ALEXANDRIA, Va.—The U.S. has the highest credit card swipe fees of any major economy, and those fees mainly benefit Visa and Mastercard, as they handle more than three-quarters of all card transactions, reports the Economist. In 2021, the companies had net margins last year of 51% and 46%, respectively, and have consistently ranked in the top 20 of companies in the S&P 500 index for average net profit margins every year for the past 10 years.
But the two companies’ domination could be diminished due to the Credit Card Competition Act, introduced in the Senate in late July, which would require the largest U.S. banks that issue Visa or Mastercard credit cards to allow transactions to be processed over at least two unaffiliated card payment networks—the same process that has been used for debit card transactions for more than a decade.
Mastercard and Visa’s reign also could be threatened by cheap, virtual payment options. In Brazil, China and Indonesia, payments are now being made through app-based options from companies such as Mercado Pago, Ant Group, Tencent and Grab, and new entrants like these could emerge in the American payments landscape.
In the United States, banks that issue Visa and Mastercard credit cards charge a swipe fee that averages 2.25% of the purchase price when the cards are processed over Visa or Mastercard’s networks, a rate that is sharply higher than in other countries. American businesses pay seven times more in swipe fees than businesses in Europe and five times more than businesses in China.
Those costs ultimately get passed on to consumers, funding their credit card perks and bonuses, unbeknownst to them. According to a paper published last year by Joanna Stavins of the Federal Reserve Bank of Boston and colleagues, retailers raise prices at the tills by 1.4%, passing interchange costs on to households.
“The way to think about it is if you are not getting your points you are essentially funding everyone else’s,” Brian Kelly, who founded the popular points hacking blog, “The Points Guy,” told the Economist.
Because these higher costs are built into the price of goods, all consumers are taking the hit of swipe fees, whether they pay in cash or with a credit card. The Economist writes that households with an annual income of less than $25,000 (roughly a quarter of the total number) on average get no net rewards, since any they do receive are entirely offset by fees. Households that bring in more than $135,000 a year recoup in points or perks around 0.6 percentage point of the interchange fees they pay.
New fintech companies offering alternatives to credit card payments are slowly entering the scene and could pose a serious threat to Visa and Mastercard. For online retailers, Klarna is a “buy-now-pay-later” provider, and customers can pay for their purchases using multiple bank transfers.
Also, Catch, a fintech app, can link a consumers’ bank account via another payment startup called Plaid. The author of the Economist article used Plaid for an online purchase, and in return, the online retailer she was purchasing from offered her 5% off her next purchase.
Visa clearly sees the threat in Plaid. It attempted to purchase the company in 2020 for $5.3 billion, but the deal was shot down by antitrust regulators on the grounds that the transaction would have allowed Visa to eliminate a competitive threat.
Additionally, FedNow, is a real-time bank-transfer system being built by the Fed and should be launched in 2023.
Swipe fees remain one of the highest operating costs for convenience store retailers after labor, according to NACS State of the Industry data. In 2021, overall card fees paid by the convenience store industry were $13.5 billion, up 25.6% in 2021 versus 2020 ($10.7 billion), NACS SOI data indicate.
NACS is asking its members to contact their senators and ask them to co-sponsor the Credit Card Competition Act, S. 4674, using the NACS Grassroots Portal. Congress must act to ensure that there is price competition on swipe fees and enable the U.S. to have an innovative and efficient credit card market.