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| An estimated 52% of credit card spending on the four major card networks takes place on Visa. |
Jan. 4, 2025, 6:00 PM GMT+6
Many small businesses are experiencing relief as inflation eases and the competition for workers slows down. However, the growing trend of consumers using credit cards is significantly eating into their profits.
Gene-Christian Baca, owner of Walter’s Hot Dogs in Mamaroneck and White Plains, New York, estimates that his business now spends around $50,000 annually on credit card processing fees. This cost has surged due to both higher processing rates and a growing preference for credit card payments over cash.
"Each year, 3% of our sales are lost to credit card processing," Baca explains.
Merchants have long borne the burden of "swipe fees"—the fees charged by banks and card companies each time a customer swipes their card. While a federal regulation caps debit card swipe fees at 21 cents per transaction, credit card fees can be much higher.
As cash use declines in favor of plastic cards and mobile payment apps, businesses have seen a sharp rise in credit card transactions. According to a Federal Reserve study, credit card payments made up 32% of all U.S. consumer transactions in 2023, up from 24% in 2019. Meanwhile, cash's share of payments dropped from 26% to 16%.
Spending on cards from American Express, Discover, Mastercard, and Visa in the U.S. surged to $5.25 trillion in the first half of 2024, up from $4.98 trillion in the same period in 2023, based on data from the Nilson Report.
This shift in consumer behavior has added pressure to business costs. In 2023, merchants paid an average of 2.26% in swipe fees for transactions using Visa and Mastercard credit cards. These two companies accounted for more than $100 billion of the total $172 billion in U.S. swipe fees that year.
Visa recently raised two of its credit card swipe fees on January 1, a move that has sparked criticism from some lawmakers and advocates who argue that these fees are excessive and often passed on to consumers.
"If Visa increases swipe fees, the likely result is higher prices for consumers," says Matt Schulz, chief credit analyst at LendingTree. "While the exact timing is uncertain, when these fees go up, merchants typically pass on the additional costs."
The Merchants Payments Coalition, which represents major trade groups in retail and restaurants, estimates that Visa’s higher fees will cost businesses an additional $100 million annually. Doug Kantor, a member of the coalition’s executive committee, explains, "Even a small increase in every transaction adds up over time."
The coalition also points out that the $172 billion in swipe fees in 2023 represents a record high and estimates that these fees cost the average American family over $1,100 annually. They are pushing for more transparency in credit card fees, increased competition among networks, and lower fees. Visa argues that its fee changes are aimed at improving the network, claiming it has "no incentive to set [fees] at levels that are too high or too low."
The Electronic Payments Coalition, which supports card networks like Visa, counters that swipe fees have remained relatively stable over the past decade, even as overall sales have grown. They also argue that businesses face their own costs when handling cash, such as operating cash registers and paying bank fees.
Small businesses handle swipe fees in various ways. Some, like Walter’s Hot Dogs, incorporate the fees into their pricing. Others, such as Patz Deli in Manchester, New Hampshire, charge a 4% convenience fee for credit card transactions to offset the processing costs. Deli owner Pat Burns explains, "It's not our credit card; it's your choice to use it, but we’re the ones getting charged."
Burns says the deli introduced the convenience fee as a response to mounting pressures from taxes, wages, and other expenses. "By the time you bring home any money, 10 other people have already had their hands in it," he said. "Even a small percentage like 3-4% from credit card fees helps small businesses stay afloat."
Consumer experts suggest using cash for small transactions, leveraging rewards cards for better returns, and paying in person rather than over the phone, as phone payments can incur higher fees due to security concerns.
The issue of swipe fees has reached Congress, with the Credit Card Competition Act—spearheaded by Sens. Dick Durbin, D-Ill., and Roger Marshall, R-Kan.—aiming to increase competition among credit card processors. However, the bill has stalled amid opposition from banks, credit card networks, and credit unions, who argue it would hurt small businesses and consumers, in part by limiting rewards.
"Swipe fees have long been a contentious issue," says LendingTree’s Schulz. "It seems this battle is set to continue for the foreseeable future."
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