Is Congress Fighting the Wrong Battle?

Credit card processing fees have been a longstanding pain point for businesses, particularly small and medium-sized enterprises (SMBs) across the U.S. These fees represent a complex and opaque system riddled with challenges such as hidden costs, predatory billing practices, and restrictive hardware and software solutions. These issues collectively contribute to the ever-escalating cost of accepting credit card payments, making it increasingly difficult for businesses to maintain profitability.

Recently, congressional hearings have spotlighted interchange fees—the charges paid by merchants to issuing banks whenever a credit card is used. While these efforts have elevated public awareness of the issue and shown a commendable intent to drive change, the focus on interchange alone feels misplaced. Congress, in my view, is barking up the wrong tree. Interchange fees, while frustrating, are just one piece of a much larger problem. The additional costs imposed by payment processors and other intermediaries often exceed interchange fees, making them a far bigger driver of inflated payment processing costs.

Rather than waging war on interchange for a marginal reduction of a few basis points, which will likely be counteracted by increases elsewhere, we need to shift our focus to the true cost drivers in the value chain. The root issue lies in the predatory and anti-competitive practices of payment processors, hardware providers, and software companies that together create a system designed to maximize profits at the expense of businesses. This article aims to demystify interchange fees, uncover the processors’ role in inflating costs, and explain why current legislative efforts might inadvertently harm the very businesses they seek to protect. Finally, I’ll propose real, actionable solutions to address these systemic issues and foster a more equitable payment ecosystem for businesses and consumers alike.

What Are Interchange Fees, and Why Do They Matter?

Interchange fees, often called “swipe fees,” are the charges merchants pay to the banks that issue credit cards. These fees are established by credit card networks such as Visa and MasterCard, and their structure is anything but straightforward. Rates vary based on a range of factors, including the type of card (e.g., rewards card, corporate card) and the nature of the transaction (e.g., in-person, online, or keyed-in).

Interchange fees are far from a one-size-fits-all model. They can range anywhere from 0.05% to nearly 3% of the transaction value, with additional per-transaction fees, assessments, and dues layered on top. The fee structure is a labyrinth of 26 pages of complex variables, encompassing card types, transaction volumes, security protocols, and countless other details. Even forensic accountants struggle to decipher these fees, let alone the average business owner or their accounting team.

The financial burden is immense. In 2023, U.S. merchants paid over $126 billion in interchange fees, which constituted nearly 70% of the $160 billion total cost of credit card processing. For small and medium-sized enterprises (SMEs), these fees are particularly crippling, as they often lack the negotiating power that large retailers leverage to secure more favorable terms.

To put this into perspective, Notre Dame law professor Roger Alford pointed out that “last year, the average American spent $1,100 in swipe fees—more than they spent on pets, coffee, or alcohol.” This staggering figure underscores how interchange fees indirectly affect everyone, from the merchants who pay them to the consumers who bear the costs in higher prices.

The Original Purpose of Interchange Fees

Interchange fees were designed to compensate issuing banks for the risks they assume when extending credit to cardholders. They also fund cardholder perks, such as cashback rewards, travel points, and other incentives that make credit cards attractive to consumers. On the surface, this system appears balanced: banks take on risk and provide value to consumers, while merchants gain the ability to accept credit cards as payment.

However, this theory falls apart under scrutiny when viewed in the broader context of payment processing. Interchange fees are just one part of the cost equation, and while they remain a focal point in legislative debates, the reality is far more nuanced. The hidden layers of costs imposed by payment processors and intermediaries—from markups to bundling practices—represent an equally, if not more, significant burden for merchants.

For small businesses, these fees don’t merely represent a cost of doing business; they are a financial strain that often results in narrower profit margins, higher consumer prices, or both. Without addressing the broader inefficiencies and predatory practices in the payment ecosystem, reducing interchange fees alone will likely achieve little more than symbolic victories while leaving the real issues untouched.

