At an average of just over 2 percent of the purchase price, the credit card industry claims the “swipe” fees charged to merchants to process transactions are small. But that 2 cents on every dollar adds up quickly – swipe fees cost merchants nearly $138 billion last year.
These fees are most merchants’ highest cost after labor, far too much for small businesses to absorb, and drive up prices paid by consumers. According to the National Retail Federation, swipe fees cost the average Missouri family $900 last year. Most consumers have no idea they’re paying a hidden credit card fee that large – and the card industry likes it that way.
Swipe fees are out of control, soaring 25 percent last year alone and more than doubling over the past decade. That’s because of lack of competition. Visa and Mastercard – which control 80 percent of the market – centrally price-fix the swipe fees charged by the huge national megabanks that issue the vast majority of their cards, and those banks all charge the same rather than competing. Visa and Mastercard also block transactions on their cards from being processed over independent payment networks, shutting out competitors who offer both lower fees and better security.
That’s why Senators Richard Durbin, D-Ill., and Roger Marshall, R-Kan., have introduced the Credit Card Competition Act. This landmark bipartisan bill that is quickly gaining support in Congress would require that the nation’s largest banks enable credit cards to be processed over at least two unaffiliated networks – Visa or Mastercard plus an independent network like NYCE, Star or Shazam, or even a competing credit card network like American Express or Discover.
Payments consulting firm CMSPI estimates that the legislation would save merchants at least $11 billion a year, a significant reduction in costs that would help hold down prices for consumers.
Not surprisingly, the card industry is willing to say just about anything to preserve its cash cow. They claim community banks and credit unions, which play a vital role in our local communities, would be harmed. In fact, the bill applies only to financial institutions with at least $100 billion in assets. That’s only about 30 banks – the largest of the large – and just one credit union (Navy Federal) in the entire country. Local banks aren’t the problem, and not a single Missouri-based bank of any size would be affected.
Opponents say credit card rewards would go away. In fact, rewards are provided by big card issuers as a marketing incentive to get consumers to choose their Visa or Mastercard over another issuer’s Visa or Mastercard and have nothing to do with which network processes the transactions. The bill changes only who processes transactions, not who issues cards or the rewards that are offered.
Card companies claim security would be threatened. In fact, the Federal Reserve says independent processing networks have about one-fifth as much fraud as Visa and Mastercard’s networks. And independents are the same networks that process billions of dollars in debit card and ATM transactions each day, trusted by banks and consumers alike. In addition, the bill would close a glaring security gap in the current system by no longer allowing foreign-controlled networks like China’s UnionPay to be eligible to enter the U.S. market. Right now, any Wall Street megabank is free to outsource credit card processing to China.
The card industry claims swipe fees don’t contribute to inflation. In fact, as a percentage of the transaction, they automatically go up as prices go up, creating a multiplier effect consumers can ill afford. While the industry denies this in public, Visa executives speaking on earnings calls have bragged to investors that they have benefitted from higher swipe fee revenue because of inflation.
Finally, those who profit from swipe fees say consumers wouldn’t benefit from reform. In fact, merchants have shared 70 percent of the savings from a similar law for debit card transactions with consumers, helping hold down the prices they charge despite continuing increases in other costs. Consumer prices rose only half as much as wholesale costs in the first five years after that law took effect in 2011, and three-quarters of merchants surveyed by the Fed were able to avoid price increases.
Missouri Senators Roy Blunt and Josh Hawley are in a position to join their neighbors Senator Durbin of Illinois and Senator Marshall of Kansas and stand up for Missouri small business and consumers. It’s time for them to co-sponsor the Credit Card Competition Act.
President of the Missouri Retailers Association