As a consumer advocate, I have heard many stories over the years of individual consumers being taken in by a variety of scams: bait-and-switch schemes, hidden fees and terms, you name it. But among the most insidious rip-offs for consumers are the giant fees that they pay but never see. Those are the swipe fees that the credit card industry charges merchants but that are so large they get baked into the prices of everything we buy.
That means all of us pay more at the store and at the pump because credit cards are a broken market. I don’t say that lightly. As the U.S. Government Accountability Office has explained, market power is the “ability of some card networks to raise prices without suffering competitive effects.” Visa and Mastercard have more than 80% of the credit card market. Visa and Mastercard sit atop an anticompetitive oligopoly where they both make the rules and set the prices. The banks, which compete on pretty much everything else, are happy to let Visa and Mastercard set both swipe fee prices and make rules for them. That makes the fees go up without any market constraints. By refusing to compete on price, those banks reap huge profits at consumers’ expense.
And swipe fees are percentage-based. When gas or food prices go up, those fees automatically go up and multiply the effects of inflation. The credit card companies and banks profit from inflation without doing anything new (and often misleadingly claim they didn’t raise their prices).
These hidden fees hit consumers who can least afford it the hardest. Economists with the Federal Reserve have studied them and concluded, “We estimate an aggregate annual redistribution of $15 billion from less to more educated, poorer to richer, and high to low minority areas, widening existing disparities.”
Of course, for the roughly half of consumers who carry a credit card balance, they also pay punitive interest charges that put them on a debt treadmill that’s hard to climb off. That’s another problem with credit cards though it’s one that the industry pretends doesn’t exist (or give them income) when they talk about hidden swipe fees.
Something needs to be done about these fees and Congress has a good answer at the ready. Bipartisan legislation sponsored by Senators Richard Durbin (D-IL) and Roger Marshall (R-KS) in the Senate and Lance Gooden (R-TX) and Zoe Lofgren (D-CA) in the House (S. 1838 and H.R. 3881) would finally bring some relief. The legislation, called the Credit Card Competition Act, would do what its name suggests. It would require the giant credit card companies to allow competition so that the fees would finally be subject to some market pressure.
Market choice already exists on debit cards in the U.S. and on credit cards in much of Europe. The system has proven to work well. Not only does it create market forces to help on fees, but the competition spurs credit card networks to improve their sometimes shaky security offerings to try to win business. It also provides redundancy. When networks are out (because of hacks or otherwise), having a second network option allows commerce to continue without delay. Those network outages have led to real problems at times when they have hit in places that don’t have that redundancy.
The bottom line is that consumers and Main Street businesses are being mistreated today. It doesn’t have to be that way. Congress can do something about it. We all know that competition is a necessary first step to having a functioning market. In fact, President Joe Biden’s Executive Order on Promoting Competition urged federal agencies to increase competition in all markets. I can’t think of a better place to start than the credit card market. It’s broken.