Beyond Interchange Fees

When it comes to credit card processing costs, interchange fees often steal the spotlight in legislative debates and industry discussions. While these fees are high, complex, and undeniably frustrating for merchants, they are only one piece of a much larger puzzle. The real financial strain for merchants comes from the layers of added costs imposed by payment processors and a chain of intermediaries, many of which operate in the shadows of transparency.

While interchange fees are standardized and publicly disclosed by card networks like Visa and MasterCard, the same cannot be said for the pricing schemes employed by payment processors and their network of agents, resellers, and technology partners. This lack of clarity, paired with predatory contractual practices, ensures that merchants pay far more than just interchange—and they often have no idea where their money is going.

The Chain That Inflates Merchant Fees

At the heart of the problem is the chain of entities involved in processing a single transaction. This chain includes acquirers, independent sales organizations (ISOs), agents, resellers, payment facilitators (PayFacs), payment service providers (PSPs), value-added resellers (VARs), software companies, and point-of-sale (POS) providers to name a few. Each layer introduces new costs in the form of:

• Percentage-based markups: Added percentages tacked on top of interchange.
• Per-transaction fees: Incremental costs for each swipe or tap.
• Monthly fees: Service, maintenance, or compliance fees that are often exorbitant.
• Surcharges: Additional charges disguised as technology or security enhancements.

While these layers do offer necessary services—such as ensuring transaction security, regulatory compliance, and a seamless customer experience—they come at a steep price. Moreover, the bundling of these costs into non-itemized invoices makes it nearly impossible for merchants to understand what they’re paying for or identify areas where they could save.

For example, software companies and POS providers frequently embed their services with exclusive payment processing agreements, forcing merchants to use a specific processor and eliminating the ability to negotiate better terms. This lack of choice and competition drives costs even higher.

Impact of Fees Above Interchange

Let’s break down how these layers of fees can inflate costs. Suppose a merchant starts with a “base rate” of 1.75% for interchange fees. By the time processors and other entities add their markups, the total cost can balloon to over 4%. Here’s a sample breakdown:

• Interchange Fee: 1.75% (determined by card networks)
• Processor Markup: 0.5%
• Technology Fee: 0.2% + $0.10 per transaction
• Security/Compliance Fee: $0.10 per transaction
• Per-Transaction Fee: $0.15
• Monthly Service Fees: $50–$100

For a business processing thousands of transactions per month, these additional costs can represent hundreds or even thousands of dollars in expenses.

Worse yet, because these fees are bundled together, merchants often receive vague, non-itemized statements that obscure what they are actually paying for. Without a detailed breakdown, merchants can’t distinguish between legitimate fees and inflated markups—or verify if the fees match the rates they were initially promised.

The Hidden Costs of Contracts and Cancellations

On top of inflated fees, payment processors frequently lock merchants into contracts designed to stifle competition and prevent switching. These contracts often include:

1. Exclusive POS and Software Agreements: Many POS systems and operational software providers embed exclusive processing agreements, forcing merchants to use a single processor. These exclusivities prevent merchants from shopping around for better rates or services and enable processors to charge exorbitant fees without fear of losing business.
2. Liquidated Damages Clauses: Some contracts impose severe penalties for early termination, such as requiring merchants to pay a year’s worth of fees—or more. These clauses effectively hold merchants hostage, making it financially unfeasible to switch providers, even when better options are available.
3. Payment & Customer Data Hostage: Merchants often lose access to their payment data and customer payment tokens if they attempt to switch processors. Without this data, transitioning to a new processor becomes a logistical nightmare, adding significant operational costs and risks.
4. Dynamic Pricing Changes: Many processor agreements allow for unilateral pricing changes with minimal notice. This means merchants may sign a contract under favorable terms, only to find their rates arbitrarily increased a few months later.

The Flawed Focus of Legislative Efforts

Recent legislative efforts have aimed to cap or reduce interchange fees, with the argument that doing so will lower costs for merchants and, ultimately, consumers. While this sounds good in theory, it fails to address the complexities of the payment ecosystem.

