Federal legislation was recently introduced to address the high fees businesses fork over every time a customer pays with a credit card. It’s an expense that’s required whether plastic is swiped in-person, entered online, or used through an app. By fostering free market competition, the Credit Card Competition Act could save job creators an estimated $15 billion per year.
Small businesses would be the biggest beneficiaries of this free market policy reform.
Unlike their corporate counterparts that are able to more easily absorb ballooning credit card swipe fees, main street businesses operate on razor thin budget margins and struggle to cover this “transaction tax.” In fact, for local restaurants, bars, and convenience stores, swipe fees are often the second largest operating expense behind labor costs.
The 2017 Tax Cuts and Jobs Act is an informative case study of what can happen when small businesses are able to keep more of their own money.
The legislative package provided meaningful financial relief to millions of small businesses, which translated to more jobs, higher employee wages, and business expansion. More broadly, the uptick in business investment led to a rising economic tide that lifted all boats—helping to create the strongest pre-pandemic economy in decades.
Now, lawmakers have an opportunity to adopt a policy that will provide billions of dollars in similar financial relief—an idea that has already attracted bipartisan support from both chambers of Congress.
The rare kumbaya moment is refreshing but not surprising. Most Americans would agree that charging a reasonable fee for services rendered is warranted. After all, that relationship between a buyer and seller is the basic building block of our capitalist system. But the current credit card environment is far from this free market ideal.
Together, Visa and Mastercard control roughly 85 percent of the U.S. credit card market. The near duopoly position has allowed the two corporations to muscle out the competition and profiteer on the backs of small businesses. In practice, that means the tag team—together with their banking partners—has been free to raise swipe fee levels without fear of backlash.
The breakdown in the free market has resulted in transaction taxes rising well beyond what it costs networks and banks to manage a credit card transaction.
Currently, these financial middlemen collect roughly two to three percent of every credit card purchase. In 2022, that amounted to more than $125 billion—an increase of 20 percent compared to the year before.
How would the Credit Card Competition Act remedy the situation?
The bill would require big banks with more than $100 billion in assets to include at least two unaffiliated credit card networks on the cards it issues to its users. That means in addition to Visa and Mastercard, small businesses would have additional options on how to process a customer’s purchase. In practice, the new arrangement would encourage credit card networks to compete against one another for a merchant’s business—pressuring swipe fees to fall in the process.
Consider the fast-food industry for an example of this principle at work.
Query: Why doesn’t Burger King quadruple the price of a cheeseburger? Because company executives understand they’re operating in a competitive environment. They have to compete against other restaurant chains like McDonald’s, Dairy Queen, or Hardee’s for customer dollars.
The Credit Card Competition Act also exempts community and regional banks from the additional rules. New polling from my organization, the Job Creators Network Foundation, finds most small businesses seek lines of credit from local banks and credit unions, rather than the large ones. Therefore, the surgical approach is a win-win for entrepreneurs and the community banks that fuel main street growth.
Small businesses are the backbone of the U.S. economy—employing nearly half the country’s workforce. Passing the Credit Card Competition Act and injecting free market competition into the credit card market is smart policymaking that will give these job creators a boost.
Lawmakers—regardless of political affiliation—should get on board.
Elaine Parker is the President of the Job Creators Network Foundation.