At a time of cost-consciousness, some light is finally beginning to shine on a previously lesser-known factor that hikes prices on all goods that Americans purchase: swipe fees. And legislation in Congress stands to address the issue and provide relief to consumers and small businesses.
Most consumers have some notion of the fees that are charged every time they use a credit card to pay for goods or services. While the fee is nominally charged to the business that takes the card, in reality, these are passed on to consumers the same way other costs are.
These fees amount to more than $137.8 billion each year and have a profound negative economic impact on consumers from all demographics and income levels. In fact, they cost the average family more than $900 each last year alone — a figure that undoubtedly will be higher this year.
In May, the Hispanic Leadership Fund (HLF), the public policy advocacy organization I lead, released a report showing just how burdensome these fees are. Because of the way these hidden swipe fees operate, our report showed that “households with income less than $75,000 per year collectively transfer over $3.5 billion to those making more than $75,000 per year” through the credit card system.
The fees also hit small and minority-owned businesses hard. Local restaurants, grocers and other Main Street businesses that serve our communities struggle under the weight of these fees, which are often their second-highest operating costs, often higher than the rent they pay for their commercial space.
The HLF report found that credit card swipe fees cost some Main Street businesses between 17 and 19 percent of their annual profits. With profit margins hovering around 2.5 percent, that is far too much for these local businesses to afford. No one should forget that damaging small businesses hurts job creation, since small businesses remain the primary economic engine in the United States.
A key factor creating this dynamic is the lack of competition in the credit processing market. Two networks, owned respectively by credit card industry kings Visa and Mastercard, control more than 80 percent of the U.S. credit card market and set swipe fees so that all card-issuing banks charge uniform rates. Without real competition, these fees continue to go nowhere but up, having doubled over the past decade.
Thankfully, there is bipartisan legislation in Congress — the Credit Card Competition Act (CCCA) — that would bring competition to the credit processing market to promote lower swipe fees by increasing the network options available to merchants when transactions are processed.
Naturally, the bill is unpopular with those whose interests lie in keeping the status quo. The most widespread claims are that the CCCA somehow would rob consumers of their credit card rewards and that the bill could put credit card security at risk. Neither is true.
First, the components of the CCCA have nothing to do with rewards, which are actually determined entirely by the banks that issue cards, not the networks that process transactions. The CCCA does not change that structure. In addition, the $11 billion in projected swipe fee savings is less than 10 percent of the $138 billion in annual swipe fee revenue, thereby maintaining plenty of room for the cost of rewards and still not threatening the immense profits for the credit card behemoths. In other countries that have adopted swipe fee reform, credit card rewards have remained intact. For example, a decade after Australia adopted a similar policy, the Reserve Bank of Australia found that banks continued to offer rewards.
Second, the assertion that credit card security would be at risk is not only wrong but entirely backward. The Federal Reserve has shown that the independent networks that would be brought into these transactions actually have about one-fifth of the fraud of Visa and Mastercard’s networks. Additionally, the CCCA would require the option to process credit cards over at least two unaffiliated networks, one of which still could be Visa or Mastercard.
The CCCA would block networks supported by foreign governments, such as China’s UnionPay, from operating the U.S. processing market, closing a conspicuous security gap. Currently, any bank can choose to route its credit card processing through UnionPay, effectively putting customers’ sensitive financial data in the hands of a foreign government — one that is becoming more adversarial to the United States.
The bipartisan Credit Card Competition Act would usher in needed changes to the credit card system by bringing market forces in an area where regressive and opaque fees hurt working families and small businesses. Especially in the current economic environment, the time has come for this reform.
Mario H. Lopez is president of the Hispanic Leadership Fund, a public policy advocacy organization that promotes liberty, opportunity and prosperity for all Americans. Follow him on Twitter @MarioHLopez.