Mastercard’s Digital Fee Hike Means Double Trouble for Merchants
By Owen Glist
As part of the annual spring ritual of interchange increases and new network fees, Mastercard has announced that it is more than doubling its “Digital Enablement Fee.” This hefty price hike raises both the cost of digital transactions and antitrust concerns.
Mastercard’s Digital Enablement Fee is essentially a tax the network imposes for “enabling” online transactions, also known as “card-not-present” or “CNP” transactions. According to Bloomberg and other sources, Mastercard is doubling this one-basis-point tax on online volume to two basis points, justifying the increase with the statement that “Electronic payments have proven even more valuable since the start of the pandemic.”[1]
Mastercard’s purported justification demonstrates its market power, as the company is apparently free to set prices without regard to cost. Notwithstanding Mastercard’s fancy term—“digital enablement”—the network’s costs do not increase merely by the shift of volume from card-present to online.
Adding insult to injury, the fee will now start at a minimum of two cents per transaction. So while the fee applies to all CNP volume, the minimum will hit some of the fastest growing CNP segments particularly hard—think meal delivery and quick-service-restaurant apps, where average tickets are well below $100. With a $50 purchase, for instance, the fee quadruples, from 0.5 cents to the new two-cent minimum. In all, with a flick of the fee schedule, it is estimated that Mastercard will siphon an additional $82 million in revenue annually from merchants with this higher fee.[2]
What is all this digital commerce Mastercard is supposedly enabling? Payments, of course, have long been “electronic,” and networks provide much the same service whether a card is present or not. For many years, “card-not-present” has operated as a lucrative fiction that Visa and Mastercard maintain to impose higher fees on merchants for these same services—or even for less service. These higher interchange and network fees apply even though the networks’ payment guarantee is worth less, given that merchants not only bear the liability for fraud losses but they also invest huge amounts to reduce online fraud.
But there is even more to dislike about Mastercard’s new fee, something that should get the attention of antitrust enforcers. Mastercard says that its more-than-doubled Digital Enablement Fee now comes with several of its existing anti-fraud products bundled together, at what Mastercard claims is no additional cost. Of course, that claim is not true. So while Mastercard previously charged separately for services to verify a cardholder’s identity, account status, or address, now these services will be bundled, at significant additional cost on all online transactions, by virtue of the newly increased Digital Enablement Fee.
Mastercard’s now-bundled services are likely provided by either Ethoca, a digital commerce fraud company that Mastercard purchased in March 2019, or Ekata, acquired in 2021. After apparently failing to sell merchants on the merits of voluntarily paying for these services, Mastercard has resorted to telling merchants the fiction that they are getting these services for “free”—when they are actually paid for by the increased Digital Enablement Fee. But merchants can only avoid the fee if they drop Mastercard acceptance entirely—an untenable proposition when Mastercard accounts for more than one in three credit cards in circulation and about 25% of both credit and debit card volume.[3]
Moreover, despite federal law that requires merchants to have at least two networks to choose from for debit transactions, online transactions are nearly impossible to route “PINless” because of obstacles erected by Visa, Mastercard, and issuing banks.[4]
With merchants forced to pay the fee and accept the bundle whether they like it or not, competing services will have a harder time selling to merchants. Competitors that Mastercard (or Visa) have not yet purchased—and with whom merchants willingly pay to do business—will now face a rival who doesn’t have to compete.
In fact, the purchases of Ethoca and Ekata are part of a series of acquisitions by Mastercard and Visa that are gobbling up all manner of players in the payments ecosystem. While Visa’s attempted purchase of Plaid, challenged by the DOJ as a “killer acquisition” of a nascent competitor, is the most notable, the list of companies acquired by Visa or Mastercard is long. Looking only at the fraud/security space, in addition to Ethoca and Ekata, Mastercard purchased Brighterion, RiskRecon and CipherTrace, while Visa bought up Rambus’s token services business, Cardinal Commerce, CyberSource, and Verifi.
So far, only Mastercard has had the audacity to directly use its market power to manipulate its network fees to favor recent acquisitions to the detriment of merchants and Mastercard’s competitors. But if Mastercard’s new fee structure does not trigger serious scrutiny and direct action by regulators, Visa—with its even greater leverage—may be soon to follow.
[1] See, e.g., Jennifer Surane, “Visa Changes Rules for Gas Stations to Avoid $125 Pump Limit,” Bloomberg (Apr. 1, 2022); John Stewart, “As Visa and Mastercard Ready New Interchange Schedules, Merchants Brace for the Impact,” Digital Transactions (Mar. 14, 2022).
[2] CMSPI, “US Card Swipe Fees Are Changing in April – Is Your Business Prepared?” (Feb. 23, 2022).
[3] See The Nilson Report, Issues 1191 (Feb. 2021) at 5, 1200 (June 2021) at 7, & 1213 (Feb. 2022) at 5.
[4] Notice of Proposed Rulemaking, Regulation II, Debit Card Interchange Fees and Routing, 86 Fed. Reg. 26,189 (proposed May 13, 2021), at 26,190 (“merchants are often not able to choose from at least two unaffiliated networks when routing card-not-present transactions”); 2019 Interchange Fee Revenue, Covered Issuer Costs, and Covered Issuer and Merchant Fraud Losses Related to Debit Card Transactions, Board of Governors of the Federal Reserve System (May 2021), at 17 (“In fact, covered issuers representing slightly more than 50 percent of the total number and value of all covered transactions reported that none of their CNP transactions were processed” over competitive networks in 2019).
By Owen Glist
Edited by Gary J. Malone