During National Small Business Week, let’s examine the challenges that small enterprises face to their ability to stay afloat amid uncertain economic times.

Yesterday, we wrote about the economic headwinds from inflation, falling sales, increased labor costs, and regulations and how they are driving small business optimism down to its lowest level in over a decade.

We can zero in on one proposed regulation that, on its face, appears to be beneficial to small businesses and consumers but may have negative unintended consequences for both: proposed federal regulations on credit card sweep fees.

The Credit Card Competition Act

The Durban-Marshall Credit Card Competition Act (CCCA) is a proposed solution to elevated inflation under the Biden administration. Let’s not forget that inflation on goods accelerated in mid-2021 after four decades of hovering around a low 2% level because of massive one-party federal spending during the pandemic (just as the economy was recovering).

The bill authors believe that credit card swipe fees, the added fees for using a credit card to make purchases, are “a part of the problem.” That argument alone is nonsensical since credit card merchant fees have been around for decades before the crushing inflation accelerated in 2021.

Nonetheless, this bill would require that credit-card-issuing financial institutions with assets of over $100 billion enable at least two credit card networks to process their credit card transactions instead of just one. At least one of those networks must be a network other than Visa/Mastercard.

The bill’s supporters believe that increasing competition in processing credit card transactions will reduce credit card processing fees. Those savings are supposed to be passed on to consumers and small businesses. This is unlikely to occur. 

How small businesses stand to lose from the CCCA

There is a cost to offering credit and processing credit card transactions. If banks are required to work with two payment networks, even if it is unnecessary, someone will have to cover the added costs. Banks are likely to pass some of the costs of maintaining dual processing networks along to customers.

Consumers and small businesses can expect to pay the price for these new regulations in two ways:

  1. The end of credit card rewards programs. Small businesses enjoy the rewards generated by using specific credit cards and invest those rewards back into their businesses. That level is estimated to be over $12 billion. Those benefits will disappear as credit card companies save money.
  2. A reduction in the availability of credit. Banks may cut credit to some small businesses in an effort to control costs.

The savings to small businesses from the proposed regulations are unlikely to outweigh the losses they will incur. These negative outcomes would erode competitiveness for small businesses, especially compared to large businesses, which would be better suited to handle the proposed changes in this bill. 

Large businesses are also likely to benefit more from the lower transaction costs than small businesses. 

A recent paper by Indraneel Chakraborty of the University of Miami Herbert Business School explains:

The impractical hope of policymakers is that large banks and payment networks will acquiesce to bearing the additional costs without raising prices elsewhere to reflect higher operating costs. But wishing will not make it so, and much of the cost of mandating an alternative payment network will ultimately be borne by SMEs and at-risk consumers.

Decades of interchange regulation have shown that such moves are regressive. If new regulations effectively reduce interchange fees, fees and interest rates will inevitably increase elsewhere to make up for the foregone revenue, and banks will invariably reduce card rewards and access to credit for marginal consumers.

Bottom Line

Small businesses view inflation as one of their top concerns. Congress should explore ways to reduce costs for the nation’s economic engine. However, mandating new credit card processing requirements is akin to putting sugar in that engine. A policy that leads to a reduction in credit card rewards and access to credit will leave small enterprises worse off not better.