The Interchange Battle 2025

With the fight over interchange showing no signs of abating, merchant groups look to legislation as the problem solver.

The ongoing battle between merchants and card networks over interchange and network fees has only intensified since the adoption of Regulation II, which capped debit interchange, more than a decade ago. And there are few if any signs that tension over the issue of transaction costs will cool this year.

The latest salvo, intended as a pre-emptive strike, was fired in early January by the Electronic Payments Coalition, which released a study detailing the negative impact the Credit Card Competition Act would have on the United States economy if passed.

The study, conducted by Oxford Economics Research, claims the CCCA’s impact on the U.S. economy four years after passage would amount to a drop of $227 billion in discretionary consumer spending and the loss of 156,000 jobs.

The CCCA did not come up for vote in the previous Congress. It proposes to reduce network fees by requiring card issuers to offer a wider choice of networks for processing beyond just Visa or Mastercard. This choice, merchant organizations contend, would create more price competition among card networks and so lower card-acceptance costs.

The EPC released the report on the expectation that the CCCA would be introduced in Congress this year, the third time it will have come before lawmakers. Proponents of the CCCA concur the bill is expected to be reintroduced this spring or earlier.

“We expect a big push [for the CCCA] in the new Congress, because retailers were promised a victory,” EPC Executive Director Richard Hunt said during a press conference unveiling the study. “We call [the CCCA] the government credit card takeover bill and we want Congress to understand how economically draconian it will be.”

But legislation aimed at regulating interchange also looms on the state level. In 2024, Illinois became the first state to pass a law exempting merchants in the state from paying interchange on sales tax and tips in exchange for capping what the state pays merchants to collect sales tax.

The law, which was scheduled to go into effect July 1, was put on hold late last year when United States District Court Judge Virginia Kendell granted a preliminary injunction.

At least 12 states are reportedly preparing to introduce similar legislation, while lawmakers in several more states are rumored to be considering similar bills.

Already this year, bills like the Illinois law have been pre-filed in Texas, Connecticut, and Washington before each state’s respective legislatures convene for 2025, according to the Electronic Transaction Association. Arizona is another state expected to file interchange legislation soon.

“We’ve seen a few bills similar to the Illinois law filed in other states already this year,” says Scott Talbott, executive vice president for the ETA.

Efforts among the states to regulate interchange are reportedly being driven by merchant organizations that view the Illinois law as a blueprint for how to provide merchants some interchange relief.

‘A Good Threat’

Another factor expected to fuel the battle over interchange is a growing awareness among members of Congress that overall fees for credit card acceptance, also known as swipe fees, are becoming a problem for merchants. This is an especially acute issue for smaller merchants, payment experts say.

Swipe fees comprise three separate charges: interchange, of course, but also network and processor fees. Of those three, credit card interchange is the costliest, payments experts say.

The longstanding dispute over card-acceptance costs has frayed relations between merchants and card issuers, but it is also showing signs of taxing legislators’ patience. In November, Sen. Thom Tillis of North Carolina told representatives of Visa Inc. and Mastercard Inc. and the merchant community to buckle down and negotiate an end to their dispute over credit card swipe fees.

“Get in the room and solve the problem, because I’ll guarantee you the solution coming from Congress won’t be good for anyone,” Tillis said during a Senate Judiciary Committee hearing last November.

During the same hearing, Sen. Josh Hawley of Missouri took the card networks to task over their profit margins. When asked directly by Hawley what their respective margins are, representatives of both Visa Inc. and Mastercard Inc. said they are about 50%. The networks levy network charges, but interchange flows to card issuers.

Now merchant representatives are optimistic that the issue of card costs may be heading for a resolution. “There’s a growing recognition [among members of Congress] that things need to change when it comes to swipe fees and how the card networks treat businesses,” says Doug Kantor, a Merchants Payments Coalition executive committee member.

Kantor, who is also general counsel for the National Association of Convenience Stores, adds: “Momentum for change is growing, and I think this will be an active year on the legislative front.”

Reasons vary for why the merchant community is turning to legislation to rein in interchange. One of the most prominent is that legislation, while not a sure thing to pass, provides a big stick for merchants.

Payment experts point to the passage more than a decade ago of Regulation II, known also as the Durbin Amendment, to support their point. Among other things, the law regulated debit card acceptance costs.

“Even if merchants can’t get legislation passed, it is a good threat to use as a negotiating tool,” says Ben Brown, a partner with Flagship Advisory Partners, a multi-national payments consultancy with offices in the United States and Europe. “A lot of people thought the Durbin Amendment would not pass, but it did, and since then there has been a constant barrage to regulate interchange.”

‘A Duopoly’

At the heart of merchants’ ongoing battle is their argument that interchange, which is set by Visa and Mastercard on behalf of card issuers, is considered non-negotiable at the network level.

“Interchange is something that merchants have the least control over or leverage to negotiate” when it comes to card-acceptance costs, says Dylan Jeon, senior director of government relations at the National Retail Federation. “Interchange fees are basically a take-it-or-leave-it deal.”

Still, this isn’t always the case for the very largest retailers. Payment experts note that behemoths like Wal Mart Inc. have high enough card volumes to negotiate interchange rates directly with the card networks.

