The Economist: Visa-Mastercard Duopoly Bad for US Consumers and Retailers

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ALEXANDRIA, Va.—The United States has the highest credit card fees of any major economy, and those fees primarily benefit Visa and Mastercard, as they process more than three-quarters of all card transactions, reports The Economist. In 2021, the companies had net margins last year of 51% and 46%, respectively, and have consistently ranked in the top 20 companies in the S&P 500 Index for average net profit margins every year over the years. last 10 years.

But the dominance of the two companies could be lessened due to the Credit Card Competition Act, tabled in the Senate at the end of July, which would require the largest American banks issuing Visa or Mastercard credit cards to authorize the processing of transactions on at least two companies not affiliates. card payment networks — the same process that has been used for debit card transactions for over a decade.

The reign of Mastercard and Visa could also be threatened by cheap virtual payment options. In Brazil, China, and Indonesia, payments are now made through app-based options from companies such as Mercado Pago, Ant Group, Tencent, and Grab, and new entrants like these may emerge in the U.S. payment landscape. payments.

In the United States, Visa and Mastercard credit card-issuing banks charge swipe fees that average 2.25% of the purchase price when cards are processed on the Visa or Mastercard networks, a rate significantly higher than in other countries. American companies pay seven times more sweeping fees than European companies and five times more than Chinese companies.

These costs are ultimately passed on to consumers, funding their credit card benefits and bonuses, unbeknownst to them. According to an article published last year by Joanna Stavins of the Federal Reserve Bank of Boston and her colleagues, retailers are raising prices at checkouts by 1.4%, passing on interchange costs to households.

“The way of thinking is that if you don’t get your points, you’re basically funding other people’s points,” Brian Kelly, who founded the popular points hacking blog, “The Points Guy,” told The Economist.

Because these higher costs are built into the price of the goods, all consumers incur the swipe fee, whether they pay with cash or credit card. The Economist writes that households with an annual income of less than $25,000 (about a quarter of the total number) receive no net rewards on average, because everything they receive is fully offset by fees. Households that bring in more than $135,000 a year get back in points or benefits about 0.6 percentage points of the interchange fees they pay.

New fintech companies offering alternatives to credit card payments are slowly emerging and could pose a serious threat to Visa and Mastercard. For online retailers, Klarna is a “buy now, pay later” provider, and customers can pay for their purchases using multiple bank transfers.

Additionally, Catch, a fintech app, can link a consumer’s bank account through another payment startup called Plaid. The author of The Economist article used Plaid for an online purchase, and in return, the online retailer she was buying from offered her 5% off her next purchase.

Visa clearly sees the threat in Plaid. He tried to buy the company in 2020 for $5.3 billion, but the deal was rejected by antitrust regulators on the grounds that the deal would have allowed Visa to remove a competitive threat.

Additionally, FedNow is a real-time bank transfer system being built by the Fed and expected to launch in 2023.

Sweeping fees remain one of the highest operating costs for convenience retailers after labor, according to NACS State of the Industry data. In 2021, overall card fees paid by the convenience store industry were $13.5 billion, up 25.6% in 2021 from 2020 ($10.7 billion), according to NACS data. SELF.

NACS asks its members to contact their senators and ask them to co-sponsor the Credit Card Competition Act, S. 4674, using the NACS Grassroots portal. Congress must act to ensure there is swipe fee price competition and allow the United States to have an innovative and efficient credit card market.

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