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Legislation was recently introduced in the U.S. Senate that will inject a dose of free market competition into the world of credit cards—alleviating a big financial headache for small businesses. You see, every time a customer swipes, inserts, or taps a credit card to purchase anything ranging from a coffee to a television, the merchant is on the hook to pay a processing fee. Think of it as a “transaction tax” for businesses.
And these charges can add up. In 2021, businesses paid nearly $140 billion to process card transactions—a 25 percent jump from the year before. For small businesses with modest margins, the fees oftentimes account for one of the largest business expenses behind labor costs. Tack on high inflation and supply chain disruptions, and the country’s 30 million job creators are fighting an uphill battle to keep budgets in the black.
Paying a reasonable fee for services rendered is warranted. But credit card companies and big banks shouldn’t be gaming the system.
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Two credit card heavyweights, Visa and MasterCard, have all but formed a duopoly. The tag team is sidestepping typical free market mechanisms that keep prices under control in most other industries. Query: Why doesn’t Burger King raise the menu price of a medium fries to $15? Because company executives understand they would lose customers to competitors like McDonald’s, Hardee’s, or Dairy Queen.
Paying a reasonable fee for services rendered is warranted. But credit card companies and big banks shouldn’t be gaming the system.
This competitive nature is lacking when it comes to card fees. Visa and MasterCard handle roughly 80 percent of the market and use their leverage to control the lion’s share of processing fees for U.S. banks. As a result, small businesses are given a deal they can’t refuse; entrepreneurs have no other option but to eat the bloated expense.
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The breakdown of the free market has come at a growing cost to Main Street. Given the lack of true competition, processing fees are rising unchecked. Even as technological advances and innovation have driven down the cost for banks to process card transactions, fees have doubled over the past decade.
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Enter the Credit Card Competition Act of 2022. Sponsored by Sens. Roger Marshall, R-Kan. and Dick Durbin, D-Ill., the bipartisan bill would apply free market principles to the credit card market—helping to lower the processing fees businesses are on the hook to cover.
What exactly does the legislation do?
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First, the bill would prohibit exclusivity contracts that tie cards issued by banks to a particular credit card network. To make it happen, the legislation ensures that financial institutions with more than $100 billion in assets include at least two unaffiliated processing networks on the credit cards they issue. There are alternative options that provide better service and prices than Visa or MasterCard.
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In practice, this will foster competition by giving small businesses more options on how to process credit cards, rather than being stuck with Visa or MasterCard (and their high swipe fees). That, in turn, will force credit card networks to compete with one another for a retailer’s business—helping to bring “transaction taxes” under control.
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The Credit Card Competition Act also has the foresight to exempt small and medium-sized banks from the additional rules; it only applies to roughly 30 megabanks that oversee a vast majority of credit card transactions. The targeted approach is a win-win-win for Main Street, consumers, and community banks.
Rescuing small businesses from the credit card hostage situation will extend Main Street a helping hand as it faces high inflation and a slowing economy. Lawmakers should join with their colleagues Sens. Marshall and Durbin to help make it a reality.
Elaine Parker is the President of the Job Creators Network Foundation.
