reports that Visa Chief Financial Officer Vasant Prabhu said on an earnings call that inflation had been a net positive for the company. 

“So let’s put to rest the theory that this has nothing to do with inflation,” Durbin said. 

Ed Mierzwinski, senior director of the U.S. Public Interest Research Group, agreed interchange fees had allowed financial institutions to benefit from inflation. 

“When we’re talking about percentage-based fees, when prices go up because of inflation the bank earns more money without doing anything or without making anything,” Mierzwinski said. 

Mierzwinski added that all consumers, not just credit card users, end up paying the cost of interchange fees. That creates a dynamic where poor people paying with cash subsidize the rewards funded through the fees for wealthy credit card holders. 

“They forbid the merchant from doing anything to lower the costs in his store. He’s got no choice, but to bake the price of these overpriced swipe fees into the costs that everybody pays, including the cash customers, who might be low-income,” he said. “The bulk of the interchange goes to pay for affluent consumer rewards cards. It does not go to the other important issues of security. Those are small items compared to rewards.”

Debit fee template

A provision, written by Durbin, in the 2010 financial overhaul law that limited debit card transaction fees could be a template for reining in the practice in the credit card industry, Mierzwinski said. He also endorsed requiring companies to disclose to customers how much they’ve paid in swipe fees each month. 

Republican Sen. Charles E. Grassley of Iowa, the committee’s ranking member, criticized linking the fees to inflation. 

“It seems like every industry, including merchants and banks, have been blamed by the president for inflation,” he said. “That blame game doesn’t work as President Biden spends trillions of dollars of money as fast as could be spent on a liberal wishlist, even when economists were warning about inflation.”

Still, Grassley said small businesses in his state had complained about the fees even as credit cards have the potential to benefit consumers. 

“There is a balancing act here that we need to acknowledge and that any future action should be carefully considered for possible impact,” he said, adding that the committee’s response will depend on whether the fees reflect a competitive market.

“We’re looking at competition and whether interchange fees are set above rates that would be found in the competitive market. Two witnesses here today represent Visa [and] MasterCard, the two largest payment networks in the United States with over 80 percent share of the credit card market,” Grassley said. “I look forward to hearing whether these rates reflect market forces.”

Linda Kirkpatrick, North America president of Mastercard, and Bill Sheedy, senior adviser to the CEO at Visa, said they face more competition than ever amid innovation in the payment industry, including peer-to-peer payment apps, cryptocurrencies and buy-now-pay-later services. 

The interchange fees create an incentive for banks to offer the cards, and by extension credit to customers, they said.  

“The definition of market power is really an institution that can raise prices while also reducing consumption,” Kirkpatrick said.”Mastercard’s motivations are the opposite. We are motivated to drive more transactions through our network. That is how we generate revenue. That is how we win. So by virtue of that, we are incentivized to create balance across all stakeholders.”

If interchange rates are too high, merchants won’t accept Mastercard cards as payment. If they’re too low, banks won’t issue the cards, she said. 

Regulation of the transaction fees face fierce opposition from the credit card industry. Visa and Mastercard spent millions last quarter on lobbyists, who in their federal disclosures listed interchange fees as an issue they tackled on behalf of the companies. 

Visa spent about $2.5 million on lobbying, of which $2.4 million went to firms that lobbied against regulation of interchange fees on the company’s behalf, according to public filings. Mastercard spent about $1.5 million in lobbying last quarter, with $1.3 million going to firms that disclosed interchange fees as an issue they worked on on behalf of the company. 

Grassley asked Giant Eagle’s Karet if she believed Mastercard and Visa were a duopoly able to extract above-market prices for their services.

“Our average store carries over 50,000 items. Every single one of which is negotiated in terms of price, how we market it, how we merchandise it,” she said. “Visa and Mastercard effectively control over 80 percent of the credit market, and they are the only vendor which we cannot negotiate with. It’s a take it or leave it proposition.”

“To me, if it walks like a duck and talks like a duck,” Karet said.