The Credit Card Competition Act may bring changes to your credit card, but not necessarily in the way you think.
A credit card competition bill targeting merchants charging credit card fees failed to pass Congress last year, returning to the Senate on June 7. While the bill has yet to be voted on, if passed, it would create more competition in the market for credit card processing networks and aim to lower the fees merchants pay every time they use a credit card.
Supporters of the bill say it could help businesses lower prices, which would have a positive impact on consumers. But opponents argue that merchants will not lower prices and that credit card issuers may close or cut rewards programs to make up for lost profits.
But credit expert John Ulzheimer, a contributor to FICO and Equifax and former president of consumer education at Credit.com, isn’t worried about premiums disappearing. “Card issuers are very smart,” Ulzheimer said. “I doubt that rewards will be impacted because consumers place a high value on their rewards programs. There are many other places [credit card issuers] that can make up for the decline in fee revenue.”
What exactly are credit card competition laws? How will it affect you? We’ll explain everything you need to know about the CCC law, the arguments on both sides, and whether its passage could actually change credit card rewards programs.
What is the Credit Card Competition Act?
The CCC Act is a bipartisan bill sponsored by Senators Richard Durbin, a Democrat from Illinois; Roger Marshall, a Republican from Kansas; Peter Welch Welch, a Democrat from Vermont; and J.D. Vance, a Republican from Ohio; and Rep. Lance Gooden, a Republican from Texas; Zoe Lofgren Lofgren, Democrat of California; Thomas Tiffany, Republican of Wisconsin; and Jefferson Van Drew, Republican of New Jersey. Its goal is to limit merchant fees by increasing competition among credit card networks and keep swipe fees above 2%.
To facilitate your credit card payment, the merchant pays the credit card network a fee called a credit card transaction fee or swipe fee. This fee ranges from 1.5% to 3.5% on average.
Most of the card swipe fee goes to the card-issuing bank and is called an interchange fee. But merchant banks, credit card networks (the two largest of which are Visa and Mastercard, with a combined market share of more than 80%) and sometimes payment processors also gain share.
The fees will cost merchants $126.35 billion in 2022, powering $5.76 trillion in card transactions, a 20.2 percent increase over 2021. Many people have no choice but to pay by credit card when they want to accept it – it’s almost a requirement of doing business in this world.
Currently, Visa and Mastercard have a duopoly, controlling more than 80 percent of the online credit card market with 576 million credit cards, according to Dubin in his summary of the CCC bill.
This means that most consumer credit cards will be used through the Visa or Mastercard network, even if they are issued by different banks. If a merchant wants to accept any Visa credit card, it must accept all Visa credit cards from all banks and issuers, regardless of the fee. The same applies to MasterCard.
The CCC law would require the largest credit card issuing financial institutions — those with assets exceeding $100 billion — to allow their cards to use at least two processing networks; one of which could be Visa or Mastercard, but the other would have to be another network. Merchants can then choose which of the two networks to use to process transactions, giving them some degree of control over the fees they pay.
This will lead to competition among Visa, MasterCard and other credit card networks, and is expected to push the online giants to lower the fees they charge merchants to facilitate card payments. If merchants pay lower fees, they can lower prices for goods and services, which benefits customers.
“Credit card fees raise the price of everyday grocery and gasoline purchases for consumers,” Durbin said in a June 7 news release. costs to merchants and their customers.”
Will this bill save consumers money?
While proponents of the bill argued the legislation would lower fees for merchants and possibly lower prices for consumers, opponents disagreed and cited a similar change, the Durbin Amendment. The change was approved by the 2010 Dodd-Frank Act and capped debit card interbank fees. The Durbin changes had a long-lasting impact on the debit card industry.
An early 2013 study by Robert J. Shapiro of Georgetown University found that for every dollar retailers saved from the Durbin Amendment, consumers saved 69 cents. However, recent research paints a different picture.
A 2015 study by the Federal Reserve Bank of Richmond found that only 1.2 percent of retailers lowered prices after the Durbin Amendment. A 2019 study from the University of Pennsylvania’s Carey School of Law found that consumers aren’t saving money because merchants pay lower debit card fees.
The 2019 study found that the change cost banks $6.5 billion a year in lost revenue and caused banks to increase product costs, a practice that hurt consumers. For example, the number of free checking accounts has dropped by 40%, according to the study.
While that doesn’t mean that history is bound to repeat itself if the CCA is passed, opponents of the bill point to these studies as proof that the CCA won’t help consumers.
Ted Rossman, senior industry expert at CNET sister site Bankrate, said: “I think the Credit Card Competition Act will boost profits for retailers and take away incentives for consumers.”
However, Stephanie Martz, chief administrative officer and general counsel of the National Retail Federation, which supports the CCCA, told CNET that retailers may try to pass the savings on to consumers in some way.
Representing retailers, Matz said retailers would pass on the savings to customers whenever they could find savings. Whether the cost savings come from lower rents or less money spent on suppliers, customers are likely to benefit.
And those advantages don’t always come in the form of lower cost of goods. Lower fees can also mean companies can hire more workers or offer better benefits to their employees. “I think all the signs of the economy are that retailers will somehow pass on any kind of fee cuts in the form of benefits. Wages, additional hiring, and of course [lowering] consumer prices,” Matz said.
Are Your Credit Card Rewards Going Away?
Another consequence of the Durbin changes is a reduction in premiums for most debit cards, as those premiums are partially funded by debit card swipe fees. Opponents of the bill argue that credit card rewards could suffer the same fate if the bill passes, since interchange fees largely fund credit card rewards programs.
“While the Credit Card Competition Act would not specifically limit credit card interchange fees, by incentivizing price-cutting competition, it could reduce card issuer margins and, in turn, revenue,” Rothman said.
But Ulzheimer disagrees, saying the CCC bill is likely but unlikely to change credit card rewards programs. “I don’t think it will affect the rewards,” he said. “There are other ways to make up for lost revenue from swipe fees that don’t affect rewards.”
Credit card rewards are one of the biggest incentives card issuers offer to get consumers accepted for their loan products. If premiums drop or disappear altogether, people may be less likely to apply for a credit card, a move that could have a big impact on the credit card industry. Fewer cardholders can mean less credit card debt, resulting in lost revenue for credit card issuers.
But Ulzheimer believes that credit card issuers will find other ways to offset the current lost revenue from swipe fees, allowing issuers to continue funding rewards programs. “You don’t have to recycle it from a specific consumer or group of consumers,” he added. Issuers can add “ATM fees, overdraft fees, foreign transaction fees, overage fees, annual fees, etc.”
While it is possible for banks to raise consumer-facing fees or interest rates to make up for lost profits, Matz doesn’t think that will necessarily happen.
Central banks must “continue to compete with each other for customers. So you have to choose between continuity, attracting customers, raising interest rates or making it harder to get a credit card,” Matz said.
Matz also thinks credit card premiums are unlikely to disappear, noting that any fee or interest rate hikes need to remain attractive to attract customers.