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Source: Apple Source: Apple

This holiday season will be the first for the Apple Card, the highest-profile new credit card in years. And every time a customer waves an iPhone at the register to use the new card, a retailer may feel an extra pinch on its profits.

That’s because the card, marketed by Apple and backed by Goldman Sachs Group Inc., is designated “elite,” which allows it to levy significantly higher interchange fees on each swipe or tap. Those fees aren't paid by the consumer but by the merchant as part of the cost of accepting credit cards. A grocer can lose more than half its profit on a sale when someone pays with an Apple Card, or one of its elite competitors, rather than a normal card. Elite cards impose higher transaction fees to support generous reward programs for their customers.

Card networks tell merchants the higher costs are justified because premium cardholders also have more buying power—so they’ll spend more. According to payment processor Auric, since January 2018 the average purchase made with premium-branded Visa cards was $50 higher than those made with regular Visa credit cards. But the cards have long irked retailers. They have no choice but to pay the higher fees for elite plastic if they want to accept any of a network’s credit cards. Visa Inc., for example, has regular Visa credit cards, higher-end Visa Signature branded cards, and top-level Visa Infinite cards, which charge stores the highest fees. A store can’t turn down, say, Infinite cards and still take the others. Mastercard Inc., the Apple Card’s network, has a similar arrangement.

Credit Card Metrics Year-over-year change Data: Bloomberg Intelligence, Nilson Report

New frustration is bubbling up. The supermarket company Kroger Co. last year banned Visa credit cards in certain stores in part because of high fees on premium cards. The stores eventually resumed taking all Visa plastic this year after months of negotiations with the network.

Merchants in the U.S. saw the costs tied to accepting electronic payments balloon to a record $108 billion in 2018, according to the Nilson Report. Some of the increase can be attributed to the rise in the overall use of cards, but many stores also blame the profusion of high-end rewards cards. According to a report from the Consumer Financial Protection Bureau, the share of credit card purchases made with any kind of rewards card rose steadily from 2015 to 2018, and is above 80%. (Some basic rewards cards don’t carry the extra transaction fees.)

Banks have introduced more than 40 cards that are part of Visa’s Signature or Mastercard’s World programs, the entry-level premium tier on those networks. Signature and World cards typically come with higher credit limits than entry-level cards, and they may go beyond offering cash-back and airline-miles rewards to include perks such as access to airport lounges. “It’s a way for cards to have bragging rights beyond points,” says Sara Rathner, a credit card expert at the personal finance website NerdWallet.

For banks, the calculation is easy. The extra rewards can help them sign up cardholders, and they get higher fees from stores for every swipe. Take a $100 purchase at a supermarket, where profit margins are already thin. If a customer uses a traditional Visa card, the merchant would owe the issuing bank $1.27 in swipe fees. If the cardholder carries plastic branded with Visa Signature, the fee would rise to $1.75. That fee is then divvied up among the network, the payment processor, and the issuing bank. “It’s almost like an arms race of who can offer the most rewards,” says Chris Ligan, vice president for acquisitions at Auric, which has seen use of premium cards climb 7% this year. “The person stuck with the bill is the merchant.”

Swipe Fee Owed by a Small Retailer When a Customer Makes a $100 Purchase *Elite cards

And merchants have begun arguing that there are categories, such as groceries, where premium cardholders don’t spend more than regular cardholders. The real beneficiaries of the rewards, they say, are the networks and issuers themselves. “Rewards were developed as a way for the networks to get more people to use the cards versus using other tender types like debit, cash, and checks,” says John Drechny, who leads the Merchant Advisory Group, a trade association for retailers focused on payments.

These premium cards have become a flashpoint in negotiations between the country’s largest retailers and the Visa and Mastercard networks. Large merchants and Visa and Mastercard are still embroiled in negotiations over litigation that started in 2005, when retailers sued the networks, saying they violated antitrust laws by inflating swipe fees. While some merchants settled the case in a record settlement announced last year—Visa and Mastercard admitted no wrongdoing—a separate class of retailers are still fighting for changes to the networks’ rules, including those that require stores to honor all of a brand’s credit cards.

If those rules were to change, consumers might face a more confusing situation at the checkout counter. Or it could just mean that stores would have more leverage to fight higher swipe fees, and that the arms race for credit card rewards would start to cool off.