One big change merchants would like to see is the opportunity to provide “meaningful input or recourse” in the setting of interchange rates, as sellers are the ones “paying the fees,” says Rob Karr president and chief executive of the Illinois Retail Merchants Association, which lobbied for passage of the Illinois interchange law.

“The card networks are effectively a duopoly,” Karr points out.

On the flipside, the card networks argue that interchange drives value through fast, secure, and convenient ways for consumers to buy goods and services.

“Payments help businesses, especially small businesses, make, expand, and increase sales,” says the ETA’s Talbott. “The payments industry drives ever-increasing value by developing and deploying new products and services to allow merchants to reach their customers. Both the cost and value of these new products and services [are] what drives fees up or down.”

Should merchants be successful in obtaining interchange relief through legislation like the CCCA, card issuers argue their margins would be substantially reduced. That, in turn, would reduce their ability to fund credit card rewards, they say.

Indeed, payments experts point to how debit card rewards dwindled and eventually went away after the Durbin Amendment was implemented to cap debit card rates.

“Interchange is fundamental to the card industry. Change its structure and it will likely cause issuers to rethink their value-added offering, such as rewards,” Brown says. “Merchants are trying to make use of all the tools they can to manage their costs in an environment when costs on all fronts are under attack.”

The Negotiable Part

One issue overlooked in the interchange debate is that processing fees, which represent a substantial portion of card- acceptance costs, have been increasing. “If interchange is non-negotiable, then merchants should turn their attention to the portion of swipe fees that is negotiable, which is processing fees,” says Michael
Seaman, chief executive of Swipesum, a Clayton, Mo.-based processor.

Since Regulaton II’s implementation, processing fees now represent a larger portion of debit-card acceptance costs than interchange. This past year, the Federal Reserve began weighing a proposal to lower the cap on debit interchange.

The Fed initially made its proposal in October 2023 as part of an effort to update Regulation II. It would in effect cut the maximum interchange fee banks can charge on debit card transactions by nearly one-third.

In December, the American Bankers Association sent a letter to the Fed arguing that further lowering the cap will harm black households in particular. It would leave more members of that community unbanked as financial institutions look to compensate for lost debit income, the ABA argued.

In addition, the trade group said community banks would have to look to new or higher fees for checking accounts and fraud prevention would suffer as banks look to compensate for reduced income.

“Efforts to reduce [debit] interchange costs have not led to a decrease in processing costs for small businesses or a reduction in costs to consumers,” says Kari Mitchum, vice president, payments policy, for the Independent Community Bankers Association. “Small businesses should ask themselves if the Fed’s proposal will make a real difference in their debit-acceptance costs because it really does not address [debit swipe fees], just interchange.”

To illustrate her point, Mitchum says the Fed’s proposal would lower interchange on a $50 debit transaction from 25 cents to 18 cents. Yet processing fees charged by fintechs such as PayPal, Stripe, and Square would be $1.98, $1.75, and $1.40, respectively.

“By helping small-business customers understand swipe fees and what percentage is interchange-related, it will become clear to the public that lowering bank interchange will not reduce small-merchant costs,” Mitchum adds.

The week after the ABA sent its letter to the Fed, the MPC sent a letter to the central bank contending that financial institutions merely want to maintain the “status quo” on debit interchange. It argues Visa and Mastercard set this cost at “lucrative levels that exceed the reasonable and proportional standard Congress established,” according to the letter.

Last May, the MPC said the Fed’s proposed reduction for debit interchange does not go far enough because it would lower the amount banks can charge by less than a third, even though banks’ average cost of processing a debit card transaction has fallen by nearly 50%, from 7.7 cents before the current rate was set to 3.9 cents as of 2021, according to a Federal Reserve report cited by the MPC.

“Banks are making more money on debit transactions than they should in a competitive market,” the MPC’s Kantor argues.

High-Octane Marketing

Merchant organizations plan to continue fighting to reduce interchange rates, but one thing merchants can do in the meantime is audit the monthly statement they get from their processors to ensure they qualify all transactions for the lowest interchange rate, Seaman says.

“One of the biggest things missing in merchants’ efforts to lower interchange is to make sure they are taking advantage of interchange discounts,” Seaman adds. “Merchants can also work on lowering processing fees. Flat-rate fees are always going to be more expensive, but many merchants are okay with a flat rate” because it is easier to calculate a flat rate than a percentage-based fee.

Other ways merchants can lower acceptance costs is to add lower-cost alternative payment methods, such as pay-by-bank. But alternative payment methods aren’t always as economical as merchants think, says Flagship Advisory’s Brown.

“To get consumers to use pay-by-bank will probably require some type of incentive, which comes with a cost,” Brown says. “Offering more than five payment options can also reduce conversions, because too many payment options can be confusing for some consumers.”

With merchant organizations eyeing legislation as the path to success for curbing interchange costs, one thing is certain: Both sides in the battle will unleash high-octane marketing campaigns to sway legislators and the public to their respective points of view. When that happens, the winner will be the side with the best lobbyists, payment and political experts say. Stay tuned.