Savings Won’t Reach Merchants

Even if Congress succeeds in reducing interchange fees, there’s little assurance that the savings will benefit merchants. In fact, in study in Europe only about 70% of the cost reductions made it to consumers. Payment processors, particularly embedded payment solutions and PayFacs like PayPal, Stripe, and Square, are not directly regulated under interchange-focused legislation. This provides them with an easy workaround: absorbing the difference rather than passing savings down the chain. “Companies like PayPal, Stripe and Square offer bundled pricing, and give no visibility to interchange”

For instance, processors can argue that new costs—ranging from compliance to fraud prevention—necessitate maintaining current fee levels or even increasing them. This is already evident in the rise of embedded finance, a burgeoning sector designed to integrate payment processing into software platforms. While this offers frictionless payment solutions, it shelters processor margins by making fees less transparent. Using buzzwords like “security,” “fraud prevention,” and “regulatory compliance,” these companies justify higher costs and complicate the fee structure further. In practice, this leaves merchants paying as much or more than before, regardless of interchange reductions.

Waging war on rewards

Interchange fees are the primary funding source for credit card perks, such as cashback rewards, airline miles, and other incentives that consumers have come to expect. Legislating lower interchange rates would almost certainly lead banks to scale back these benefits, much like the outcome seen in Europe.

For example, in the EU, interchange fees are capped at 0.2% for debit cards and 0.3% for credit cards, drastically lower than the average 2% or more seen in the United States. While this regulation aimed to reduce merchant costs, it also eliminated many rewards programs. Influencers like The Points Guy and Off the Beaten Points frequently highlight the lack of credit card rewards in Europe and the reliance on cash. This has made cards less attractive to consumers and has limited the accessibility of credit to those who could responsibly benefit from perks like cashback.

These structural differences are reflected in consumer behavior: 83% of Americans use credit cards compared to just 40% of Europeans. Furthermore, it’s not uncommon to encounter European businesses that do not accept cards at all, often citing costs as a barrier. While this could encourage financial responsibility, it also reveals how such regulations can inadvertently hinder convenience and innovation in payment systems.

In the U.S., cashback rewards can offset costs for consumers, particularly when merchants pass processing fees on to their customers. Without these rewards, consumers are left bearing higher costs without compensation—a scenario that would disproportionately hurt middle- and lower-income populations.

The Rise of Consumer Surcharges

One of the most alarming trends in the payment processing landscape is the normalization of surcharges passed directly to consumers. Credit card processors have marketed this as a “zero-cost” solution for merchants, encouraging businesses to add flat fees of 3% or more to transactions. However, the average interchange fee is closer to 2%, meaning these surcharges often exceed the actual cost of processing.

For example, consider PayFacs like Square, which charge 3.5% + 15¢ per transaction. This flat fee incorporates interchange, processor markups, and other costs. For a typical debit card transaction at a convenience store—a category heavily represented in hearings—this can lead to effective rates far exceeding interchange fees.

Take the case of a $7.80 transaction (the 2023 average for convenience stores):

• Interchange Rate for Debit: 0.25% = $0.02
• Square’s Flat Fee: 3.5% + 15¢ = $0.42
• Net Effective Rate: 5.42%

Even if interchange fees for debit transactions were eliminated entirely, saving $0.02, the merchant would still face exorbitant costs. This illustrates how reducing interchange fails to address the real drivers of merchant expenses.

The most troubling aspect of this trend is its inflationary impact on consumer costs. By passing inflated surcharges directly to customers, processors are essentially shifting the burden of high fees downstream, compounding the problem rather than solving it. As highlighted during the hearings, this practice disproportionately affects lower-income consumers, who are more likely to use debit cards with lower interchange rates, making the additional surcharges even more regressive.

A $5.5 Billion Lesson

The $5.5 billion class action settlement against Visa and Mastercard stands as a stark example of the uphill battle merchants face in challenging interchange fees. This case, filed on behalf of millions of merchants, spanned nearly two decades, alleging that Visa and Mastercard conspired to set artificially high interchange fees and established anti-competitive practices that left merchants with no alternatives. While the settlement represented a significant financial victory on paper, the reality paints a much grimmer picture for those hoping for systemic reform.

