How Mastercard and Visa Profited from Swipe Fees: Unpacking the System

by Vice Versa Victory LLC.

Mastercard and Visa, two of the largest payment processing networks in the world, have long profited from the intricate system of credit and debit card transactions. Central to their success is a hidden fee structure that generates billions in revenue annually: interchange fees. These fees, which merchants pay every time a customer uses a credit or debit card, have been a source of significant controversy—and the basis for the $5.5 billion settlement for overcharges spanning 15 years.

But how exactly did Mastercard and Visa profit from these fees, and how does the system work?

The Mechanics of a Credit Card Transaction

Every time a customer swipes their card at a merchant’s point of sale, the transaction involves multiple parties:

1. Cardholder: The customer making the purchase.

2. Merchant: The business selling goods or services.

3. Acquirer: The merchant’s bank that processes the transaction.

4. Issuer: The bank or financial institution that issued the card to the customer.

5. Payment Network: Mastercard or Visa, which acts as the “rail” through which the transaction travels.

   
   

Here’s how a typical transaction flows:

1. The customer swipes their card, initiating the purchase.

2. The acquirer forwards the transaction to the payment network (e.g., Visa or Mastercard).

3. The payment network routes the request to the issuer.

4. The issuer approves or denies the transaction based on the customer’s credit limit or account balance.

5. If approved, the issuer transfers the transaction amount, minus an interchange fee, to the acquirer.

6. The acquirer then deposits the remaining funds into the merchant’s account.

   
   

The Key Profit Driver: Interchange FeesThe interchange fee is a percentage of the transaction amount, plus a fixed fee. For example, a $100 purchase might include an interchange fee of 2.5%, or $2.50. This fee is split between the issuer and the payment network, with Visa or Mastercard taking a cut for providing the infrastructure.

How Mastercard and Visa Profited from This Scheme

Over the years, Mastercard and Visa profited by:

1. Setting High Interchange Fees: While they don’t directly collect interchange fees, Visa and Mastercard set the rules for these charges. By keeping rates high, they ensured that more revenue flowed to the issuers—and by extension, to their networks through higher transaction volumes.

2. Monopolizing the Payment Industry: By controlling the majority of the card payment market, Mastercard and Visa created a near-duopoly, limiting competition and giving merchants little choice but to accept their terms.

3. Hidden Costs to Merchants: Merchants often weren’t aware of how much they were paying in interchange fees, as these charges were bundled with other processing fees. This lack of transparency allowed Visa and Mastercard to keep the system opaque and profitable.

4. Tying Practices: In the early 2000s, Visa and Mastercard required merchants to accept all their cards (credit and debit) if they wanted to accept any of them. This forced merchants to pay fees for both types of transactions, even if they preferred to avoid certain card types with higher fees.

The True Scale of Profits

While the interchange fee might seem small on a single transaction, the scale of Visa and Mastercard’s networks is immense.

• Visa’s Network: Processes over $13 trillion in transactions annually.

• Mastercard’s Network: Handles more than $8 trillion in transactions annually.

• Even a fraction of a percentage in interchange fees adds up to billions in revenue.

The Merchant's Burden

Merchants are the ones who bear the brunt of these fees. In many cases:

• Small Businesses Suffer More: Larger retailers can negotiate lower rates, but small businesses often pay higher interchange fees, cutting into their already tight margins.

• Costs Passed to Consumers: To offset these fees, merchants often raise prices, indirectly passing the cost onto consumers.

Why the $5.5 Billion Settlement Matters

The recent $5.5 billion settlement is a direct response to claims that Visa and Mastercard abused their market power to enforce excessive fees. It’s a rare win for merchants who have long been at the mercy of these financial giants.

What Can Businesses Do?

For eligible merchants, filing a claim in the settlement is a way to recoup some of the excessive fees they’ve paid. Beyond this, businesses can:

• Negotiate with Payment Processors: Larger merchants have more leverage to demand lower rates.

• Encourage Alternate Payment Methods: Steering customers toward lower-cost options like ACH payments or even cash can reduce reliance on credit card networks.

• Stay Informed: Understand the fee structures and how they impact your bottom line.

Conclusion

Mastercard and Visa’s profitability is built on a system that extracts value from every card transaction, with merchants footing the bill. While these companies have revolutionized how we pay, their practices have also raised serious concerns about fairness and transparency. The $5.5 billion settlement is a step toward accountability, but for many businesses, the fight for equitable fees is far from over.

Need help filing your claim in the Mastercard settlement? Vice Versa Victory specializes in guiding businesses through this process. Contact us today to get started.