China’s payment foothold threatens American small businesses

OPINION:

This summer has delivered a shot in the arm for small businesses across the U.S.

With World Cup watch parties and America’s 250th birthday celebration, consumers have been showing up in force at local bars, restaurants and shops.

The boom comes on the heels of record small-business formations in the first half of the year.

Still, that momentum is fragile. China is wrangling to secure a foothold in our payment system, which processes millions of transactions every day.

A single disruption could have a major chilling effect on commerce. For that reason, keeping our payments infrastructure secure and competitive should be a national priority.

Today, roughly 8 in 10 small businesses use online marketplaces to reach consumers. That digital transformation has unlocked tremendous opportunities, allowing entrepreneurs to ship merchandise from coast to coast with a single click.

Yet the digital age has also exposed businesses to threats such as cyberattacks, fraud and intellectual property theft.

Although the United States has strong legal protections and enforcement mechanisms designed to deter bad actors, Beijing often turns a blind eye to them. American startups, such as fashion retailers and design shops, have fallen victim to overt Chinese copycat violations.

In 2019, 1 in 5 North American companies had their intellectual property stolen by China, according to a CNBC survey.

China’s appetite for exploiting American innovation and intellectual property does not stop there. It extends to the financial infrastructure that powers everyday commerce. UnionPay, a Chinese-owned credit card network, is accepted by more than 80% of U.S. businesses.

This is creating a back door for the Chinese Communist Party to access American payment data.

Federal lawmakers have an opportunity to slam that door shut via the Credit Card Competition Act. Endorsed by a bipartisan coalition of leaders, including President Trump, Sen. Richard J. Durbin, Illinois Democrat, and Sen. Roger Marshall, Kansas Republican, the legislation includes a provision requiring the Federal Reserve to establish and publish a list of payment networks operated by foreign entities or that pose national security risks, which covered banks would then be barred from using as a routing option.

The change would give federal regulators a path to block foreign payment systems, such as UnionPay, that could be used for nefarious purposes.

In addition to targeting the source of foreign interference, the legislation would also take aim at a modern-day credit card cartel, which raises its own security concerns. Right now, two financial titans — Visa and Mastercard — control 85% of the credit card market, according to the bill’s sponsors.

Such concentrated power is risky. If either company sustains a network outage, tens of millions of small businesses and their customers would lose the ability to process transactions.

Southwest Airlines’ 2022 scheduling meltdown, which lasted 10 days, provides a tiny taste of the potential chaos. The airline lost its ability to reschedule flights and crews, stranding more than 2 million travelers. Imagine if a majority of businesses, including gas stations and grocery stores, temporarily lost the ability to serve consumers.

The Credit Card Competition Act would throw cold water on this issue by requiring banks with more than $100 billion in assets to include a second processing network beyond Visa and Mastercard on the credit cards they issue. That single change would help to diversify payment networks and give small businesses alternative options if a system fails.

Main Street should not be forced to put all its financial eggs in one basket.

Small businesses are the backbone of the American economy, and they are experiencing a summer renaissance. As low taxes and regulatory cuts continue to provide a strong foundation for this revival, hardening payment networks to better protect the small-business economy from cyber sabotage would be a strong next step.

• Alfredo Ortiz is CEO of Job Creators Network, author of “The Real Race Revolutionaries” and co-host of the “Main Street Matters” podcast.