Winning the Battle, Losing the War

The lawsuit culminated in 2018, with a $5.5 billion settlement—the largest antitrust payout in U.S. history. Yet, the tangible benefits to merchants were marginal at best. The settlement effectively reduced interchange rates by a mere 4 basis points (0.04%), a drop in the ocean compared to the actual costs merchants face. To put it bluntly, two decades of legal wrangling resulted in savings that were imperceptible to most small and medium-sized businesses.

Adding insult to injury, Visa and Mastercard quickly countered the settlement’s financial impact by raising fees elsewhere. Shortly after the agreement, both companies implemented adjustments to their fee structures, effectively offsetting any reductions won in the courtroom. This maneuver underscores the industry’s power dynamics, where even legal victories fail to create lasting change for merchants.

The Commitment That Wasn’t

During a recent hearing, it was evident that Visa and Mastercard’s dominance has allowed them to dictate terms to both merchants and consumers alike. Despite public commitments to uphold interchange pricing standards post-settlement, these adjustments reveal a different story. Comments from the hearing emphasize how these fee increases undermine any progress:

“Visa, even after just being sued in September (2024), by the Department of Justice, has scheduled an increase in their fees for January (2025) and it will be over $100 Million that consumers will have to foot the bill for.”  – Doug Cantor

The True Costs of a Broken System

The current focus on interchange fees diverts attention from the deeper structural issues within the credit card processing industry. Small and medium-sized businesses are disproportionately affected, paying higher effective rates due to their lack of bargaining power. These businesses often face a labyrinth of complicated interchange structures and markups that are nearly impossible to decipher, even with forensic accounting expertise. Processing statements are riddled with misleading labels, and merchants are frequently locked into contracts with predatory terms, including liquidated damages for early cancellation. Even worse, merchants often rely on POS hardware and operational software that are locked into exclusivity agreements with a single processor, eliminating free-market choice and allowing processors to exploit pricing further. The system is so opaque and restrictive that merchants are often left powerless, unable to identify or negotiate fair rates. It’s important to note that many of these practices are entirely independent of Visa and MasterCard, who set the interchange rates, leaving merchants battling against processors and their monopolistic tactics.

Lack of Transparency

Transparency is a cornerstone of fairness in any industry, yet it’s glaringly absent in credit card processing. While interchange fees set by Visa and MasterCard are publicly available, processor fees remain shrouded in mystery. These fees are buried under layers of complex pricing structures, making it virtually impossible for merchants to discern the actual cost of processing a transaction. As a result, merchants have no way to verify if they are being overcharged or if their processor is acting in good faith. This lack of transparency not only undermines trust but also makes it harder for businesses to budget accurately for their operational expenses.

Bundling and Markups

The practice of bundling interchange fees with processor markups further obscures the true cost of credit card transactions. Processors combine the fixed interchange rates with their own variable fees into a single, seemingly comprehensive rate. While this might appear convenient, it actually inflates costs significantly and leaves merchants with no way to separate the two components. For example, a merchant might think they are paying a competitive rate, only to discover—if they dig deep enough—that the processor’s markups account for a disproportionate share of their fees. This erosion of clarity not only leads to higher costs but also fosters a pervasive distrust between merchants and processors.

Anti-Competitive Practices

Anti-competitive practices in the industry exacerbate the situation, creating an environment where merchants have little to no leverage. Embedded finance agreements are a particularly egregious example. These agreements tie POS systems, operational software, and e-commerce platforms to specific processors, effectively locking merchants into long-term relationships with little room to negotiate or switch providers. These exclusivity agreements prevent free-market competition, enabling processors to charge exorbitant rates without fear of losing customers. Merchants who try to leave often face steep penalties or are unable to switch because their existing systems are incompatible with other processors. This stranglehold not only stifles competition but also undermines the very principles of a free-market economy.

