Congress should address the credit card charity swindle

OPINION:

Last year, Americans donated more than $480 billion to charity — generosity that typically picks up between Thanksgiving and New Year’s. But this year, meeting that benchmark will be difficult as families pinch pennies amid high inflation. A survey of 2,000 Americans conducted by the crowdfunding platform Kiva found that many plan to contribute less to charities this year than last — with 44% citing a lack of funds as the reason. 

The tight budgets are no surprise. According to the latest federal government data, inflation over the past year overtook pay growth, meaning the average American experienced what is effectively a pay cut. As a result, requests for charitable assistance have skyrocketed. It’s the perfect storm that emphasizes the need for every donated dollar to be used effectively.

One strategy to streamline the giving process — beyond donors choosing groups that spend money wisely — is for Congress to pursue reform involving credit card fees. Under the status quo, anytime someone uses a credit card to donate, a portion of the contribution is diverted to the banks and credit card networks rather than the nonprofits. These “swipe fees” amount to 2% to 3% of the transaction total. 

For example, if someone uses a credit card to donate $100 to a group that helps veterans, the charity will receive only $98. The modest $2 of waste may not seem like a big issue when isolated, but when applied to donations across the board, the bucks really add up.

How big is the charity swindle? According to the payment consulting firm CMSPI, a majority of charitable giving in the U.S. last year was done via credit or debit card. And of that money, $4.9 billion was redirected toward card companies and banks. That’s nearly $5 billion — yes, billion with a “B” — that could have been better used by the intended recipient nonprofit groups.

I understand that credit card companies and banks need to make a profit. But over time, swipe fee levels have begun rising at an alarming rate — more than doubling over the past decade. Between 2009 and 2021, total swipe fees collected by Visa and Mastercard — with sources ranging from charitable donations to back-to-school shopping — jumped by more than $50 billion alone. The dramatic trend should raise eyebrows and raise the question, why? 

The short answer: lack of competition.

Visa and Mastercard dominate the credit card industry — together controlling roughly 80% of the market. The tag team leverages its commanding position to avoid competitive pressures that typically keep costs under control in other industries. It’s why a McDonald’s Big Mac is close in price to a Burger King Whopper, or a Snickers costs roughly the same as a Butterfinger. Company executives understand that customers can always switch to a competitor.

Federal legislation has already been introduced that will create a similar competitive environment among credit card companies.

Called the Credit Card Competition Act, the bill would require banks with more than $100 billion in assets to include at least two unaffiliated credit card networks on the cards it issues to its users. In practice, that would give nonprofit groups — as well as businesses — more options on what processing network to use when someone donates or purchases an item. The change will open Visa and Mastercard — or any other credit card, for that matter — to an influx of competition that will drive swipe fees down.

For example, non-household names that process debit transactions today — such as Shazam, Star and Pulse — could all compete for merchant business. And if the new free market landscape lowers swipe fees by even a third — which would still allow credit card networks and banks to make money — that amounts to well over an additional $1 billion going to charitable organizations.

The U.S. is the most generous country in the world — altruism that shouldn’t be taken advantage of, especially with this year’s challenging economic headwinds. In that spirit, Congress should pass the Credit Card Competition Act to help stretch donor dollars. That way, charitable contributions can have a bigger impact rather than, for example, helping fund a fat $6 million bonus for Visa’s chief executive.

• Richard Berman is president of Berman and Co. in Washington.