Their ubiquity has been accompanied by complaints from some merchants that the amount they are charged for the service—typically 2–3 percent of the transaction—is excessive. Merchant trade associations and consumer advocates have reinforced this notion with assertions that the payment card networks collude to set excessive fees and stifle competition, charging well above the marginal cost of processing the transaction. However, these assertions ignore that creating a payment network is a costly and complicated endeavor that entails billions of dollars of investments and that the market, with four major competitors—MasterCard, Visa, American Express, and Discover—is more competitive than they allege.

Politicians responded to the anti-payment-card outrage with legislation to have the government cap card fees. In 2010, the Durbin Amendment imposed a ceiling on debit card transaction fees, along with requirements for debit card issuers to offer alternative transaction networks for merchants to choose when presented with Visa- or Mastercard-branded debit cards. The legislation resulted in millions of households losing access to debit cards while doubling the rate of debit card fraud at the same time that credit card fraud declined (Bird 2024).

The proposed Credit Card Competition Act would extend to the most commonly held bank-issued credit cards a fraud-promoting requirement that has been found to be disastrous in the debit card market: Covered banks that issue credit cards to their customers would be required to allow merchants to funnel transaction processing through cut-rate alternatives to the Visa and Mastercard networks, and the act limits the ability of card-issuer banks to require these alternative processors to provide adequate anti-fraud protection.

Why accept cards? / Merchants incur costs regardless of the medium of exchange. For instance, a business using cash must arrange for regular pickups from an agent—sometimes in an armored truck—and deal with the inevitable “shrinkage” that comes from careless or corrupt employees, not to mention an increased risk of armed robbery. Checks—still ubiquitous, albeit less common than in the past—present a risk of fraud as well.

Electronic payment card transactions are immediately transmitted to the merchant’s bank, and merchants and their employees don’t face any risk of robbery when all transactions are handled by payment cards. What’s more, customers using a debit or credit card spend 12–28 percent more per transaction than cash customers.

Payment cards provide merchants with a bigger potential market for their goods or services because their customers are not constrained by the amount of money in their pocket or, with checks, the cash in their checking accounts. Cardholders with available credit line balances are more likely than other customers to purchase extra items that were not on their shopping list.

Before credit cards gave customers the ability to make large purchases easily, consumers had to obtain individual bank loans for major purchases. Many stores extended credit to their regular customers, which was laborious and costly, invariably entailing mailing monthly bills, dealing with non-paying customers, and effectively floating loans to most customers.

Beyond marginal cost / Much like pharmaceutical companies that spend billions of dollars to formulate and test a new drug that patients’ rights groups demand be sold at or near its marginal production cost, merchants who take umbrage at their fee because it’s above the marginal cost of the transaction are ignoring the significant fixed costs of creating and maintaining the network of merchants that accept payment cards and consumers who use them. The payment card networks that exist today did not spring up spontaneously: Their creation required years of entrepreneurial labor, marketing costs, and endurance of recurring financial losses. Maintaining these networks requires continuing expenses of recruiting new merchant participants and new cardholders as businesses and the population grow and change. Transactions must be continually monitored to detect and prevent fraud and require investment to maintain the security and efficiency of the system. These costs are largely hidden from public view. Any assessment of whether these companies are earning economically excessive profit must first consider these legacy costs.

Merchants, consumer advocates, and regulators often allege that having just four major networks is a sign of imperfect competition and monopolistic fee-setting power. However, it would cost tens of billions of dollars to set up a new system, and it is hard to see how a new firm could earn back that investment in this market, as Discover, American Express, Visa, and Mastercard compete fiercely with one another. These payment card networks also face increasing competition from non-card payment systems, as well as the automated clearing house systems and emerging payment innovations. The largest retailers, Wal-Mart and Amazon, are investing heavily in researching how they could develop alternative payment structures that would bypass payment cards altogether.

Two generations ago, a vacation entailed bringing a large amount of cash and perhaps travelers’ checks, and the loss of that money in any way would create a bona fide crisis. Today, people can travel virtually anywhere in the world without bringing any cash with them. This development constitutes an incredible improvement in consumer well-being. Contending that the government should cap the fees that payment card networks charge for this service—which are effectively set by what is a competitive market—makes little sense.

Reading

• Bird, Ronald, 2024, “The Durbin Amendment: A Short Regulatory History,” Regulation 47(1): 16–19, Spring.