The Misguided Focus on Interchange

Legislative efforts to regulate interchange fees are well-intentioned but fundamentally misguided. While interchange fees are a visible target, they represent only a fraction of the fees merchants pay. The true cost drivers—processor fees, markups, and ancillary charges—remain unregulated and unchecked. Even if interchange fees were reduced, there’s little guarantee that these savings would ever reach the merchants. Processors are likely to absorb any reductions into their own profit margins, leaving merchants in the same position—or worse.

Moreover, focusing on interchange fees risks destabilizing the entire credit card ecosystem. Interchange fees fund critical cardholder benefits such as rewards programs, fraud protection, and interest-free grace periods. Reducing these fees could lead to higher costs for consumers or diminished cardholder perks, creating a ripple effect that ultimately harms the economy.

Real Fixes to a Big Problem

To create a fairer, more transparent, and competitive payment ecosystem, we need to tackle the root causes of inefficiency and abuse in the credit card processing industry across the entire value chain. These issues go beyond Visa and MasterCard interchange fees and require a systemic overhaul that focuses on transparency, simplification, and the elimination of anti-competitive practices. Here are actionable solutions to address these challenges:

Mandatory Transparency

• Clear Statements and Reporting
  Today’s merchant statements are notoriously difficult to decipher. Processors use misleading labels and complex pricing structures to hide their markups and fees. Requiring processors to present itemized statements with a clear breakdown of costs—including interchange rates, processor fees, and any additional markups—would empower merchants to understand what they are paying for. Independent third-party audits should also be encouraged to verify the accuracy of these statements, ensuring merchants aren’t being overcharged. Additionally, processors should provide detailed reports that show how transactions are routed and categorized, giving merchants the ability to cross-reference costs with known interchange rates.
• Card Identification
  Merchants often have no way of knowing the cost of processing a particular credit card until they receive their statement—by then, it’s too late. Cards should have visible indicators, either physically or digitally, to show their interchange category and cost structure. For example, a card with high rewards (and high interchange fees) should be clearly marked, allowing merchants to make real-time decisions about whether to accept it. This measure would also introduce accountability by enabling merchants to verify that processors are accurately categorizing transactions.

Simplification of Interchange

• Reduce Complexity
  Interchange fees currently depend on numerous factors, including card type, transaction size, security features, and the merchant’s business type. These complexities create confusion and make it difficult for merchants to understand their costs. Simplifying the interchange structure into fewer categories with standardized rates would increase transparency and reduce administrative burdens for businesses.
• Universal Rate Standards
  Establishing universal rate categories for common transaction types could make it easier for merchants to predict costs and reduce disputes with processors. Such reforms would eliminate unnecessary layers of complexity and ensure fairer pricing across the board.

Breaking Anti-Competitive Practices

• Fair Contracts
  Regulators should prohibit predatory contract clauses, including excessive early termination fees and liquidated damages. Merchants should not face financial ruin simply for seeking better terms or leaving a processor. Furthermore, processors should be required to provide formal notice and obtain explicit merchant approval for pricing changes or new service additions, ending the exploitative practice of unilateral or automatic opt-ins.
• Eliminate Hardware and Software Exclusivity
  Point-of-sale (POS) systems, operational software, and hardware should be interoperable with multiple processors, provided they meet security and compliance guidelines. Just as the Federal Communications Commission (FCC) requires cell phones to be unlocked, payment hardware should be free from exclusivity agreements. This would restore competition, allowing merchants to switch processors without being locked into a single ecosystem.
• Data Portability
  Payment tokens, customer information, and transaction data stored within software systems should be fully portable. Merchants should retain ownership of their data and have the right to migrate it to another processor or platform. This would prevent processors from holding data hostage to retain customers against their will.
• Cap Processor Markups
  The markups added by processors above interchange fees should be capped, similar to price-gouging laws. With markups sometimes exceeding 3% on top of interchange, regulation is necessary to ensure fair pricing. Processors would still be able to compete, but within a framework that prevents exploitative practices.

