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Credit Card Competition Act: What It Is and How It Impacts Merchants, Consumers

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The way credit card transactions are processed in the U.S. may change significantly, thanks to proposed legislation aimed at reducing the amount of fees that merchants pay for accepting those cards.

The proposed law, backed by a bipartisan group of senators and representatives, is known as the Credit Card Competition Act, and it has stirred up fiery debate since its introduction. Those in favor call it a long-overdue step toward reducing costs for retailers around the country. Those opposed say it could lead to the end of credit card rewards programs as we know it or reduce access to credit for many Americans.

Votes on the bill are expected by the end of the year, according to The Hill, though the timing and outcome are far from certain.

Here’s what you need to know.

What’s the Credit Card Competition Act?

It’s a bipartisan bill that would require credit card issuers with assets over $100 billion to include at least two possible network processors on each card. It’s backed by U.S. Sens. Dick Durbin (D-Ill.), Roger Marshall (R-Kan.), Peter Welch (D-Vt.) and J.D. Vance (R-Ohio) and U.S. Reps. Zoe Lofgren (D-Calif.) and Lance Gooden (R-Texas).

At least one would have to be a network other than Visa or Mastercard, the two biggest players in the industry. When a customer buys something with a credit card, the merchant would be able to choose which of the two available networks to use to process the transaction.

Wait, back up. What does a credit card network do and why does it matter?

A credit card network facilitates transactions between the issuers and the merchants that accept them. The four major card networks in the U.S. are Visa, Mastercard, American Express and Discover. These networks, as well as other far smaller ones, provide the infrastructure to authorize and process payments, essentially providing the rails that the credit card business runs along.

The networks charge merchants a percentage — typically 1.5% to 3.5% — of each transaction each time someone uses one of their cards. These are often referred to as interchange or swipe fees. Part of these fees go to the card network, while a larger piece typically goes to the card issuer.

To be clear, the card network and the card issuer are usually different companies. The card issuer is the financial institution that lends you the money through the card. (The biggest issuers in America include Chase, Bank of America, Citi and Capital One.) They approve or deny your application, determine your credit limit, APR and fees, and take the risk that you’ll pay back what you borrow with the card. They also provide you customer service. The card network, on the other hand, provides the connection between the issuer and merchants that allows card transactions to happen.

However, American Express and Discover, two of the nation’s biggest credit card issuers, are also credit card networks. That makes them different from other major card issuers and networks because each issues cards and processes transactions themselves.

What would the Credit Card Competition Act require card issuers and networks to do differently?

It would force most of the nation’s biggest credit card issuers to enable at least two credit card networks to be used with their credit cards. That’s a significant change because credit cards today come with a single network.

For example, you may have a credit card issued by Chase and processed by Visa or issued by Bank of America and processed by Mastercard. However, if the act were to become law, cards from many major issuers would have to allow another processing option for the card. For example, you could have a Chase card that could be processed by both Visa and American Express. Or you could have a Capital One card that could be processed by Mastercard and Discover or an even smaller card network outside the Big Four.

This wouldn’t impact all credit card issuers in the U.S., only those with assets of $100 billion or more. (In a news release, Durbin’s office estimates that would include “the biggest 30 or so” issuers.) However, even though the number of institutions impacted would be relatively small, the impact would be far larger. That’s because the credit card industry is so thoroughly dominated by a dozen or so issuers that account for the vast majority of card spending in the U.S. today.

One important caveat: American Express and Discover, which are both networks and issuers, wouldn’t be required to include the second network processing option with their cards. They would, however, be allowed to serve as a second option on other cards.

What’s the point of introducing this change?

The bill’s proponents say this is about increasing competition, leveling the playing field among credit card networks and allowing merchants to pay lower fees for accepting credit cards.

As mentioned, interchange fees can run from about 1.5% to 3.5% and have long been a big sticking point for merchants. A percent or two may not sound like much to pay for credit card processing. However, given how small many businesses’ profit margins can be, every percent matters.

According to Nilson Report, merchants paid $160.7 billion in swipe fees in 2022, a figure that’s more than doubled in the past 10 years.

That’s all about merchants, though. What would all this mean for consumers?

