The Hidden Costs of Convenience: How Credit Card Fees Burden Local Businesses

Credit cards are a modern convenience most consumers take for granted. For local businesses, however, the convenience comes with a significant and often underappreciated cost. Credit card processing fees, which typically range between 1.5% and 3.5% of each transaction, can quickly add up to a hefty expense. While these fees are often absorbed as part of doing business, certain aspects - like fees applied to tips and taxes - place an unfair burden on businesses, especially small, independent ones.

Fees on Tips and Taxes: A Double Hit

When a customer tips their server or pays sales tax on a purchase, these amounts often pass directly through the business to workers or the government. Yet, credit card companies charge fees on the entire transaction, including these amounts. This means small businesses pay a percentage of money that doesn’t contribute to their revenue. For restaurants, where tipping is common, or in high-tax states, the impact is even more pronounced.

The Tax Rate Incentive

Here's where the issue becomes more troubling. The higher the tax rate, the greater the revenue credit card companies collect through processing fees. For example, in a state with an 8% sales tax, a $100 transaction incurs $8 in tax. A 3% credit card processing fee on that tax alone nets the processor $0.24. While this might seem negligible in isolation, across millions of transactions, these fees generate billions in revenue - paid not by credit card companies, but by local businesses already operating on thin margins.

This creates a perverse incentive for payment processors to benefit from higher tax rates. As taxes rise, their cut of the pie increases without any additional service or value provided. This dynamic places small businesses in an untenable position, shouldering costs beyond their control while corporate giants reap the rewards.

Why Small Businesses Suffer Most

For small businesses (the bedrock of our economy), these fees are more than a line item - they can mean the difference between profitability and closure. Unlike large corporations with bargaining power to negotiate lower fees, local businesses often pay higher rates. Additionally, because many small businesses operate in service-based industries like dining or hospitality, they’re disproportionately impacted by fees on tips.

These challenges hinder entrepreneurship and local economies. Every dollar a small business spends on unnecessary fees is a dollar not reinvested into the community through wages, inventory, or local hiring.

A Free Market, but for Whom?

The credit card industry has been dominated by a few major players who wield immense pricing power. Businesses are often locked into the existing system because cash transactions are declining, and customers demand the ease of card payments. Yet, this lack of meaningful competition creates an environment where fees remain high, and businesses are left with little recourse.

Addressing these imbalances doesn’t mean undermining the free market; it means ensuring the market remains free for all participants. Excessive fees on non-revenue portions of transactions - like tips and taxes - are antithetical to the principles of capitalism.

A Path Forward

Representative Brooks is collaborating with local businesses and organizations to develop sensible free-market solutions to address these challenges. Stay tuned to his future newsletter for more details.