Stop Surcharging and Cash Discounting Exploits

• Surcharging Practices
  The growing trend of passing processing fees directly to consumers as a “zero-cost” solution for merchants is hyperinflating costs. In many cases, processors charge 3% or more to consumers, lumping low-cost debit cards and low-reward credit cards into a high-cost bucket. This practice drives inflation and disproportionately affects consumers. Additionally, surcharging results in processors charging fees on the additional surcharge itself, compounding the problem. Regulations should outright ban these deceptive practices.
• Cash Discounting Misrepresentation
  Cash discounting, where merchants offer discounts for cash payments to avoid surcharging laws, is another band-aid solution that fails to address the underlying issues. Accepting cash comes with its own hidden costs, including handling, security, and loss risks, which often exceed the cost of credit card processing. Merchants need better alternatives rather than being forced into misleading or counterproductive practices. Learn more about the hidden costs of cash vs. credit here.

Educating Businesses and Consumers

Awareness is the most critical yet overlooked component in addressing the challenges of the credit card processing industry. Both businesses and consumers lack a clear understanding of how fees are structured and how these costs ripple through the economy. Bridging this knowledge gap is essential to creating meaningful change and fostering accountability among processors.

Educating Businesses

Businesses, particularly small and medium-sized enterprises (SMBs), need access to straightforward resources that demystify the complexities of credit card processing. Too often, merchants are handed statements they cannot decipher, riddled with hidden fees, vague labels, and bundled costs. Education should focus on:

• Breaking Down Statements: Merchants should be trained to identify specific cost components, such as interchange, processor markups, and additional fees. Clear guidelines on evaluating contracts before signing are crucial to avoiding predatory terms.
• Understanding Contracts: Processors often use legal jargon and predatory clauses to trap merchants. Providing businesses with tools to analyze and negotiate contracts, such as cost breakdown templates or third-party reviews, can empower them to make informed decisions.
• Leveraging Market Knowledge: Resources like VeriFee’s cost-analysis tools can help businesses benchmark their fees against industry standards, giving them leverage to negotiate better rates or switch to more transparent processors.

Educating Consumers

Consumers also play a role in reforming the payment ecosystem. When they understand the implications of surcharges and fees, they can make more informed choices about payment methods:

• Transparency on Costs: Retailers and processors should clearly communicate any surcharges or added costs to consumers. This will allow consumers to weigh the benefits of using a credit card versus other payment methods.
• Informed Rewards Usage: Consumers should understand the true value of rewards programs. While cashback is straightforward, travel points and other perks often come with hidden trade-offs, such as higher interest rates or annual fees.

Public campaigns that educate consumers on how payment processing fees impact prices and overall inflation could also drive demand for more transparency from businesses and processors alike.

My 2 Cents: Building a Better Ecosystem

The credit card processing industry is a mess, and small and medium-sized businesses (SMBs)—the backbone of our economy—are paying the price. This isn’t just about a few bad actors; it’s a systemic issue with shady billing practices, confusing fee structures, and anti-competitive contracts that lock merchants into terrible deals. Meanwhile, consumers are left footing the bill as merchants and processors fight to continue to pass the buck, creating ripple effects in inflation across the economy. This broken system needs a serious overhaul, not a patch job.

At the core of the solution is transparency. Everyone who touches a transaction must stop hiding behind vague, bundled fees and start giving merchants clear, itemized statements that show exactly what they’re paying for. Simplifying interchange fees is another must. The current maze of rates and tiers is a gift to processors who exploit the confusion to pad their margins. On top of that, predatory practices like locking merchants into exclusive agreements or slapping them with sky-high cancellation fees need to go. And let’s not forget the surcharges: the “zero-cost” solutions for merchants are nothing more than a cash grab, inflating costs for consumers and eroding trust.

Fixing this won’t happen overnight, but it’s not impossible. A fair system benefits everyone—merchants, consumers, and even processors who compete on value rather than exploitation. It’s why I started VeriFee, and the work we do every day to expose hidden costs and fight for real change. It’s time to stop letting processors call the shots and start putting fairness and transparency at the center of the credit card ecosystem.