As merchants continue to call on Congress to address soaring credit card “swipe” fees that drive up the prices of almost everything consumers buy, one group feels the pain particularly acutely: small businesses.
The Impact of Swipe Fees on Small Businesses
Small business owners from across the country have shown up at lawmakers’ town hall meetings, traveled to Washington for swipe fee fly-ins, testified before Congress, written op-eds, and flooded congressional offices with letters, calls, and emails.
The message is clear: These hidden fees hurt small businesses the most, keep them from hiring more employees and growing their businesses, make it harder for them to keep prices low, and keep them from contributing more to their communities, whether it’s sponsoring a little league team or supporting a charity. And in an increasing number of cases, swipe fees threaten the ability of small businesses to keep their doors open.
As every merchant knows, Visa, Mastercard, and the megabanks that issue cards under their brands charge 2%-4% of the transaction amount to process credit card purchases. Swipe fees add up quickly and totaled a record $187.2 billion last year, representing most merchants’ highest operating cost after labor. They are too much to absorb, especially for small merchants, and drive up prices for the average American family by nearly $1,200 a year.
How Visa and Mastercard Dominate the Market
Swipe fees have soared 70% since the pandemic, thanks largely to lack of competition.
With Visa and Mastercard controlling 80% of the market, they centrally set swipe fees charged by all banks that issue their cards, and also restrict processing to their own two networks.
I don’t make this accusation lightly, so let me explain. Visa and Mastercard provide a digital network to facilitate transactions between merchants and banks. Both the merchant and bank pay Visa and Mastercard a fee to use that network. However, Visa and Mastercard also set the fees that merchants pay banks on bank-issued credit cards. These are called interchange fees, which happen to be the highest credit card fee.
Visa and Mastercard set up a structure where every bank charges a merchant the SAME EXACT FEE when that merchant takes the same type of card from any one of those banks. This means that there is no competition between banks on interchange fees because they all get compensated at the exact same rate and thus have no need to compete for the business of merchants.
If you are a big bank, why compete when Visa and Mastercard simply schedule regular rate increases? Can you imagine any other industry where every single “competing” company is paid the same exact rate for its services? That is usually considered an anti-competitive practice.
Why Small Businesses Pay Higher Swipe Fees
While swipe fees affect all merchants, small businesses are hit the hardest. They pay the highest rates (sometimes twice as much as national chains). That is part of Visa’s and Mastercard’s design. They dictate that their banks charge small businesses more than larger competitors.
There is no reason to charge small businesses more. The service on each transaction is exactly the same, and businesses small and large have to pay for their own equipment to be able to take cards. The practice of Visa and Mastercard dictating higher prices for small businesses is simply punitive to small businesses — and a money grab for the credit card industry.
The Credit Card Competition Act: A Solution for Reform
For the past three years, Congress has been considering legislation to address this growing challenge.
The bipartisan Credit Card Competition Act would require that the nation’s largest financial institutions — about 30 banks with assets over $100 billion each — enable credit cards to be processed over at least one competing network in addition to Visa and Mastercard.
Well-established networks like Star, NYCE, Pulse, and Shazam that have processed debit card and ATM transactions for decades could do the job for less, and the Fed says they have one-eighth the rate of fraud of Visa and Mastercard.
Enabling a second network would create competition over fees, service, and security and is expected to save merchants and consumers $17 billion a year. That is savings that would help small businesses.
Some 92% of NFIB members believe small business owners should have the right to choose which network processes transactions. Of course they should. Because they get charged the highest fees today, small businesses have the most to gain from market-based reforms like the Credit Card Competition Act.
The Fight for Swipe Fee Reform
Leaders who champion small business success see this clearly. Vice President JD Vance, who cosponsored the CCCA as a senator, has said small businesses “are being crushed” by swipe fees.
The Senate has held two hearings in the past two years, with Senator Josh Hawley, R-Mo., calling Visa’s and Mastercard’s practices “collusive monopoly behavior” this past November. Senator Peter Welch, D-Vt., told Visa and Mastercard executives, “You are killing small businesses.”
This spring, CCCA lead sponsors Senators Roger Marshall, R-Kan., and Richard Durbin, D-Ill., sponsored an amendment to make the bill part of legislation called the GENIUS Act that would establish a regulatory framework for stablecoins — a form of cryptocurrency pegged to the U.S. dollar that could someday help small merchants avoid swipe fees altogether.
The Senate rarely allows amendments and ultimately passed the GENIUS Act without a vote on the CCCA. But the effort brought an outpouring of demand that Congress take action, giving swipe fee reform a tremendous boost in momentum.
NFIB sent a letter telling senators “small business owners operate on razor-thin profit margins which have been increasingly cut into” by rising swipe fees. Small merchants were among the thousands who signed letters to individual senators asking them to support the amendment. And those endorsements came in addition to support from nearly 300 trade associations and almost 2,000 companies — many of them small businesses — along with a broad group of consumer, labor, and pro-competition organizations.
The Urgent Need for Change
Swipe fee reform has always been about small business fighting corporate giants for survival. Visa and Mastercard have profit margins of 50% and large card-issuing banks like JPMorgan Chase average 30%.
It is hard to imagine a system that could be worse for small businesses and more in need of change. On the vast majority of sales, day in and day out, small businesses are systematically given a worse deal than their big competitors. It puts them at a disadvantage every single time. Now it’s time for Congress to show it really does support small businesses by injecting competition into the credit card market.
Small businesses must compete every day to stay in business. So should credit card companies and big banks.
Andrea McGee is principal, federal government relations, at the National Federation of Independent Business.