Credit card industry squeezes small business
By Maruti Seth October 4, 2013 5:20PM
Updated: November 6, 2013 6:05AM
I’m a serial retailer. For most of my adult life I’ve owned and operated gas stations, convenience and liquor stores, and now a small group of Burger King restaurants. It’s been a unique perch from which to watch the “plasticizing” of America and how credit card companies and the nation’s biggest banks are allowed to operate like a cartel and, as a result, drive up the price of goods and services.
When I opened my first store in 1994, cash was king and “charge cards,” as they then were called, were status symbols held by a tiny number of affluent customers. When I served my first burger just 10 years ago, the fast food business was cash only. No more.
Today, almost everyone carries at least one credit or debit card that they routinely use for purchases of every size, and many people, about a third of my customers, freely use them instead of cash. But cards aren’t free.
Every time a credit or debit card is swiped, the big banks that own the big payment card companies like Visa and Mastercard charge the business taking the card a fee — usually 2 to 3 percent of the total sale. The bigger the sale, the bigger the banks’ windfall since it doesn’t cost any more to process a big transaction than a little one. Perversely, the banks have even figured out how to make their highest swipe fee margins on the tiniest sales! On small transactions, which are subject to high fixed fees, my customers and I get hit 3 or 4 times harder than usual. A $2 “Dollar Meal” order, for example, puts a 9 percent cut in these companies’ pockets. This isn’t about pennies.
Last year, swipe fees were my biggest expense after meeting payroll, buying food and supplies and paying for utilities. Put another way, in a business where margins for me and my fellow franchisees usually run between 1 and 3 percent, 1 to 2 percent of my total revenues last year went to pay swipe fees.
That’s real money that isn’t going back into my business to hold prices down, up employee hours or hire new people. Multiplied by millions of small businesses like mine, that’s at least $50 billion every year that’s lining the pockets of big banks instead of boosting America’s economic recovery.
In fact, a recent economic study conducted by Robert Shapiro of Sonecon LLC, an economic analysis firm, found that reducing debit and credit swipe fees to 12 cents and 24 cents respectively per transaction would put $34 billion back into the hands of consumers and create more than 154,000 new jobs annually.
Worse yet, since together Visa and Mastercard control 80 percent of the payment processing market, swipe fees will keep going up and up unless the people who make and enforce our competition laws do more to end their stranglehold on the market. They’ve got more than enough grounds to act.
In 2010, Congress told the Federal Reserve to look into debit card swipe fees and make sure fees were reasonable compared to what a sale actually costs the card companies. Somehow, after finding that the real per-transaction cost was only about 4 cents, the Fed decided to let card companies charge up to 6 times that much! Fortunately, a federal court this summer found that the Fed had ignored Congress’ clear instructions and ordered the agency to recalculate maximum debit fees based on banks’ actual costs.
Meanwhile, European authorities also looked into the true cost of processing debit and credit card sales. They recommended that swipe fees in the EU should be just 0.2 to 0.3 percent of the sale. Banks in the U.S. get away with charging up to 10 times that much. In retail, there’s a word for that. It’s called gouging.
As a businessman, I’m certainly not saying that “paying with plastic” provides no benefits to business, or that Visa and Mastercard shouldn’t make a fair profit themselves. That’s not the way the economy and free markets are supposed to work. I am saying that with two behemoths controlling 80 percent of it and keeping fees hidden, the payment card market isn’t free and isn’t working.
Once regulators restore it to balance and increase transparency, they and consumers can expect fierce competition in virtually all spheres of retail to convert illegitimately high swipe fees into consumer savings, job growth and employee benefits. With more and more of my customers — and every other American small business’ customers — using more and more kinds of payment cards every day, there’s no time to lose.
Maruti Seth owns and operates nine Burger King franchises in East Central Illinois.