For years, merchants have been arguing that card network operators leverage market power to charge exorbitant fees. On the other hand, the industry argues that fees closely reflect the high cost of offering secure, reliable, and fast transactions associated with credit card merchant accounts.

The Credit Card Competition Act of 2023 (CCCA) legislation was proposed by U.S. Senate Majority Whip Dick Durbin (D-IL), Chair of the Senate Judiciary Committee, and U.S. Senator Roger Marshall, M.D. (R-KS). The bill is also backed by Rep. Zoe Lofgren (D-CA), Sen. Peter Welch (D-VT), Rep. Lance Gooden (R-TX), and Sen. J.D. Vance (R-OH).

What is the primary objective of CCCA?

Presently, merchants are required to pay swipe fees or card transaction processing fees that cut down on the money they receive from a sale. For instance, if a product costs US$100, on average, 2-3 percent of that goes towards these fees. This means that the merchant receives only US$97 to US$98 for the US$100 payment. An interchange fee accounts for a significant majority of this card transaction processing fee that goes into the pockets of the bank that issued the credit card. This fee also includes a fee payment to the merchant bank. Today, MasterCard and Visa set interchange fees for the cards that get processed on their networks.

The proposed legislation would make it mandatory for large banks with assets of more than US$100 billion to offer a choice of two different networks to merchants for processing transactions. One of them could be MasterCard or Visa, but the other one has to be a different entity. It has been pointed out by the legislators that MasterCard and Visa enjoy a duopoly controlling more than 576 million cards or 80 percent of the credit card network market.

The primary objective of the Credit Card Competition Act of 2023 (CCCA) is to end the duopoly enjoyed by MasterCard and Visa and reduce interchange fees for merchants. The benefits of CCCA would be passed on to consumers in the form of reduced prices while the networks would compete with each other for increased security for transactions. The proposal for network choice would not apply to credit cards issued by American Express and Discover that serve as their own networks. However, American Express and Discover can act as the second network in a transaction along with Visa or MasterCard. The proposed legislation also requires the U.S. Federal Reserve to compile a list of networks that banks cannot use as the second network to process credit card transactions.

The CCCA has received mixed responses from retailer associations and banks. The National Association of Convenience Stores has remarked that swipe fees drive up costs significantly for small merchants. It added that the lack of competition is the primary problem and the card industry will benefit from the proposed legislation. The American Bankers Association (ABA) remarked the CCCA is a regressive bill that would take from small businesses, consumers, and financial institutions and give it to the most profitable grocery chains and global retailers. The Credit Union National Association (CUNA) said that the legislation would only benefit the big retailers.

How will the CCCA impact credit card rewards?

A possible reduction in interchange fees charged by card-issuing banks would encourage them to cut down on credit card rewards that are doled out to cardholders. The legislation wants to place limitations on the present-day status quo relationships between the payment networks and the largest issuing banks. The reduced interchange fees to all merchants would translate to reduced prices for products and services for consumers.

Many reward cards are co-branded with partners such as retailers, hotels, and airlines. Card issuers generate revenue because of enhanced use and linked interchange fees while partners end up receiving payments for marketing, rewards, and other ancillary benefits such as lounge access. These deals represent more than 5 percent of total revenue for the top 6 airlines in the United States alone and 5 times their annual revenue.

Exempted card issuers will still be able to provide rewards to customers and the level of offered security of their networks would not be impacted. Merchants who have partnerships with exempted third-party card issuers would almost certainly benefit at the expense of other merchants whose co-branded cards were issued by MasterCard or Visa that are covered by the CCCA. For instance, Delta Airlines which has a co-branded card with American Express would benefit at the cost of other airlines.

The CCCA may also affect the capital costs of many airlines. For instance, a cut in expected revenue from the sale of rewards may translate to the downgrading of the bonds issued by United and American Airlines’ rewards-program subsidiaries during the pandemic by credit rating agencies. This could further increase the capital costs of parent companies impact their expected future profitability and lead to bankruptcy.

Many against the legislation claim that the loss of interchange revenues and increased cost of compliance would reduce the ability of such financial institutions to provide low-cost or free banking products. The legislation could also impact co-branded credit card agreements that are already in place between commercial entities with material rewards programs and covered card issuers.

Opponents of the proposed legislation cited the Dublin Agreement (Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010) that introduced dual routing requirements and capped interchange fees on debit cards in 2011. Subsequently, rewards on debit cards were removed. They further added that history could end up repeating itself if the CCCA reduced interchange fees for credit cards just like the Dublin Agreement did for debit cards.

Chairman Patrick McHenry, R-N.C. is likely to remain an opponent of credit card interchange amendments while bankers and merchants are likely to continue with fierce lobbying. MasterCard has commented that the CCCA would erode security, remove consumer choices, prevent small businesses from investing in the future, and eliminate rewards.

Conclusion

The Credit Card Competition Act may hurt credit card processing and is unlikely to pass on any real benefits to consumers. Although the intention of the proposed legislation is good, its execution and scope don’t fall in line with the primary objective.