Small businesses and shoppers grapple with conundrum of credit card swipe fees

Facing higher costs, Twin City Nails started charging a 3.9% transaction fee every time customers swiped their credit cards to pay for their manicures and pedicures.

Manager Alisha Nguyen of the St. Louis Park location said the business could no longer absorb the fee after reopening following the COVID-19 shutdown. So the salon added the credit card surcharge but subtracted it for customers paying in cash.

"The cost of rent and supplies were increased," she said. "It was hard to cover the costs of transactions to accept credit cards."

Twin City Nails is among the growing number of businesses locally and nationally passing on credit card fees to customers, whether it's built into the price or added on as a surcharge. Companies, such as T-Mobile, are asking customers to move their regular payments from credit cards to debit cards or bank accounts to maintain their monthly discount. More restaurants and small businesses offer price reductions for paying cash.

Now, some of the large groups representing retailers — including the National Association of Convenience Stores and the National Retail Federation — are fighting back against what they feel are unfair fees.

The Credit Card Competition Act of 2023 — introduced in Congress earlier this year after an unsuccessful debut in 2022 — would enhance credit card competition and choice in order to reduce excessive credit card fees, supporters said. They allege fees are ballooning out of control because Visa, Mastercard and the largest banks who issue cards set fees. If the measure becomes law, retailers could save $15 billion, supporters say.

"Business owners, local restaurant owners, all those sorts of folks have seen this huge cost of theirs, which on average is their second-highest operating cost already, just explode," said Doug Kantor, general counsel of the National Association of Convenience Stores.

Opponents — which include the American Bankers Association, Airlines for America and Electronic Payments Coalition — contested the proposal would ultimately do away with credit card rewards and security measures that consumers value.

If it becomes law, payments could move to a cheaper, less secure network that sacrifices customers' security, said Brian Kelly, founder of the Points Guy, a leading voice on rewards and loyalty programs. As a result, he said banks that issue credit cards would have less ability to fund loyalty programs, secure their networks and innovate their payment technology.

"By axing the ability to earn points on credit cards, which is how most consumers earn points, it's going to cause huge headaches for consumers," Kelly said.

Nick Simpson, a spokesman for the Electronic Payments Coalition, believed the proposed legislation could lead to major data security concerns and said credit cards are more efficient than cash.

"If you look at the cost of handling cash, the cost is 9 percent. In a restaurant or bar, it's 15 percent," he said. "That's because somebody's going to miscount the cash someone gives you or you're going to have to have a safe or have man-hours to go to the bank."

Airlines for America, an opponent of the proposal, recently released economic data on visitors using rewards from cobranded airline credit cards and found 160,663 visitors used reward points to travel to Minnesota, resulting in $129.3 million in spending, $9.7 million in state and local tax revenue and 2,356 supported jobs.

Supporters of the legislation said they believe increased competition will lower costs for retailers and consumers.

According to the office of bill co-sponsor U.S. Senate Majority Whip Dick Durbin (D-IL), the Visa-Mastercard "duopoly" controls more than 80% of the U.S. credit card network market — more than 576 million cards — and every time someone swipes a Visa or Mastercard credit card, the companies deduct about 2% to 3% out of the transaction total.

Some of that cut Visa and Mastercard keep for themselves as a network fee, but Durbin's office said most of it is an interchange fee which Visa and Mastercard fix but pay to the bank that issued the card.

In 2022 alone, his office said Visa, Mastercard and their card-issuing banks charged merchants a total of $93 billion in credit card fees that businesses pass on to consumers in higher prices on everything from gas to groceries. And the fees keep increasing every year or so.

The bill would require the largest credit-card issuing financial institutions in the country — those with assets of more than $100 billion — to enable using their credit cards on at least two credit card networks instead of just one, and at least one of those networks must be a network other than Visa or Mastercard.

For more than a decade, federal law has required debit cards to carry at least two debit networks, which has helped hold down fees, supporters said. But Kelly of the Points Guy noted debit card issuers ceased rewards after that change.

Only the biggest 30 banks would have to obey the bill's requirements. Cards where the network is itself the card issuer — such as American Express and Discover cards — would not have to add a second network, though they could serve as a second network.

If the bill becomes law, how much relief consumers will actually experience remains unclear. Most regulars at Twin City Nails haven't switched to cash to lower their costs.

"I would say the credit card use is a high amount because a lot of people don't carry cash around," Nguyen said.