The politics of payment fees: Harris, Trump and the future of interchange

Angel Garcia/Bloomberg

This is the third in a series of articles on the impact of the presidential election on financial services. Here's where to read parts one and two.

Donald Trump and Kamala Harris have records and political allies that suggest tough new rules for the payments industry that will be forged amid legal battles that have gone on for years. 

The environment calls for the ability to quickly adjust to regulations or laws that do not fit easily into the standard blue/red political disposition on government policy that informs regulatory compliance strategies for other industries.

"I think the payment industry is going to have to steel itself for a challenging four years no matter who wins," said Eric Grover, a principal at Intrepid Ventures.

The primary regulatory issue the payments industry will need to address is payment fees such as interchange, or the fees charged between the consumer and merchant banks to process card payments — a cost generally borne by the merchant and passed on in some form to the consumer.

 There are at least two initiatives that the next presidential administration and Congress will consider or change that will govern how and how much payment companies can pay to process transactions. These moves have at least some bipartisan support, and both Harris and Trump have at times taken a hard stance on antitrust issues.

"Payment companies will need to make a more aggressive, affirmative public case for the value it delivers and for the freedom to price, to compete and to innovate in the market," Grover said.

Changing interchange

Card networks set interchange fees, which are a percentage of the payment amount and an additional fixed fee. These fees aren't static and are based on the merchant, business category, region or whether a payment is in-store or online.

The card networks and merchants have battled in a series of legal cases over interchange that date back at least two decades. And there are also moves in Congress and by the Federal Reserve that could tighten the rules for these fees.

The position of each potential president will depend on the fate of the legal battle, since a settlement or judge's ruling could create downward pressure on interchange fees that informs any regulatory action, said Nick Economides, a professor at the New York University Stern School of Business. 

In March, Visa, Mastercard and merchant plaintiffs reached a settlement to lower interchange fees. The card networks agreed to reduce posted fees by four basis points for at least three years, with a reduction of at least seven basis points below Dec. 31, 2023, levels for at least five years.

But a judge this spring rejected the settlement, sending the litigants back to the drawing board. Merchant trade groups such as the Merchant Payments Coalition and the National Grocers Association are opposed to the settlement, contending it would provide only temporary relief. 

Visa and Mastercard have expressed disappointment with the settlement's rejection, though the card networks are hopeful of a settlement being reached before a trial. 

"We already have an interchange bill that has been introduced more than once," Economides said. "Whether that suit goes to trial or is settled will make a big difference on how that bill moves forward." 

Election 2024

American Banker's coverage of the 2024 elections centers on the impacts that will be felt throughout the banking industry from the next presidential administration and Congress — from regulatory approaches to the economy to the advance of technology like artificial intelligence.

In Congress, Sen. Richard Durbin, D-Ill., who wrote a cap on debit card swipe fees into the Dodd-Frank Act that followed the 2008 financial crisis, has proposed expanding parts of the amendment that required competition between which card networks could process debit-card transactions to also include credit cards. 

When Durbin first floated the network competition expansion in 2022, merchant groups ran an ad campaign targeting interchange fee adjustments that the card networks set at the time. Durbin contended the hikes in some interchange fees disproportionately affected lower-income consumers. 

Durbin is the co-sponsor, along with Sen. Roger Marshall, R-Kan., of the Credit Card Competition Act, which would require credit cards issued by banks with more than $100 billion in assets to offer merchants the choice between two unaffiliated card networks — at least one of which cannot be Visa or Mastercard, a move designed to increase competition and drive down payment-processing costs.

The Credit Card Competition Act, which has been referred to the Senate's Committee on Banking, Housing and Urban Affairs, has bipartisan support as Durbin and Marshall have leaned into the Trump-era trend toward conservative populism to recruit co-sponsors, including Sens. Josh Hawley, R-Mo., Jack Reed, D-R.I., Peter Welch, D-Vt., and J.D. Vance, R-Ohio, Trump's running mate and Republican nominee for vice president.  

The banks oppose the proposed legislation, stating the bill would favor large retailers over consumers. A group of lobbyists including the American Bankers Association, the Bank Policy Institute, the Consumer Bankers Association, the Credit Union National Association, the Electric Payments Coalition, the Independent Community Bankers of America, the National Association of Federally-Insured Credit Unions and the National Bankers Association signed a letter expressing opposition to the bill. 

The Federal Reserve Board of Governors has also proposed cutting debit card interchange fees by up to 28%, contending the expense for processing debit payments has fallen since the caps were last set in 2011. Called Regulation II, the changes would be limited to banks with more than $10 billion in assets, a proposal that has drawn opposition from banking groups.

