Over six decades in business, our family-owned clothing store has faced its share of challenges and unfair business practices. But none has been more unfair than the way businesses today are beholden to credit card companies, particularly Visa and Mastercard.
The vast majority of purchases at our store are paid for by credit card, and our customers tend to have those premium cards that offer amazing rewards. But we merchants pay for those rewards because banks charge us higher “swipe” fees for premium cards — sometimes close to 4% of the transaction, rather than the average 2% to process regular cards.
These fees are growing too cumbersome for small businesses to absorb and must be added into selling prices just like other expenses, contributing to inflation. The difference is that all other expenses are negotiable, while the card industry says take it or leave it. Today, with fewer customers carrying cash, we cannot afford to not accept credit cards.
Our only recourse is exploring various merchant services companies, but that can only save one- or two-tenths of a percent per transaction. Swipe fees are centrally set by Visa and Mastercard, and all banks that issue cards under their brands charge the same rates rather than competing to offer merchants the best deal. Visa and Mastercard, which control 80% of the market, also block competition by restricting processing to their own networks, even though a dozen independent networks offer lower fees and better security.
This lack of competition has allowed credit and debit card swipe fees to more than double in the past decade, skyrocketing 17% in 2022 to a record $160.7 billion nationwide. They are most merchants’ highest costs after rent and labor, driving consumer prices up by over $1,000 a year for the average family, according to the Merchants Payments Coalition.
High swipe fees have helped major card-issuing banks make obscene net profits, averaging 27%, while Visa and Mastercard each rake in around 50%. Consequentially, they are stomping out the American dream for small businesses, who are part of the most competitive and important sector of the economy but struggle to earn 1%-5%.
Fortunately, there is hope for consumers and small businesses in the Credit Card Competition Act, sponsored by Sens. Dick Durbin, D-Ill., and Roger Marshall, R-Kan.
This bipartisan legislation would require that the nation’s largest banks enable credit cards to be routed over at least two unaffiliated networks for processing. One could still be Visa or Mastercard, but the second would be a competing network like NYCE, Star or Shazam, just like debit transactions. Banks would choose which networks to enable, but merchants would decide which to use, requiring networks to compete over fees, security and service. Merchants would save at least $11 billion a year, most of which would help hold down prices for consumers.
This legislation would have no impact on credit card rewards — those are determined by the bank that issues a card, not the network handling the transaction. Security would improve because the Federal Reserve says competing networks have only 20% as much fraud as Visa’s and Mastercard’s networks, and foreign-controlled networks like China’s UnionPay would be prohibited from processing transactions. There would be no effect on community banks or credit unions because the bill applies only to financial institutions with at least $100 billion in assets. Finally, nothing would change about which cards consumers use or how they use them.
During a recent Washington “fly-in” held by the Merchants Payments Coalition and the National Retail Federation, I was dumbfounded by lawmakers who said their concern was the “health and well-being” of banks rather than their own constituents.
Have they forgotten the contributions small businesses make to local communities? Can you imagine Rehoboth Beach and other towns without small businesses to support community youth programs or local nonprofits?
I am calling on Sens. Tom Carper and Chris Coons, both D-Del., to support the Credit Card Competition Act. Fair competition is the American way, and we need competition to keep the American dream from being “swiped” away by swipe fees. If you are for competition in free markets, support the American dream and value the contributions small businesses provide, then join me in asking Congress to vote yes on this important legislation.
Trey Kraus is a co-owner of Carlton’s, a 63-year-old clothing store in Rehoboth Beach, Delaware.