Photo courtesy of iStock.

By Annie Sholar, Open Markets Agriculture Policy Intern

Of all the challenges facing independent grocers, restaurants, and other small businesses this year, the issue some say is their top priority may surprise you. It’s not inflation, a tight labor market, or supply chain uncertainties, but a more hidden cost: increasingly high “swipe fees.”

Every time a customer uses a credit card, the retailer pays what’s known as a “swipe fee” to cover processing costs. Generally, banks offer credit cards in exclusive partnership with one credit card company, such as Visa, Mastercard, and others. Credit card companies sit between stores and banks, sending transaction requests and approval messages back and forth. Because banks only contract with one credit card company, stores must pay that company’s swipe fees. The fees can range from 1.5 to around 3.5 percent and are shared between the banks and the credit card company. If a store accepts a Visa credit card, they have to pay the fees that Visa sets.

Visa and Mastercard maintain a duopoly over this credit card processing market. Recently reintroduced legislation seeks to break up the duopoly and put competitive pressure on swipe fees. The bill’s most vocal proponents argue this will lower consumer prices. But even if consumer prices are unaffected, local economies could also benefit if small businesses reinvest money being levied in swipe fees back into their own businesses and communities.

Visa alone controls some 60% of credit card transactions while Mastercard handles another 25%. Absent regulation, Visa and Mastercard abuse their market power to charge American retailers swipe fees 10 times higher than they charge in Europe, according to Ed Mierzwinski, the senior director of federal consumer protection programs at the US Public Interest Research Group (U.S. PIRG).  

Total credit card fees – of which swipe fees are a huge portion – can eat up as much as 5 percent of a small store’s revenue. This is particularly challenging in the low-margin food industry, where the average profit margin for grocers is less than 2 percent. As credit card use continues to rise, grocers and business owners simply cannot afford to refuse Visas or Mastercards; they would lose out on too many sales.

Earlier this month, a bipartisan coalition reintroduced legislation in both houses of Congress that would require all large banks with over $100 billion in assets to allow at least two credit card companies to compete for the store-to-bank communications on any given credit card. At least one of these companies would have to be a company that’s not one of the top two competitors. In effect, the bill requires that banks give merchants at least one choice other than Visa or Mastercard. Merchants could still use credit cards from the largest banks in the country – which issue the vast majority of credit cards – but opt for a smaller credit card company to handle the back end. A store or restaurant could make that choice based on any number of factors, like speed, security and fraud protection, or lower swipe fees.

Groups lobbying for the 2023 Credit Card Competition Bill feel optimistic about the bill’s chances. Swipe fees (including those charged on debit cards) have grown from $16 billion in 2001 to $138 billion in 2022 – representing a 760% increase in revenue for banks and credit card companies, and a massive spike in transaction costs for businesses. The amount of money on the line has led to some unexpected lobbying partnerships. Small and independent businesses and their advocates, like the National Grocers Association (NGA), the Institute for Local Self-Reliance, and others have lined up alongside industry behemoths like Amazon, BP, and the National Restaurant Association to lobby for the bill. On the flip side, massive commercial banks and credit union associations have joined together to oppose it. Although a 2022 version of the bill never made it out of committee, advocates see a pathway to passage for this session. Noting similar regulation on debit cards passed as part of the 2010 Dodd-Frank Act with bipartisan support, U.S. PIRG’s Mierzwinski said, “I’d be scared if I were a bank.”

Some consumer advocates and store owners argue that high swipe fees raise consumer prices and that lowering swipe fees will help consumers. Christopher Jones, senior vice president of government relations at the NGA, an advocacy group for independent grocers, predicts that independent grocers would lower consumer prices if swipe fees decrease. “Since [independent grocers] have to be competitive to survive in the market and have a very thin margin, anytime they experience lower operating costs, typically the response is to lower margins,” he says. Lower margins mean lower mark-ups from the store and lower prices for shoppers.

Critics of the legislation, however, doubt that shop owners will use swipe fee savings to lower prices. Calling the bill a big box giveaway, the Credit Union National Association argues that large-scale national retailers and chain restaurants would be the primary beneficiaries of the bill and would pocket any savings from lower swipe fees rather than pass them along to consumers.

In fact, some smaller stores currently find they must absorb the swipe fees without raising prices or risk losing customers. “We can’t increase our prices,” explains Suman Shrestha, owner of Fenwick Beer and Wine, a small craft beer shop in Silver Spring, MD, because “the retail market is very competitive.” He says that if he raised prices to cover the 4 to 5 percent he pays in credit card fees, his customers would notice the price discrepancy with competitors and not return.

Stores like Shrestha’s would indeed benefit from lower swipe fees but would likely use any potential savings to bolster their businesses rather than lower prices – since they don’t necessarily account for swipe fees in their pricing as is. Katy Milani, a senior policy advocate for the Institute for Local Self-Reliance, sees store reinvestment as a boon to local economies, saying, “We also want businesses to put resources to other investments that will then have other spillover effects to our economy.” Robin Cline, the co-owner of Driftless Market, a small organic grocery store in Platteville, WI, agrees that savings from swipe fees would be invested into other parts of her business. “Honestly, in small business grocery right now, it would go to paying maintenance costs, things that are going years without being done,” Cline said. Jones also acknowledges that some independent grocers may respond to lower swipe fees by raising wages, rather than lowering prices.

While it may be hard to predict exactly what impact increased competition among credit card companies will have, advocates agree that money tied up by swipe fees could be going to more economically beneficial activities. As Mierzwinski says, as things stand, “banks are keeping all the money.”