A recent report from the National Retail Federation predicts holiday sales will increase by roughly seven percent this year compared to 2021 — with the proportion of online sales projected to grow by 15%. Inflation is a key component of the equation. According to the latest government data, consumer prices are up nearly 8% compared to a year ago — meaning although Americans are spending more, they’re getting less bang for their buck.
As the United States’ economy squeezes family budgets and shakes up buying habits, Americans are looking to elected leaders to ease the pressure. Following the midterm election circus, it’s time for Congress to roll up their sleeves and get to work. But beyond reining in government spending that contributes broadly to quickly rising prices, what can be done?
A concrete reform that has already been introduced in Congress would help lower consumer prices across the board. Called the Credit Card Competition Act, the bipartisan legislation would apply free market mechanisms to the credit card industry that is currently dominated by a duopoly.
Visa and Mastercard control roughly 80% of the market, which has allowed the tag-team to increase the amount of money they charge to merchants every time a customer uses a credit card. Similar to negotiating with a gangster, businesses are left with a deal they can’t refuse and are forced to swallow the expense.
Last year, for example, businesses were charged nearly $140 billion to cover these swipe fees — an amount of money that has more than doubled since 2012. To remain financially sound, merchants are left with no other choice but to pass down the extra expense to consumers in the form of higher prices.
What exactly would the legislation accomplish?
To drive down costs that are trickling down to consumers, the bill would prohibit exclusivity contracts that link credit cards issued by banks to a particular credit card network. More specifically, it would require big banks that hold more than $100 billion in assets to include at least two unaffiliated processing networks on the credit cards they issue. There are alternatives that offer better service at lower prices without the baggage of Visa and Mastercard.
The new framework will foster competition by giving merchants more options on how they can process credit cards — rather than being strapped to Visa and Mastercard, and their high swipe fees. In practice, the change will force credit card networks to compete for a merchant’s business, driving down swipe fees in the process. Opening the door to substitute credit card networks will also attract more companies to enter the market to provide similar services — encouraging further competition.
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Opponents of the legislation — notably Visa and Mastercard, which risk losing their death grip on merchants — argue the change would compromise safety mechanisms intended to protect consumers from fraud. But that talking point falls flat on its face because artificially high swipe fees are not funding the bulwark against scams, which largely happen online — something even the CEO of Visa acknowledges. During an October earnings call, Al Kelly noted, “in an e-commerce world … the liability for fraud sits with the merchant.”
As a rule of thumb, competition and transparency benefit consumers. Lawmakers in Washington should abide by that rule to improve the financial situation of Americans struggling to grapple with a teetering economy. Passing the Credit Card Competition Act in addition to being more fiscally responsible with taxpayer dollars is a good blueprint to get started.
James Bowers is the managing director of the Center for Consumer Freedom.