Credit Card Competition Act: What it is, and how it would affect consumers if passed

Lawmakers are taking another go at providing network choice for processing credit card transactions, an effort that could impact consumers and has raised concerns about reduced credit card rewards and card security.

Senators Dick Durbin and Roger Marshall are looking to move forward with the Credit Card Competition Act of 2023 (CCCA) legislation they proposed earlier this year (which follows a similar 2022 effort). While efforts to attach the bill as an amendment to the National Defense Authorization Act (NDAA), did not go through, the bill is expected to be voted on this year.

And following news reports that Visa and Mastercard are planning to raise their card transaction processing fees for online transactions in October, Durbin and Marshall have weighed in and asked the two major card networks to drop their plans to raise the fees. They also noted that there is more need for competition in the credit card network space to bring down costs.

However, Mastercard told pymnts.com that the news reports are “not correct” and there are no upcoming changes to Mastercard’s interchange fees. According to a Mastercard spokesperson cited in the pymnts.com story, the change referenced in news reports is an “existing service” the network provides acquirers (merchants’ banks) that they can activate as required to provide a “safer and more streamlined checkout experience” for consumers.

The CCCA legislation would require big banks to give merchants a choice of two different networks to process credit card transactions. Currently, credit cards bearing a Visa logo are only processed through the Visa network, while transactions on cards backed by Mastercard are only routed through Mastercard’s network.

In a press release about the proposed legislation, Senator Dick Durbin (D-IL) noted, “Credit card swipe fees inflate the prices that consumers pay for everyday purchases like groceries and gas.” The bill is also backed by Rep. Zoe Lofgren (D-CA), Rep. Lance Gooden (R-TX), Sen. Roger Marshall (R-KS), Sen. Peter Welch (D-VT) and Sen. J.D. Vance (R-OH).

Those opposed to the legislation, including banks, say that, if passed, the legislation would result in a cutback on credit card rewards and also raises card security concerns.

What is the CCCA trying to accomplish?

To accept your credit card, merchants need to pay card transaction processing fees, or swipe fees, which cut down on the money they receive from a sale. For instance, if a good costs $100, on average, 2 to 3 percent of that goes toward these fees. This means that the merchant actually receives only $97 to $98 of your $100 payment.

A so-called interchange fee accounts for the majority of this card transaction processing swipe fee, which goes to the bank that issued your credit card. The credit card processing fee also includes a fee to the merchant’s bank, the card network involved in the transaction and sometimes to a payment processing company. Today, Visa and Mastercard set interchange fees for the cards processed on their respective networks.

The legislation would require large banks (those with more than $100 billion in assets) to provide merchants a choice of two different networks for processing transactions. One of them could be Visa or Mastercard, but the other would be a different network. Legislators point out that these two networks together have more than an 80 percent share of the credit card network market (controlling more than 576 million cards), effectively making them a duopoly.

The idea is that giving retailers network choice would spur competition between the networks and result in lower interchange fees for merchants, which could be passed on to consumers in the form of lower prices. The networks could also compete on the basis of increased security for transactions. The network choice proposal would not apply to cards issued by Discover and American Express, which serve as their own networks. However, either of these two networks could be the second network in a transaction along with Visa or Mastercard.

Retailers applaud, while others say the bill would hurt consumers

The proposed legislation has been applauded by retailer associations, while banks have spoken out against it.

In a press release, Doug Kantor, general counsel for the National Association of Convenience Stores, said, “Swipe fees that drive up costs for small merchants and prices for American families are already the highest in the industrialized world and are going nowhere but up. Lack of competition is the problem, and the sooner the card industry can be made to compete the better. As policymakers work to reduce inflation, this carefully crafted bill will lead to lower fees and better security while helping merchants hold down prices.”

The American Bankers Association (ABA), however, said the bill is a “regressive bill that takes from consumers, community financial institutions and small businesses and gives to the most profitable global retailers and biggest grocery chains.”

The Credit Union National Association (CUNA), a trade group for credit unions, also spoke out about the proposal in a press release, saying that only big retailers stand to benefit. According to Jim Nussle, CUNA’s president and CEO, “This bill would allow these large merchants to use the cheapest credit card processing option, with no requirement to keep consumers’ data safe or return savings back to them.”

In response to security concerns, the proposed legislation also requires the Federal Reserve to identify a list of networks that banks cannot use (as the second network) to process credit card transactions (including networks that present a national security threat or those owned or operated by foreign governments).

Will there be an impact on credit card rewards?

Besides the potential security concerns, there is also the issue of whether any reduction in interchange fees that card-issuing banks receive will lead them to cut down on the rewards they dole out to cardholders.

In response to a query from Bankrate, Stephanie Martz, general counsel for the National Retail Federation, a retail industry trade association, noted, “Rewards are banks’ main marketing tool for getting a consumer to choose a Visa or Mastercard from one bank over another and they are unlikely to give that up. The $11 billion that would be saved under this legislation is only a fraction of the swipe fees collected on credit cards last year, so banks would still have plenty of revenue left to cover rewards.” She added that, while banks have previously threatened to take away rewards if swipe fees were lowered in Europe and Australia, that hasn’t happened.

However, the National Association of Federally Insured Credit Unions maintained, in a press release, that “contrary to merchants’ deceptive claims, data shows consumers end up paying more across the board — from higher prices of goods, to more expensive card products at their financial institutions, and fewer rewards and benefits on their card purchases.”

Impact of Durbin Amendment on debit card marketplace

The Durbin Amendment to the Dodd-Frank Act of 2010 was a similar legislative measure to contain interchange fees in the debit card marketplace as well as introduce network choice. That legislation’s cap on interchange fees on debit cards didn’t apply to banks with total assets under $10 billion.

A look at the impact of that law may give an indication of what might happen if the current proposal targeting the credit card market goes through. According to a 2014 study by the Federal Reserve, the Durbin Amendment led to “significant reductions” in interchange income for impacted banks. Moreover, those banks were not able to make up for this lost income by shifting consumers to credit cards (which don’t have a cap on interchange fees).

However, the banks raised their deposit fees and thereby made up 30 percent of their lost income. The banks also did not cut down on costs by shutting branches or reducing their employee count.

Further, a 2019 study by academics out of the University of Pennsylvania Carey Law School found that banks fully made up for their losses by charging higher fees for their products, such as by cutting down on free checking accounts. And retailers only passed on savings to consumers in very competitive situations where debit card usage was high. The study found that consumers did not see savings across the board and are not helped by the legislation.

Ted Rossman, Bankrate’s senior industry analyst, is concerned about a similar fallout on credit card rewards if the CCCA passes. He notes that after the Durbin Amendment took effect, debit card rewards mostly dried up.

“I think the Credit Card Competition Act is a threat to credit card rewards, data security and access to credit,” Rossman says.

And according to the ABA, “We’ve seen this movie before: the original Durbin Amendment eliminated debit card rewards, raised banking fees, and increased fraud costs all without lowering costs for consumers.”

What consumers can do

For those concerned about losing out on credit card rewards, you can take action by contacting your elected representative and sharing your views. Consumers can also indicate their opposition to the act by sending a message through “Hands Off My Rewards,” which is a project run by the Electronic Payments Coalition.

The bottom line

The Credit Card Competition Act of 2023 seeks to provide network choice for processing credit card transactions by requiring banks to name an additional network (besides Visa or Mastercard) to process credit card transactions. This would give merchants some choice and lead networks to compete on the basis of interchange fees and security.

Based on past legislation in the debit card processing space, banks may try to make up for lost revenue via other means. This could have a consumer impact, such as a lower level of credit card rewards.