MPC Letter to the House Committee on Financial Services

March 8, 2022

The Honorable Maxine Waters
House Committee on Financial Services
2129 Rayburn House Office Building
Washington, DC 20515

The Honorable Patrick McHenry
Ranking Member
House Committee on Financial Services
4340 O’Neill House Office Building
Washington, DC 20024

The Merchants Payments Coalition applauds the Committee’s interest and concern with inflation as shown in today’s hearing on “The Inflation Equation: Corporate Profiteering, Supply Chain Bottlenecks and COVID-19” and requests to have this letter submitted into the hearing record. MPC advocates on behalf of the millions of Main Street merchants that accept credit and debit cards in every Congressional district. U.S. merchants pay the highest fees for accepting debit and credit cards of any of their competitors in the industrialized world. Card processing fees topped $110 billion in the United States in 2020 and are forecast to be significantly higher this year. These fees limit Main Street merchants’ ability to keep prices low for U.S. consumers, hire more workers, grow their business and compete in an ever-expanding global market. Unbelievably, the two largest card networks, Visa and Mastercard, are on track to have
increased fees by $1.2 billion this April compared with the same time last year, ensuring that they and the mega-banks that issue cards reap massive profits on the back of Main Street America.

As President Biden noted in his State of the Union Address, “capitalism without competition isn’t capitalism. It’s exploitation — and it drives up prices." That is particularly true in the U.S. card payment system, which is broken and lacks the fundamentals of a competitive functioning market. Visa and Mastercard control 87 percent of the debit card and credit card markets, with Visa alone accounting for 62 percent. Visa and Mastercard centrally set fees, rules and terms of acceptance on behalf of their member banks that merchants must pay and adhere to in order to accept card payments from their customers. It is difficult to imagine any other market in the U.S. economy in which two entities set prices for thousands of businesses that should be competitors. That lack of competition or downward pricing pressure has resulted in out-of-control swipe fees and increases inflation throughout the economy.

MPC respectfully requests that the Committee immediately investigate Visa and Mastercard’s market power and ability to unilaterally increase fees the banks that issue their cards collect. After providing a brief explanation of the inflationary effect of swipe fees, this letter provides just a few brief examples of fee increases and rule changes that are scheduled to be implemented in the coming weeks alone that will exacerbate these problems.

Visa and Mastercard Driving Up Inflation
Visa and Mastercard set the swipe fee rates that the banks that issue their cards collect every time a card is used. Those banks – particularly the mega-banks with hundreds of billions (or trillions) of dollars in assets – normally compete with each other on their fees and rates, but not on swipe fees. That lack of competition makes the fees unreasonably high and anticompetitive.

But there is another aspect of the centralized price-setting that is particularly destructive now. The largest portion of swipe fees are set as a percentage of the amount of a transaction, meaning the fees automatically rise every time other prices rise across the economy.

For Visa and Mastercard credit cards, the fees average 2.22 percent, meaning the banks and card networks receive more than $2 from every $100 spent, leaving the merchant with less than $98. Fees can be even higher with some premium cards, and the amount received by the merchant even lower.

This structure ensures greater profits for banks as prices rise. When an item sold for $100 increases to $107 based on the 7 percent inflation rate seen in 2021, the amount taken off the top for swipe fees increases from an average $2.22 to $2.38, multiplying the rate at which prices increase. The compounding multiplier effect of inflation is guaranteeing mega-banks massive profits paid for by American consumers and Main Street merchants.

In addition, swipe fees are charged on the total transaction amount, including sales tax and other taxes collected by merchants as a service to local, state and federal governments. Many of those taxes are also a percentage of the purchase amount and are also increasing as inflation forces prices up, thereby further increasing swipe fees.

Credit and debit card processing fees totaled $110.3 billion in 2020, up 70 percent over the previous decade, according to the Nilson Report. These fees are most merchants’ highest operating cost after labor, and drive up prices for consumers, with estimates equating them to $724 a year for the average U.S. family.

Swipe fees are a clear example of high costs faced by merchants that could be lowered if card networks and banks were required to compete like any other business.

Visa credit card fee increases
In April 2021, Visa and Mastercard were set to implement a combined $1.2 billion increase in swipe fees but announced that they would postpone those increases to April 2022 under pressure from Congress. Nonetheless, Visa implemented a myriad of increases, including higher fees for online commercial card transactions and increases for full-service restaurants and some other industries. The remainder of Visa’s increases are scheduled to go into effect this April, bringing its total to $842 million and creating even more challenges to Main Street merchants. Because swipe fees are a percentage of the transaction amount, inflation means the dollar amounts Visa and its banks will collect could be even higher than reflected in these figures.

Mastercard fee increases
The assault on Main Street does not stop with Visa. Mastercard is scheduled to implement $330 million in swipe fee increases in April, along with a number of rule changes. In addition, Mastercard plans to increase its Digital Enablement Fee, which is charged on all online transactions, to 0.02 percent from the current 0.01 percent. While that alone would double the amount collected across millions of transactions, Mastercard is also setting a minimum of 2 cents per transaction, bringing the total increase to an estimated $80 million on top of the swipe fee increases. Mastercard also
plans to bundle a variety of add-on services, which are currently charged separately, under this fee. That means beginning in April, merchants will be forced to pay for those services even if they do not want the services or currently use one of Mastercard’s competitors to provide the services. Mastercard’s digital enablement fee is not optional and will significantly increase processing fees for merchants large and small. This fee is being levied unilaterally without any merchant input. Merchants will now have to pay for the same service twice or stop working with a Mastercard competitor. As a result, we can expect not just merchants and their customers to be harmed, but any competitor to Mastercard that provides these services.

Mastercard Buy Now, Pay Later
Mastercard intends to automatically make merchants accept its new buy now, pay later product. Mastercard will require merchants to proactively opt-out if they do not want to accept this expensive form of payment. Most merchants are unaware of this new product, the costs associated with it, and how it could impact their customers. Mastercard is working with banks that issue its cards to add a BNPL option within consumers’ accounts.

Merchants who do not opt-out will pay an additional fee on top of the underlying swipe fee to accept the card for BNPL payments. To date, there is still no clarity on how this will work, including whether the consumer be notified of whether a merchant is participating in BNPL, who will notify consumers of which merchants are or are not participating, and what will happen if a consumer attempts to use BNPL at a nonparticipating retailer. In addition to the higher cost of BNPL fees, this new product raises
considerable concerns about consumer protection. Today, BNPL providers compete on the open market for both merchant and consumer adoption. The Mastercard program
bypasses any competition, instead allowing banks to directly target individuals without clarity on how consumers will be selected and advertised to. Additionally, by automatically enrolling merchants, a single consumer could have multiple BNPL purchases at one store, increasing the risk of over-extension.

These are only a few examples of how the two giant card networks and their partner mega-banks routinely use their market power to stifle competition and charge merchants the highest swipe fees in the industrialized world. MPC requests that the Committee immediately investigate how Visa and Mastercard are allowed to double down on the pain they inflict on Main Street when everyone else is working to tackle
inflation. It is crucial for Congress to act swiftly and implement real reforms to bring true competition, transparency and equity to the U.S. payments market. MPC and all of Main Street stands ready to work with the Committee to ensure that the payments system works for all stakeholders, not just a very few.

Merchants Payments Coalition
cc: House Committee on Financial Services members