When it comes to the transaction, it wouldn’t have much impact on consumers. That’s because the choice of which card network to use would belong to the merchant. If your card was enabled to work with both Visa and Discover, the merchant would choose which one to use. The choice would likely be a seamless part of the transaction process, invisible to you, the cardholder.

Beyond that, things get sticky, so let’s break it down in a few areas …

1. Rewards

This has been the primary flash point in bill debates. Those against the bill say its passage will devastate the credit card rewards industry because interchange fees largely make those rewards possible. If interchange dries up, they say rewards will, too.

Opponents of the bill point to what happened to debit card rewards after debit card interchange fees were capped a little over a decade ago. Debit card rewards basically vanished overnight.

The cap was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in the wake of the Great Recession and took effect in October 2011. The part of the act dealing with the cap is typically known as the Durbin amendment, named after its primary sponsor, the same Durbin responsible for the Credit Card Competition Act.

The specter of credit card rewards vanishing is pretty scary, both for banks and consumers. However, it’s important to understand how different the original Durbin amendment’s debit-card interchange cap is from what is being proposed in the Credit Card Competition Act.

The Durbin amendment capped debit interchange fees at 21 cents plus 0.05% of the amount of the transaction. (They could also charge an extra cent per transaction if certain fraud prevention policies and procedures were implemented.) Prior to that, the average interchange fee was reportedly 44 cents. That’s a seismic change, essentially taking a blowtorch to one of banks’ most significant revenue streams overnight.

The Credit Card Competition Act has no cap, however. Card networks would be able to charge whatever they saw fit for interchange fees. What this act does is require card issuers to enable multiple networks to process each card. Yes, competition could drive down the cost of interchange fees. Yes, there’ll be significant costs involved in implementing the changes associated with the new regulations. That’s not to be overlooked, but neither is the fact that this act doesn’t cap interchange fees the way the original Durbin amendment did.

Also, it’s important to remember that American Express and Discover, half of America’s Mount Rushmore of credit card networks, aren’t subject to the multiple-network mandate. These and other questions mean that the immediate impact of the Credit Card Competition Act seems far less clear than that of Dodd-Frank’s Durbin amendment.

2. Credit access

Any major reduction in revenue for card issuers could have a chilling effect far beyond rewards. More significantly, it could lead to card issuers being less willing to extend credit to those with less-than-perfect credit. If banks bring in less revenue, they may be reluctant to take risks to lend to people who may be less likely to pay them back.

That’s a big deal and a real possibility, depending on the magnitude of the revenue loss. However, given that the Credit Card Competition Act isn’t a hard cap on fees the way Dodd-Frank was, it’s far from clear whether there’ll be a revenue loss severe enough to lead to this outcome.

3. Prices of goods and services

In theory, the introduction of greater competition would be good for consumers because merchants could pass along their swipe-fee savings in the form of lower prices. There’s no guarantee of this, however.

In fact, the bill’s detractors will tell you — and they’d be right in doing so — that the last time interchange fees were reduced, little of the merchants’ savings were passed along to consumers. A 2015 report from the Federal Reserve Bank of Richmond found the changes brought by the Durbin amendment had a “limited effect on retail prices.”

4. Data security

Detractors of the bill voice concerns that adding more smaller networks into the mix of processing credit card transactions will introduce more security risk. They claim that smaller, upstart processors may not be well-equipped to provide the security that the big established players do. They also suggest that the reduction of swipe-fee revenue would reduce the funds that the big networks and banks have to devote to security research and development.

However, the bill’s supporters say greater competition tends to encourage greater innovation and would ultimately lead to improvements that may not emerge otherwise.

What should consumers do?

Consumers should take the time to learn more about the bill and its potential impacts. The truth is that this isn’t a cut-and-dried, one-side-is-obviously-right situation. We’ve provided a 30,000-foot view of what’s happening, but there’s far more available from groups on either side of the issue.

Supporters include the National Retail Federation and the Merchant Payments Coalition, while opponents include the American Bankers Association, National Association of Federally-Insured Credit Unions and the Electronic Payments Coalition.

If you have a strong opinion, contact your elected officials to make yourself heard.

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