The Credit Card Competition Act—introduced last year by a bipartisan group of senators—may be under consideration during this session of Congress, and industry groups are lining up for and against.
If implemented, cards from the nation’s largest banks would be required to be routed over at least one competing network in addition to Visa or Mastercard’s networks. Merchants would then choose between the networks, going for ones that are cheaper and have better services. Merchants would save money, and perhaps pass on some of those savings to customers in the form of lower prices. To a certain degree, they already do this. They offer discounts to customers who pay with cash or debit cards, which typically have lower transaction fees than credit cards. In theory, they might do the same with their savings in fees.
Credit Card Fees Add Up for Merchants
Merchants typically pay a variety of fees when customers pay via a credit card. These fees can vary depending on several factors, including the type of card used, the card network involved, and the terms of the merchant’s agreement with their payment processor.
What’s more, merchants are forced to pay whatever network the credit card issuer chooses, if they decide to accept the card. They end up paying an interchange fee to the customer’s credit card issuer (typically a bank), a network fee to the processing network (typically VISA or Mastercard), and a fee to the payment processor (such as Square). There can be additional fees for chargebacks.
Overall, the fees that merchants pay when a customer uses a credit card—1.5% to 3.5% of the total transaction—adds up quickly and it can have a significant impact on their bottom line.
Cutting down on these fees can produce significant savings for merchants. For credit card companies, this will directly affect their profitability, and might cause them to increase late fees and reduce rewards to make up for these losses.
Parallels in Past Legislation
To consider what might happen if the Credit Card Competition Act is enacted, consider what happened when legislation in a similar spirit, The Durbin Amendment, was passed.
The Durbin Amendment is a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law in 2010. The amendment capped the interchange fees that debit card issuers, such as banks and credit unions, can charge merchants for processing debit card transactions. Prior to the enactment of the amendment, these fees were typically set by the card networks, such as Visa and Mastercard, and were often considered to be excessive by merchants and consumer advocacy groups.
Under the Durbin Amendment, the interchange fee for debit card transactions was capped at a maximum of 21 cents per transaction, plus an additional fee of up to 0.05% of the transaction amount.
The cap on interchange fees was intended to increase competition in the debit card market and provide relief to merchants who were paying high fees for processing transactions. The idea was that with lower fees, merchants would be able to pass on the savings to consumers in the form of lower prices, and that increased competition would encourage more innovation and efficiency in the market.
While the Durbin Amendment has had some success in reducing interchange fees for merchants, it has also been the subject of ongoing controversy and debate. Some critics argue that the cap on fees has had unintended consequences, such as increased fees for consumers or reduced access to credit for small businesses, while others argue that it has been effective in reducing costs and increasing competition in the market. One clear result is that debit card rewards programs are pretty much a thing of the past.
The Credit Card Competition Act is different than the Durban Amendment in that it doesn’t cap fees, but rather forces competition. Nevertheless, for consumers, credit card benefits will likely take a hit as credit cards become less profitable. Merchants will benefit, and more competition is generally a good thing in a market economy.
Brian Riley, Director of Credit and Co-Head of Payments at Javelin Strategy & Research cautions that “the [Credit Car Competition Act] might sound attractive to politicians that want to influence payment costs, but the untended consequence will be to reduce credit availability, at the time that may voters are navigating high inflation and a riskier environment.”