Online Retail Merchants Struggle with High Credit Card Processing Fees

Posted on April 24, 2019 at 23:10 PM

Online Retail

Things have been boiling in the credit card processing business for the past few decades, exacerbated by a major shift from in-store to online shopping. It’s referred to as the “retail apocalypse,”  by trade merchants, but in reality shoppers are avoiding brick and mortar stores for the convenience of shopping online. Remember that online, cash has never been king; credit cards always were.

Consumers were first lured to online shopping by Amazon’s low prices and the 24/7 availability of products on the internet, and later by free shipping. The shift happened much faster than anyone thought it would. You may remember that there was a time when no one thought clothing could be sold online. The same goes for diamonds, groceries, pet food, and even eyeglasses.

Little by little all those barriers fell, yet this hasn’t meant the death of brick-and-mortar stores. Even though it seems as if stores are closing every day, retail sales hit a record of $6 trillion in 2018, according to the U.S. Census. That’s better than the pre-recession high of $4.4 trillion spent in 2007.

The spectacular growth of online sales from 20 years ago, when there were only 40 million people using the internet in the U.S, and online sales generated only $2.4 billion, would have been difficult to predict. In 2017, more than 287 million people in the U.S. alone used the internet –– and online sales were expected to hit $440 billion .

That is an 18,650% increase in global internet usage and an 18,233% increase in online sales.

What Does This Mean For The Future Of Retail?

During the past 20 years, credit cards have surpassed cash to become the dominant payment method. The turning point came in 2016, according to Marketwatch, when the use of plastic overtook the use of cash.

The Rise of Credit Payments


With the rise of credit card transactions, merchants are paying more and more in credit card processing fees. With millions of online stores popping up, most working within narrow margins, these fees are making big inroads into profits.

For a long time, the big card issuers and networks, primarily Visa and MasterCard, established rules that codified the existing system where merchants were responsible for 100% of the transaction fees. Their rules had the force of law. With the exception of gas stations, which only sold one product, for almost two decades merchants could neither give a discount for cash or offset the fees onto the customer.

By the end of the first decade of online commerce, merchants had begun to file lawsuits, arguing that the activities of Visa and MasterCard were in restraint of trade. In 2005, a class action suit was filed by merchants looking to change the law. At the time, Visa and MasterCard were still owned by banks, but within a short time both of them went public.

And guess what? Their stock soared, while the poor online merchant was eeking out a living after paying climbing transaction fees.

Why Did Transaction Fees Climb?

Because you and I began paying for things with rewards cards, such as American Express and airline affinity cards so we could get those perks.

“The major reason that interchange fees for rewards credit cards are higher than those for traditional cards is because banks use the interchange fee to help subsidize the cost of the rewards program,” says Scott Schuh, senior economist, policy advisor and director of The Consumer Payments Research Center at the Federal Reserve Bank of Boston.

Until recently, merchants could only grumble about those climbing fees subsidizing our airline miles or cash back card. But in 2013, the first of the anti-trust lawsuits against Visa and Mastercard settled, giving merchants the right to implement a surcharge and pass credit card processing fees on the customer who uses a credit card.

The big daddy of all the merchant lawsuits was preliminarily settled in 2017, promising between $5.5-$6.2 billion back to merchants who took Mastercard and Visa between 2004 and 2019. The final hearing will be held in November, at which time the amount is expected to be ratified and claim forms issued to merchants in the class action suit.

In the meantime, more court cases have been happening to overthrow state laws against surcharging. And at the time of this article only six states still prohibit the practice: Maine Massachusetts, Colorado, Kansas, Oklahoma, and Connecticut.

The big Kahunas in the settlements were New York and Florida, which kept their state laws. New York’s law went all the way to the Supreme Court and was finally decided in favor of the merchants on the grounds of free speech.

Why free speech you might ask?

Because Expressions Hair Design v. Schneiderman, 581-1391 U.S.(2017) [read: The Credit Card Surcharge Heard Around the World], at the United States Supreme Court held that price controls, when used to prohibit the communication of prices of goods with regards to a surcharge, was a regulation of speech and required an analysis of the First Amendment’s protections for freedom of speech.

In a five-Justice majority, Chief Justice of the United States John Roberts, joined by Associate Justice of the Supreme Court Kennedy, Thomas, Ginsburg, and Kagan, wrote that, “In regulating the communication of prices rather than prices themselves, §518 regulates speech.

While it may be difficult to understand that the communication of prices is part of the right to free speech, nevertheless the fact that this case got all the way up to the Supreme Court and was settled there in favor of surcharging means that other states will probably follow the lead of the New York law and surcharging will be legal everywhere in the next couple of years.

In the meantime, surcharging remains complicated, and compliance with any of the 60-odd regulatory bodies that govern online commerce is still an issue holding many merchants back from adding a surcharge to their customers’ bill.

SurchX offers an innovative, world-class surcharging system that is completely agnostic and easily integrates with your current eCommerce platform and automatically calculates and applies the allowable surcharge fee by jurisdiction and individual credit card. Merchants who choose to surcharge with SurchX are guaranteed to stay 100% compliant with the laws everywhere they can legally do so.

To find out more about Surcharging, download our Merchant Surcharging Guide:

Surcharge Guide