Retailers and issuers are still battling over payment-card fees

IN 1966 a medical journal identified a condition it dubbed “credit-carditis”: lower-back ache, with pain radiating down the leg—caused by a back-pocket wallet stuffed with plastic. Payment cards still inflict pain of a different sort. American merchants paid more than $40 billion to process debit- and credit-card transactions in 2015. Despite a reform by the Federal Reserve in 2011 aimed at reducing these costs, revenue from these so-called “interchange fees” has more than doubled since the financial crisis. Retailers are still in revolt; banks are still resisting. That is not surprising, since they rely on the fees for a large and growing share of their income.

American consumers favour debit and credit cards over cash by more than two to one. But this convenience comes at a cost. The seller is charged a fee for every card purchase: in America, typically 0.5% to 3% of its value. These fees are set by payment-card networks, such as Visa and MasterCard and collected by card issuers, such as Wells Fargo and JPMorgan Chase. Some portion of these fees is borne by consumers, including those who pay by cash, in the form of higher prices.

Retailers have long argued that card networks use their market power to set excessively high fees. Card providers maintain that such fees are necessary to cover the cost of processing payments and combating fraud. Policymakers have struggled to settle the debate. Payment-card markets are hard to regulate. Cap fees too harshly and banks may not bother issuing cards; allow them to climb too high and merchants will stop accepting them. Either way, the consumer would be the loser.

In 2011 the Federal Reserve capped fees on most debit-card transactions at 21 cents plus 0.05% of the value of the transaction. Payment networks responded by ending discounts on low-price transactions, so fees went up for many small outlets, such as convenience stores. Meanwhile, banks raised customer fees and cut rewards. In 2014 economists at the Federal Reserve estimated that banks recouped nearly half of the lost income with higher service charges and lower card rewards.

Interchange fees have continued to grow—by over 8.5% a year between 2012 and 2015. Many banks have become increasingly reliant on these fees, which now account for 43% of card fees, according to R.K. Hammer, a bank-card advisory firm (see chart). Chase, America’s largest credit-card issuer, earns nearly 16% of its total revenue from interchange fees.

Merchants have developed strategies for avoiding card fees. Some no longer accept more expensive cards, or impose credit-card minimums. Others steer their customers to cheaper payment methods. In 2015, Kroger, a Cincinnati-based grocer, installed point-of-sale terminals that routed debit-card payments over PIN debit networks, rather than more expensive, less secure signature networks. After Visa fined it $7m for the offence, Kroger filed suit. Walmart and Home Depot have each sued Visa over similar disputes.

To offset rising costs, some merchants—from taxi-drivers to utilities—now charge customers for paying with cards. This practice, known as “surcharging”, is no longer banned by payment-card rules, but is still illegal in ten states. The Supreme Court will soon weigh in, hearing a case brought by a group of New York retailers who say the state’s ban on credit-card surcharges is unconstitutional. Whoever wins the legal battle, the plastic wars will rumble on.