In a recent piece for RealClearMarkets, Indraneel Chakraborty asks the question: “Are credit card swipe fees really too high?” Yet, throughout his piece, Chakraborty makes numerous claims that require clarification in order to accurately understand this issue.
First, Chakraborty says “it is impossible to suggest credit card fees contributed to inflation, since they haven’t increased since 2018.” This statement overlooks the role of percentage-based swipe fees in accelerating inflation of consumer prices. Visa and Mastercard, which control around 80 percent of the credit card network market and which fix the swipe fee rates received by all card-issuing banks within their networks, set swipe fee rates as a percentage of the transaction amount plus a flat fee. For example, Mastercard’s current “Standard” consumer credit interchange fee rate and Visa’s current“Non-Qualified Consumer Credit” rate are both 3.15% + $0.10 per transaction. These swipe fees are then deducted from the payment amount as the transaction is processed, meaning that merchants receive about 97 cents on the dollar and are compelled to raise retail prices to cover the deducted fee amount.
Visa and Mastercard have established complex rate schedules with hundreds of fee rates that apply to different types of credit card transactions, and many of these rate categories have increased in recent years. But all of Visa’s and Mastercard’s rates include a percentage-based fee component, and this effectively serves as an inflation multiplier. As prices rise due to inflation, the percentage-based fee deducts more money, which compels merchants to raise prices further to cover that growing cost. Overall, the annual amount of swipe fees paid on Visa and Mastercard credit transactions has quadrupled since 2010 and now totals over $100 billion per year. Those fees indisputably inflate the prices consumers pay for gas, groceries, and more.
Visa has even admitted that they benefit from inflation. The fees they set and inflating prices complement and reinforce each other. During its first quarter earnings call in 2022, Visa’s Chief Financial Officer said, “In terms of inflation as it relates to our revenues, as you know, our service fees, cross-border, et cetera, are denominated primarily in basis points on ticket size. So, to the extent that there's inflation, driving up ticket size, clearly, it's beneficial to us.” Then, during Visa’s next earnings call, its CEO said, “And then, the last thing I'd say, net-net, historically, inflation has been positive for us.” The credit card industry recognizes the obvious: percentage-based swipe fees compound inflation and inflation in turn benefits the credit card giants.
Chakraborty also makes several specious claims in opposition to the bipartisan Credit Card Competition Act (CCCA), proposed federal legislation that would boost competition by requiring banks with over $100 billion in assets to equip their credit cards with a choice of at least two card networks.
Chakraborty claims this legislation would “virtually eliminat[e] all credit card rewards programs” – a claim that defies basic economic logic in several ways. For one, rewards programs are offered by banks, not credit card networks, and the legislation only applies to about 30 giant banks. All other credit card-issuing banks in the country are not covered by the bill and would have no reason to change current practices, including rewards programs.
Further, he argues that there is “fierce competition in the broader transaction processing network” for consumer business. If this competitive environment is as fierce as he describes, why would the giant banks covered by the CCCA, which currently enjoy robust net profit margins of around 30 percent, eliminate rewards programs that are meant to win consumer business? If they do, they could lose consumers to the smaller banks not covered by the CCCA. Note that many retailers with far smaller profit margins than banks offer significant rewards programs, because competition incentivizes it. While Chakraborty’s op-ed implies that banks may lack funds to adequately cover rewards and fraud losses if credit swipe fees are reduced, it does so by excluding interest income, which he concedes makes up the “bulk of the income from credit cards,” from the profitability analysis.
Finally, Chakraborty’s claim that enacting the CCCA “would result in millions losing access to credit,” customers who he describes as “marginally profitable.” This again defies basic economics. Banks enjoy huge overall profit margins in part because they collect interest from consumers on their credit cards in addition to fees. As Federal Reserve economists have found, the majority of bank revenues from sub-prime credit card customers comes from interest payments, not swipe fees. Interest income is the main reason banks pursue these customers, and the CCCA does not affect it. Also, the CCCA applies only to the very largest banks, giving banks not covered by the CCCA the opportunity to acquire any customers the big banks drop. If those customers are profitable, as Chakraborty concedes they are, then banks will compete to serve them.
Competition is better for consumers and for the economy. Passing the CCCA would bolster marketplace competition and incentivize Visa and Mastercard to temper their inflation-accelerating fees. At the same time, it would give smaller banks a competitive opportunity to win business from banking giants. That’s a win-win.
