If you’ve ever wondered why a local small business has a piece of cardboard taped to the register that says, “no credit cards under $10,” the reason is what’s called a “swipe fee.” For every credit card transaction, the merchant pays 2–3 percent to the network like Visa or Mastercard that handles the processing. That may not sound like much, but these fees add up to over $137 billion yearly—the single biggest cost for retailers after wages.
Visa and Mastercard dominate this market, comprising a duopoly that can name their price. Merchants from bodega owners to dry cleaners must pay up or lose sales, and either take the hit or pass the cost on to consumers through higher prices.
Other nations do not demand this tribute from retailers to banks. America has the highest swipe fees in the world by an order of magnitude — in Europe, the typical swipe fee is 0.2 percent for debit cards and 0.3 percent for credit cards. The industry suggests these high fees are invested in improved security; in reality, the U.S. has the highest rates of credit card fraud in the world.
As one small business owner told The Economist, “You know you’re going to get screwed, the only question is how to get screwed the least.” Meanwhile, in 2022 Visa and Mastercard reported net profit margins of 51 percent and 46 percent, respectively, and their executives openly celebrate how much their business benefits from inflation.
Congress is considering action to inject some much-needed competition into this broken market. Sen. Roger Marshall (R-Kan.) and Rep. Lance Gooden (R-Texas), along with a bipartisan group of colleagues, have introduced the Credit Card Competition Act, which would prohibit major banks from continuing their anti-competitive practice of issuing cards that can be processed on only one network. Instead, they would have to allow at least one additional network, other than the duopoly, to always compete for merchants’ business. Whereas Europe’s approach is to simply cap fees, this bill takes a market-friendly approach by creating choice in processing credit card transactions and relying on competition to drive down cost and improve service.
Wall Street is outraged at the suggestion it compete for Main Street’s business, and it is getting support from a coalition of legacy anti-government groups is equally outraged at having their bankrupt ideology challenged.
These critics warn that “the bill does not promote competition, instead it dramatically expands the role of the federal government to overregulate the market for credit cards.” But it provides no support for this claim—how could it? A requirement that cards function on multiple networks, so that a merchant can choose which network to use, is laser-targeted at creating competition in a market that currently lacks it. Not all federal action is overregulation, and not all ungoverned markets are well-functioning ones. As The Economist, no enemy to free markets, has reported, the status quo “is bad for American consumers and retailers.” Some markets, naturally or not, tend toward a monopoly or duopoly structure, and the job of policymakers is to step in to protect—and at times create—healthy competition.
In the past, the anti-government dogma of libertarian activists and a financial industry determined to protect its profits might have carried the day. But years of blind faith in “free trade” led policymakers to cheer the offshoring of American industry to China. Denial of the dangers of monopoly power left policymakers feckless in the face of Big Tech’s abuses. Conservatives have learned from these mistakes, and are waking up to the reality that strong support for free markets sometimes requires active policymaking. It means ensuring that those markets are fair and well-governed ones, in which businesses’ legitimate pursuit of profit advances the national interest and the common good, rather than blindly trusting that what is good for big business must, by definition, always be good for America.
Big business, of course, does not like having its anticompetitive price fixing threatened. Lobbying groups have dropped millions on deceptive ads meant to misinform the public about the Credit Card Competition Act, smear the bill’s authors, and scare other legislators from taking a stand. Wall Street has started to publicly complain that it, in fact, is the real victim here. It is an encouraging sign for our politics that staunch conservatives like Marshall and Gooden are holding to their principles, even when the big money and legacy Washington intellectuals are against them.
What Marshall, Gooden and their colleagues understand is that government’s role in protecting economic freedom goes beyond just getting out of the way. It must also ensure that private companies don’t become private tyrants. Congress should take seriously the failures in the credit card industry, consider how public policy could support a stronger and more competitive free market, and ignore the discredited dogmatism of those who simply fight reasonable government at every turn no matter the damage they do in the process.
Chris Griswold is the policy director at American Compass.