Sunday, July 14, 2024

Two credit cards dominate transactions. (Photo: Roujo via Flickr)

As credit card use increases, so do the cost of credit card swipe fees. The lack of competition among card companies – Visa and Mastercard are essentially an industry duopoly – is a problem.

Massachusetts business owners are in a uniquely complicated position, though: This is one of only two states where merchants can’t pass these fees directly onto consumers.

Banks and credit card companies charge merchants 2 percent to 4 percent of each transaction per swipe of a card in what’s also known as an “interchange fee.” It’s significantly higher than the actual cost of processing transactions, which averages around 3.6 cents.

For a small business, swipe fees can make up one of their largest expenses. In a national survey, 38 percent of respondents said that the fees are a significant challenge for their business. “If I didn’t have to pay swipe fees, I could pay for the wage of an additional employee,” said Kari Kuelzer, the owner of Grendel’s Den and The Sea Hag in Harvard Square and board president of Cambridge Local First.

Larger companies have the bargaining power to negotiate more reasonable rates; small businesses have little choice but to pay. “The larger the scale of your business, the better the transaction rates you’ll get from the credit card companies,” Kuelzer said.

Because of this, rising swipe fees disproportionately affect small businesses, which often operate on thin margins and are most vulnerable to decline as a result of additional costs.

Swipe fees continue to rise, too. Merchants paid $160.7 billion to banks and credit card networks in 2022, an increase of about 46 percent in just the two years since 2020, according to the Institute for Local Self-Reliance. The institute is looking at the fees as a partner of Cambridge Local First, a nonprofit group that advocates for locally and independently owned businesses, along with Small Business Rising.

One solution small-business owners have used increasingly in recent years is credit card “surcharging,” in which merchants pass the swipe fees on to customers who choose to pay by card – the product or service costs an additional 2 percent to 4 percent per transaction to cover the same expense from Visa or MasterCard. Customers who pay using a debit card or cash are not charged the additional fee.

In Massachusetts, where surcharging is prohibited, some business owners have implemented alternatives such as offering discounts to customers who pay by cash. That can incentivize payment by other methods, but it’s more cumbersome than surcharging. A restaurant doesn’t want to print two menus – one with cash prices and one with credit card prices, state legislators were told at a July hearing by restaurant owner Douglas Bacon over a bill filed in 2023 by then-state Sen. Anne Gobi.

That bill would overturn the Massachusetts ban on surcharging (“An Act Relative to Transparency in Credit Card Fees” is in a Joint Committee on Consumer Protection and Professional Licensure), mandating that there be signs “conspicuously posted” to warn customers of a surcharge before they buy.

The legislation, while meaningful, fails to address the underlying problem of a lack of competition in the credit card ecosystem, and that burdensome credit card fees are taxing already constrained small businesses. A more systemic solution is needed.

At the national level, the Small Business Rising coalition has been supporting the bipartisan Credit Card Competition Act of 2023. This bill aims to “reduce excessive credit card swipe fees, which would spur competition and curtail this monopoly tax. The legislation requires at least two credit card networks be offered to merchants from card-issuing institutions instead of just one, and at least one of those networks must be a network other than the Visa-Mastercard duopoly. This competition and choice between networks would incentivize better service and lower costs with an estimated savings of $15 billion per year.”

Without a competition environment, Visa and Mastercard can continue to dictate rising rates to merchants.


Theodora M. Skeadas is executive director of Cambridge Local First, and Pooja Paode is associate director. Christy Zheng is an intern.