Dan Connor watched hand-cut steak fries cook in hot oil at Donovan’s Pub in Woodside, Queens. Connor took it over 11 years ago, but it’s been a staple in the neighborhood since 1966.

“We’ve won best burger a few times,” he said, but emphasizes the breadth of the menu; it stretches from French onion soup to wings to Italian dishes. “When you think of restaurants that are in the middle of the neighborhood that everyone knows each other, that’s Donovan’s.”

Also getting fried? Connor’s patience. 

“We’re still seeing a lot of restaurants closing now, because of the inflation and the cost of everything that’s going up, and just, you can’t make money and survive,” he said. Donovan’s Pub, like many restaurants, is at the crossroads of economic trends that are eroding its bottom line. Inflation, rising labor costs, rising utilities and … credit card fees.

“The swipe fees have gone up over the years, and people are more inclined to charge their meals now, to charge anything now,” he said.

Every time a customer swipes their credit card, the merchant — whether a restaurant, a store, a deli or Amazon — pays fees to credit card companies, processors and banks. Online orders require even higher credit card fees because the risk of fraud is higher.

Not only are more people ordering online, more people are swiping their cards more often in general. It could be for convenience, could be for reward points.

“You know, when we first took over 11 years ago, we were probably doing 50-60% of our business in cash. And now that’s probably down to 10% to 20%,” he said. “Everybody is charging, but they’re also swiping more.” Instead of running a tab, buying eight beers and paying at the end, people simply swipe for each beer, incurring both percentage and flat fees for the restaurant. “That happens a lot.”

What all of this means is that more of Connor’s very thin profit margin goes to credit card fees.

Merchants paid $126 billion in credit card fees in 2022, an increase of 20% from the year before, and more than double from 2013, according to Nilson Report.

“It’s at the point where swipe fees are the third-highest cost for restaurants right now, behind food and labor,” said Sean Kennedy, executive vice president for public affairs at the National Restaurant Association. Convenience stores say it’s their second-largest expense.

Some of the dramatic increase in what merchants are paying for the use of credit cards is inflation — as prices have risen, so have the fees charged as a percentage of transactions. 

Some of the increase is due to a growing use of cards generally, as Connor has experienced.

But merchants say it’s also due to credit card companies and banks raising their fees. 

This is a contentious part of the fight that’s been stewing between the retail and credit card industries. Credit card companies insist their fees haven’t changed much.

“Our rate has remained at 2% for the last decade,” said Richard Hunt, chairman of the Electronic Payments Coalition, which represents credit card companies, banks that issue cards and airlines that work with credit cards on points programs. “Tell me what else has remained flat over the last decade. Not a cup of coffee, not doughnuts.”

According to Nilson report, the weighted average percentage of fees paid by merchants for the use of credit cards has fluctuated between 2.09% and 2.24% since 2013. The rate for Visa and Mastercard credit cards was 2.24% in 2022. 

Merchants argue these percentages are averages of hundreds of different kinds of rates for different cards, merchants and situations, and conceal increasing numbers of high-end credit cards that charge merchants higher rates. 

“A lot of times what Visa and Mastercard will do,” said Doug Kantor, general counsel for the National Association of Convenience Stores, “is they’ll create new rates, leave the old ones in place, and say, ‘Well, we didn’t increase all these rates in here,’ and they sort of average out all their rates, even though they know the banks are issuing more cards at the higher rate.”

A credit card that earns you all those travel miles tends to charge merchants a higher fee. Merchants aren’t allowed to single that card out — if you take one kind of Visa you have to take them all. Nor can they tell consumers they’re going to charge more for using that card because of the fees. 

“If you could charge consumers, pass on the cost, then they can make a decision,” said Joe Stiglitz, professor of economics at Columbia University. “Is the cost that is being levied on the merchant worth the benefits that are being received?”

Merchants from gas stations to ice cream shops to Amazon have complained about the fees and contracts, and many are lobbying for legislation that would increase competition in the credit card industry. Credit card companies argue that the market is plenty competitive for consumers, and that’s how it should be.

“The consumer is in charge here. They’re gonna drive what the merchant should or should not take,” said Richard Hunt with the Electronic Payments Coalition. Regulation that reduces fees, he said, would threaten one of consumers’ favorite perks: points. “There’s no doubt reward points would be severely reduced or not even at all in use anymore,” he said.

Indraneel Chakraborty, chair of the finance department at the University of Miami, agreed.

“There is sufficient competition in the credit card industry such that all the transaction fees people are paying are passed on back to the consumers through rewards,” he said.

But as with nearly everything in this industrial feud, this is contested as well. In ongoing antitrust litigation that resulted in a multibillion-dollar settlement between a group of retailers and Visa and Mastercard, TD Securities Managing Director Reto Kohler testified that “rewards expenses do not take up a majority of interchange fee revenue,” and that issuers “have other streams of income, such as interest income and fees, from which they are free to fund rewards.”

Merchants also point out that rewards programs still function well in countries like Australia that have regulated credit card fees.  

The two sides also debate who exactly would benefit and who would suffer from regulation — consumers, large businesses, small businesses; dueling research and recriminations trade punches in circles.  And so the battle between industries rages on, with hundreds of billions of dollars at stake.