Credit cards and the banks that issue them really ought to take the “swipe” out of so-called swipe fees.
When customers swipe credit cards to pay for something, merchants are charged a fee of 2% to 3% or more, far more than the cost of processing those transactions. Part of that money goes to the bank that issued the card and part goes to the credit card company.
To many merchants, it feels as though someone is unreasonably swiping part of their revenue by charging exorbitant fees. They want to inject some competition into the system in hopes the fees will be lowered and rival networks will compete to be the most secure.
“[Swipe fees are] often the second- or third-highest expense our members have, and it is one they can’t negotiate,” Stephanie Martz, chief administrative officer and general counsel of the National Retail Federation, told us.
Visa and Mastercard share more than 80% of the business of routing credit card transactions, but whichever card a customer uses, only one company is available to process the transaction. Legislation named the Credit Card Competition Act, backed by U.S. Sen. Dick Durbin, D-Ill., and others, would give each merchant at least two choices of a network to process transactions, instead of just one. The hope is that injecting competition would bring down costs. Backers hope they can pass the bill this month or in the first quarter of next year.
“This legislation would save businesses, including restaurants, an estimated $15 billion a year,” said Sam Toia, president and CEO of the Illinois Restaurant Association.
The total cost to U.S. businesses for credit card and debit card processing and network fees was $160 billion in 2022, Toia said.
Kevin Vaughan, whose Vaughan Hospitality Group operates five Chicago restaurants, said swipe fee costs keep going up.
“There are no guardrails in place,” said Vaughan. “They are talking about very significant increases. There needs to be some control and regulation of these costs.”
Competition might also boost transaction security as competing companies vie for business, he said.
Debit card fees already lowered
A law to cap similar debit card fees was enacted more than a decade ago. As Stephanie Sack, who owned two Bucktown boutiques, told us at the time, “In small businesses, every dollar counts. This type of income leaving before it comes to your bottom line can be really detrimental.”
In September, the U.S. Supreme Court agreed to hear a case asking the Federal Reserve to lower the cap on debit card fees.
But, unlike debit cards, there is no cap on the cost of processing credit card transaction fees. And if businesses raise prices to cover those fees, even cash-paying customers are chipping in. Some businesses assess customers a fee to process credit card transactions, but at the risk of driving away those customers — a big risk because many people who formerly tended to spend cash turned to credit cards at the start of the pandemic.
The current system siphons money from consumers’ wallets. It is estimated the average American household pays $1,000 a year for the convenience of swiping credit cards. In theory, if businesses could lower their costs, they could pass the savings on to customers.
Different cards carry different fees, but businesses have no control over which card a customer uses to pay.
In a statement last month, Durbin, chair of the Senate Judiciary Committee, and U.S. Sen. Roger Marshall, R-Kans., said “Visa’s and Mastercard’s market power and network structure have enabled them to impose fees on U.S. merchants that are among the world’s highest.”
The Credit Card Competition Act would apply only to banks with $100 billion or more in assets, so smaller banks and credit unions would not be affected. A report issued in July by the consulting firm CMSPI concluded margins in the business are large enough that the legislation would have little impact on such customer rewards as cash-back programs and airline miles.
People enjoy the convenience of credit cards, and almost no one wants to go back to the cash-only days. But there’s no good reason to overcharge people when they use those cards.
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