Banks keep piling credit card fees on retailers. Congress must act.

Interchange fees that banks charge to process card transactions have long been a significant and growing burden, driving up costs for merchants and, ultimately, prices for consumers.

But the coronavirus pandemic has only exacerbated the problem and widened cracks in the broken payments industry as spending has moved online, where virtually all purchases are paid for by card. Online, merchants face even higher processing fees than what is charged for in-store transactions, and card industry obstacles make it difficult for merchants to exercise their legal right to route transactions to the lowest-cost networks.

Merchants have long asked to bring these skyrocketing fees under control, but the banks and card networks that set the fees insisted they were simply a cost of doing business. And since the fees aren’t disclosed on receipts or monthly bills, most consumers are not aware they exist. Therefore, they are unlikely to complain about the hundreds of dollars a year the fees can cost the average family.

However, retail groups have successfully advocated to regulators around the world to cap the fees in some countries, mandate competition in others and reach voluntary agreements elsewhere.

Fees once 2% or more are now as little as 0.2% for debit and 0.3% for credit in Europe, for example. And some countries have no interchange fee at all for debit. This past summer, the U.K. Supreme Court declared interchange anticompetitive, and British merchants are seeking refunds of fees back to 2013 or earlier.

These reforms have been welcome, and a new report from CMSPI shows such fee curtailing has reduced interchange collections worldwide by an estimated $82 billion a year. Unfortunately, that doesn’t mean retailers or their customers — as regulators’ intended beneficiaries — have seen a net savings anywhere near that large.

That’s because interchange is just one component of the merchant discount rate, and other components remain unregulated.

Instead, CMSPI’s Global Review of Interchange Regulation report showed increased network fees have eroded about 40% of annual savings for merchants, money that could have significantly helped some merchants through the quarantine period. And card issuers have recovered about 24% of interchange savings by reducing card rewards or increasing checking account fees.

There have been some efforts in the past decade to curtail interchange fees, like the Durbin Amendment as part of the Dodd-Frank Act, which capped interchange on debit cards from major banks at 21 cents per transaction. Retailers have saved an estimated $9.4 billion annually since the Durbin Amendment took effect.

Though largely successful, the Durbin Amendment has limited scope. It exempted cards from banks with assets of less than $10 billion, for example, which cost merchants around 50 cents per transaction.

Glaringly, it exempted credit card interchange, which makes up roughly 80% of all U.S. card processing fees, and totaled an $86 billion cost to merchants in 2018, according to the Nilson Report.

The CMSPI report estimates U.S. network fees charged each year are now about $4.2 billion higher than before Durbin took effect in 2011, wiping out almost half of interchange savings. And issuers have raised checking account fees or decreased card rewards by about $2.3 billion a year.

Particularly alarming is what has happened with acquirers, who collect interchange fees and network fees from merchants in addition to charging their own fee. While most large retailers pay card fees on an “interchange plus plus” model that breaks out the three fees, many small retailers pay so-called bundled fees that lump all three together, making changes difficult to spot.

The problem goes beyond bundled fees for small merchants.

There are opaque charging structures, an overall complexity of card fees and confusing invoices. All of this makes reconciliation impossible and overcharges rife, even for large merchants under an “interchange plus plus” plan. In fact, a study done for the European Commission said acquirers “absorbed” 45% of the savings rather than passing it along to merchants when interchange was capped in Europe.

Card fees would be even higher without Durbin, but the savings amount to less than one-eighth of global savings from interchange reform, even though Nilson says the United States represents one-quarter of global card spending.

By limiting interchange fees and giving retailers the right to route transactions to the network of their choice, the Durbin Amendment has been highly successful in creating competition and bringing down the cost of face-to-face debit transactions. But ignoring credit cards, network fees and acquirer fees has resulted in a game of Whack-a-Mole: knocking down one fee at a time only results in others popping up.

In the 10 years since Durbin, overall card fees have continued to climb. As the next administration and Congress set a new course for the year, they need to take another look at card fees. This time, they should take a comprehensive approach that covers not just debit cards, but credit cards. All while bringing about the transparency and robust competition badly needed in the broken payments market.

To do that, it is imperative that they consider the whole swipe fee charged to merchants rather than just interchange.

Anything less is a job half done.