Image for Possible Legislative Remedy for Credit Card Blues

Pending Bill Promises Lower Swipe Fees from Greater Credit Card Competition

Post-holiday credit card blues provides a timely backdrop for a congressional  bid to reduce credit card swipe fees, which consumer advocates say totaled more than $93 billion in 2022 and even more in 2023. A Texas ice cream vendor with two locations said his swipe fees last year exceeded $25,000.

Swipe fees of 2 to 3 percent are charged each time a consumer uses a credit card. Merchants often adjust to fees by raising prices. The Credit Card Competition Act aims to hold down swipe fees by promoting competition among large banks that process transactions.

“American consumers are worried about inflation and rising prices, and credit card swipe fees are part of the problem,” says Senator Dick Durbin, D-Illinois, and a chief sponsor of the legislation. “Market competition helps keep fees in check.”

Swipe fees have attracted greater interest since consumers have moved to paying for almost everything with credits cards instead of cash.

Doug Kantor, general counsel for the National Association of Convenience Stores, told NPR, “These fees are just baked into the cost of everything we buy. Even consumers who are cash payers pay more for every good they buy.”

Visa and Mastercard
Durbin pins much of blame for swipe fees on what he calls the “Visa-Mastercard duopoly”. “Every time a Visa or Mastercard credit card is swiped, around 2-3 percent is deducted out of the transaction amount the merchant actually receives. Some of that cut Visa and Mastercard keep for themselves as a network fee, but most of it is an interchange fee which is fixed by Visa and Mastercard but paid to the bank that issued the card.”

According to Durbin, “Visa and Mastercard have structured their networks to avoid competitive market pressures on their fees. A merchant has to accept Visa and Mastercard credit cards no matter how high the fees get or else the merchant will lose access to all the cards issued by all the banks in the Visa and Mastercard networks. It’s a take-it-or-leave-it system, and it is difficult for any merchant to stay in business without accepting cards from the Visa/Mastercard duopoly.”

The Credit Card Competition Act would require big credit card issuers to allow a network other than Visa and Mastercard to process transactions to promote competition leading to lower swipe fees.

“This competition and choice between networks would incentivize better service and lower cost,” Durbin says. “in fact, for more than a decade, federal law has required debit cards to carry at least two debit networks and this requirement of a choice of debit networks has fostered increased competition and innovation in the debit network market and has helped hold down fees.”

Even though the legislation would apply to only the largest banks, industry groups representing banks and credit card networks are pushing back. The Electronic Payments Coalition calls the legislation a government overreach. It warns that the legislation, if enacted, could lead to the loss of credit card rewards and fraud protection.

Durbin and his bipartisan cosponsors he rounded up an impressive array of supporters that includes trade groups representing grocers, retailers, convenience stores, restaurants, theaters, liquor outlets, franchisees, energy marketers, the Armed Forces Marketing Council and the Hispanic Leadership Fund.

The Federal Trade Commission is charged with enforcing federal competition and consumer protection laws to prevent anticompetitive, deceptive and unfair business practices. A third-party observer said Durbin’s legislation “stands as a testament to the ongoing struggle to balance consumer benefits, merchant rights and market competition.”

“Swipe fees are the second-highest operating cost, on average,
for many small businesses. Only labor is a higher cost.”

Swipe Fee Backgrounder
Nerd Wallet provided this background on swipe fees:

“When you use a credit card to make a purchase, the card issuer, a bank or credit union, actually makes the payment for you, and you later repay the issuer when you pay your credit card bill.

“Issuers don’t pay merchants directly, however. Payment networks like Visa, Mastercard, American Express and Discover work as the intermediary, sending purchase information back and forth between the merchant and the card issuer. Payment networks charge merchant interchange fees, also known as swipe fees. Those fees, in part, go toward funding the rewards that your credit card earns.

And here’s where much of the conflict lies. Under the current system, if a merchant accepts credit cards, it is locked in to whatever payment network that credit card runs on – and thus the merchant must pay whatever fee that network charges.

Among payment networks, Visa and Mastercard are the biggest players by far. The Credit Card Competition Act would require large banks to allow more choice in what payment network can be used for processing transactions. For example, when a shopper using a Visa card to make a purchase, the merchant could choose Visa as the payment network to process the transaction, or it could opt for another and possibly less expensive network.

“Swipe fees are the second-highest operating cost, on average, for many small businesses. Only labor is a higher cost,” says Kantor. Backers of the Credit Card Competition Act say the savings would be passed along to consumers. Opponents say nothing in the act requires merchants to pass along any savings they may achieve.

Matt Garfield, a business consultant, anticipates small merchants will use the savings from lower swipe fees to keep prices stable, increase their cash cushion or put toward business improvements. He also foresees credit card companies cutting back on rewards and promoting consumer loyalty in other ways. One byproduct, he says, could be less leisure travel made financially feasible through credit card points.