Starting next month, Visa and MasterCard will raise credit card fees. This will put an additional strain on retailers who are already stretched thin due to Covid, inflation and the astronomical amount they paid last year in credit card fees: a whopping $93 billion.
Those fees are passed along to consumers, who also pay the price, quite literally. In fact, the National Retail Federation estimates that credit card swipe fees “cost the average American family over $1,000 annually, whether it’s in the form of higher prices or credit card surcharges.”
Eric Shoykhet, CEO of open-banking API solutions provider Link Money, believes that open banking is one solution to high credit card fees since it benefits merchants and consumers alike. And it can even reduce retailers’ payment processing fees by 70-80%.
“Fundamentally, we need open payment methods in the U.S.,” Shoykhet says. “Other alternatives such as PayPal are not cheaper, and are actually more expensive for merchants to accept. And buy now, pay later (BNPL) costs merchants even more than credit cards and PayPal.”
What is Open Banking?
Open banking allows consumers to permit third-party providers to access their financial information and handle transactions through application programming interfaces (APIs). It is a secure way to share financial data with third-party companies, usually in the fintech space, to use their services without logging in with their bank account providers repeatedly.
Open banking is already transforming the financial and banking industry in Europe and countries like the UK and Australia—it reimagines how consumers think about financial products and services in a way that ultimately can benefit shoppers.
“The beauty of open banking is that it is much cheaper to move money this way rather than via debit or credit cards. The merchants can offer cheaper payment methods, which ultimately results in the end consumer having a cheaper cost of goods,” Shoykhet says.
Is Open Banking Safe and Secure?
The short answer is yes. Shoykhet explains that with open banking, the merchant does not collect any of the customer’s bank account information. All consumers have to do is login to their bank and then initiate the payment.
Open banking is integrated similarly to PayPal or BNPL, but instead of paying through a separate provider’s app or website, consumers will be directed to a screen where they can choose their bank, securely log in to their account and finalize the payment.
The Credit Card Competition Act
Senators Dick Durbin and Roger Marshal proposed the Credit Card Competition Act earlier this year, which would enhance credit card competition and choice in order to reduce excessive credit card fees. While efforts to attach the bill as an amendment to the National Defense Authorization Act (NDAA) did not go through, the bill is expected to be voted on this year.
“Despite the nearly $100 billion Visa and Mastercard took out of communities and small businesses across the country last year, guess what they’re going to do in October? They’re going to raise the interchange fee again,” Senator Richard Durbin, D-Ill., said in a Senate floor speech. “While we’re trying to fight inflation from every angle that we can find to bring down the cost of groceries and gas, the credit card companies have decided it’s just the right time to have this take-it-or-leave-it fee increase. When credit card fees go up, it increases inflation and consumers pay it.”
Visa and Mastercard – which control over 80 percent of the market – each centrally set swipe fees charged by banks that issue cards under their brands, and also restrict processing to their own networks. The legislation would require banks with at least $100 billion in assets to enable cards to be processed over at least two unaffiliated networks – Visa or Mastercard plus well-established, high-security competitors like NYCE, Star or Shazam. That would make networks compete over fees, security and service and is expected to save merchants and their customers $15 billion a year.
While the Credit Card Competition Act is still in progress and would take some time to implement, open banking is a great payment alternative for both retailers and consumers to save money.