Both the Biden and Trump administrations were relatively aggressive on antitrust issues, according to Doug Kantor, a member of the Merchant Payments Coalition executive committee and general counsel at the National Association of Convenience Stores, noting the regulatory pressure on Visa's attempted acquisition of Plaid that spanned both administrations and resulted in the deal being scuttled in 2021. And President Joe Biden has pushed for greater scrutiny of bank mergers and acquisitions, a bent toward antitrust that could spell greater pressure on card fees under a Harris administration, according to Kantor.

"With the Democrats, there is a willingness to look hard at consolidation in payments," Kantor said of the concentration of power in the payments industry.

Policymakers recognize the strong public opposition to anything that undermines the modern payments system, said Tom Rosenkoetter, executive director of the American Bankers Association's Card Policy Council, noting the Supreme Court's recent decisions in the Chevron Deference and Corner Post cases that diluted the ability of federal agencies to interpret and impose regulations. "The recent Supreme Court rulings should make federal agencies think twice about making changes that go beyond Congressional intent," he said.

How much of a political divide?

The politics of payment policy, including large corporations such as banks and card networks on one side and large merchant chains and e-commerce firms on the other, creates corporate pressure to both rein in payment fees and to give the payments industry more leeway to set processing costs. 

The judge that rejected the interchange settlement was Margo Brodie, an Obama appointee, while the Biden administration has pushed against some payment and bank industry fees, referring to them as "junk fees."

"It's likely that a Harris administration would be interventionist," Grover said. "The conventional wisdom holds that a Republican administration would be hostile to price controls and government intervention in and directing markets."

 To some degree, the first Trump term fit that mold, with Attorney General Jeff Sessions ending Operation Choke Point, and other Trump cabinet officers such as Mick Mulvaney and Kathy Kraninger pressuring the Consumer Financial Protection Bureau, Grover said, adding there are some noteworthy exceptions.

"I'm not sure the policies of a Trump administration toward interchange would be different from a Harris administration," he said, adding Trump isn't opposed on principle to the government intervening in markets, noting Vance and Hawley's support for curbs on credit card fees. 

As a presidential candidate, Harris has called for curbs on corporate landlords who make large purchases of residential properties, which the vice president says leads to higher rents. Harris has also supported many of Biden's antitrust and pro-labor policies, including a ban on "price gouging" for groceries, a $6,000 child tax credit for families with newborns and a cap on prescription drug prices. 

Harris has not provided details on these proposals, though merchant groups have deflected the price-gouging proposal to calls to curb interchange fees for card payments at supermarkets.

The offices of Harris, Trump and Vance did not return requests for comment by deadline. 

In addition to the presidential race, control of Congress is also up for grabs, which could create single-party control or, more likely, split government.

 "All eyes are on the Senate," said Peter Dugas, an executive director at Capco. "The president will set the policy tone, but at the end of the day any fee regulation will be based on the outcome of the Senate races." 

If Trump wins and the Democrats control the Senate, or both houses of Congress, it would limit any deregulation that would give the card brands more leeway to set payment fees, while a Harris administration and a Democratic Congress would make it likely that the credit card competition bill will move forward. 

"That would be in line with a general 'war on fees' on the Democratic side, whether it be medical debt or predatory lending or overdraft fees," Dugas said. 

In the event of a split government, progress on the Credit Card Competition Act is likely to remain sluggish, Dugas said. 

The financial stakes

Any squeeze on interchange fees could impact bank revenue, particularly pertaining to incentive marketing, loyalty or rewards. 

Credit card interchange fees are a significant cost for retailers, averaging about 2% of purchase volume. Most of this 2% goes to the bank that issued the credit card used in the transaction, said Guanyu Zhou, a researcher at the Wharton School at the University of Pennsylvania.

"However, our research shows that interchange income isn't the primary driver of profitability for credit card lenders," Zhou said, adding that while interchange income has grown to about 7% of banks' total credit card loans in 2024, a large portion is returned to consumers through rewards. The rewards expenses amount to about 5.5% of total loans, or much higher than collection and fraud-related costs.

The high interchange fees that banks collect help fund these consumer rewards, leaving a net interchange fee of roughly 1.5%. For context, net interest income (interest minus charge-offs and expenses), which is the largest profit component for credit card lenders, is about 10%, Zhou said.

"Therefore, any regulation that caps interchange fees likely won't have a major impact on banks' credit card lending profitability," Zhou said. 

"However, since rewards are largely funded by these fees, we might see issuers reduce reward programs for consumers in response," he said. "It's the networks like Visa and Mastercard, which rely heavily on interchange fees for their revenue, that would feel the most direct impact from such policies."