In July, Visa announced a new initiative. It would offer a select number of restaurants and food vendors as much as $10,000 each to upgrade their payment technology. There was one catch: The businesses had to agree to stop accepting cash.
The initiative was the “opening salvo,” as one Visa executive put it, in the credit card company’s plan to increase its market power by eliminating cash. “We’re focused on putting cash out of business,” Visa CEO Al Kelly told the company’s investors.
There’s a clear incentive for Visa to take on cash. That’s in part because the company has already conquered the market for credit cards. In 2016, 59 percent of credit and debit card purchases in the U.S. were made with a Visa card. Another 25 percent of purchases were made with a Mastercard, meaning that just two card networks now have a near lock on the market.
For the businesses on the receiving end of this push, though, a cashless future could be quite costly. That’s because of one of the other incentives Visa has for getting rid of cash. Every time a customer pays for a transaction with Visa, Visa gets a cut, along with the bank that issues the card, in what are known as swipe fees. Visa and the banks decide what that cut is. It averages about 2 percent [PDF] of the purchase amount. In other words, on a $100 purchase, that’s $2 that gets eaten up in swipe fees that would otherwise go to the business. Smaller businesses, which have no leverage to negotiate, often pay even more; in our survey of more than 3,000 independent business owners, retailers reported a median of 3 percent of their total revenue spent on swipe fees.
For many businesses, especially retailers and restaurants, swipe fees’ cut of their revenue is often more than their entire profit margin. As one business owner, the head of a fourth-generation supermarket in the Cleveland area, explains it, “Swipe fees have ballooned into my second-largest operating cost after labor… my profit margins don’t go much above a single percent.” Another business owner, who employs 400 people at eight gas station and convenience store locations in Minnesota, echoes the experience: “As with almost every other convenience store, the banks take more in swipe fees than I earn in profits.”
Visa and Mastercard argue that these fees cover costs like preventing fraud. In fact, however, the Federal Reserve Board has found that the companies’ processing costs average just $0.05 per transaction [PDF]. The difference between the companies’ costs and their fees is a lot of profit, much of which goes to the large banks that issue most cards: As the U.S. Government Accountability Office notes, “for large credit card banks, credit card earnings have been consistently higher than returns for all other commercial bank activities.”
The merchants on the receiving end of these fees, meanwhile, are left with only bad choices. Visa and Mastercard are so dominant that merchants can’t well not accept them, and federal law prevents merchants from banding together to collectively negotiate with the card networks and issuing banks for better terms. The result is that Visa and Mastercard wield monopoly power over these businesses. As a 2009 report from the U.S. Government Accountability Office put it, “Concerns remain over whether the level of these rates reflects market power — the ability of some card networks to raise prices without suffering competitive effects.”
All of this has high costs, and not only for the business owners. When businesses are burdened with this kind of extractive fee, it limits their ability to upgrade stores, open new locations, and hire employees. One study found that if swipe fees were capped for credit cards, consumers and merchants would have saved $22.4 billion in 2012, and that the resulting spending and investment by merchants could support more than 40,000 jobs. And while steep swipe fees allow card issuers to fund big rewards for their highest-spending customers, everyone else ends up paying more. As the GAO study notes, “merchants pass on their increasing card acceptance costs to all of their customers.”
There’s a better option. The federal government could regulate swipe fees. Many other countries do, including the European Union, which caps swipe fees at about one-seventh of the rate that U.S. businesses are charged. Even the United States places a cap on the swipe fees for debit cards, thanks to a reform enacted in October 2011 as part of the Dodd-Frank Act, though this cap is twice as high as the level initially recommended by the Federal Reserve. Three-quarters of local businesses favor extending this cap to credit cards too.
But despite their numbers and economic importance, these small businesses haven’t gotten far with lawmakers — in large part because the credit card networks and big banks wield more political power in D.C. Their sway is such that The Capitol Forum, a subscription news service covering competition policy, recently added Visa and Mastercard to its list of “Top 5 Politically Safest Monopolies.”
Until that changes, the big card networks and even bigger banks that dominate credit cards will continue to levy their own private tax on commerce. Meanwhile, they’ll also continue to try to expand their share of the pie, like with Visa’s newly-declared war on cash. In its press release announcing the incentive for businesses that stop accepting cash, Visa proclaimed that it’s “aiming to create a culture where cash is no longer king.” What’s left implicit is that, instead, Visa’s setting out to rule.