As the financial landscape evolves, so does legislation. One bill making waves in recent days is the Credit Card Competition Act of 2023. Aimed at restructuring the credit card industry, the bill has sparked various discussions and debates.
In this article, we’ll delve into this act, its objectives, and potential impacts on consumers, particularly regarding credit card rewards.
What is the Credit Card Competition Act?
The Credit Card Competition Act is a bill proposed by Senators Dick Durbin and Roger Marshall in 2023. The legislation seeks to modify how credit card transactions are processed, creating an environment that encourages competition and potentially reduces merchant costs.
Currently, credit card transactions are processed exclusively through the respective networks of Visa or Mastercard, creating an effective duopoly.
This act aims to challenge this status quo by mandating large banks (those with assets exceeding $100 billion) to offer merchants a choice of two different networks for transaction processing. While one of these networks can be Visa or Mastercard, the second must be an alternative.
Why the Need for the Credit Card Competition Act?
The proposal for the Credit Card Competition Act stems from the high transaction processing fees, or “swipe fees,” that merchants must pay. These fees, which average 2 to 3 percent of the transaction value, are shared among the card-issuing bank, the merchant’s bank, the card network, and sometimes a payment processing company.
Most of this fee is the interchange fee, which goes to the bank issuing the credit card. Currently, Visa and Mastercard set these fees for transactions processed on their networks. This lack of competition has resulted in higher swipe fees, causing some to argue that consumers ultimately bear the burden through inflated product prices.
The Proposed Solution: Retailers’ Perspective
The Credit Card Competition Act aims to introduce competition into the credit card network market, hoping to lower interchange fees and costs for merchants. Proponents argue that lower product prices could pass these savings on to consumers.
Additionally, networks could compete based on transaction security, potentially enhancing the safety of credit card transactions.
Retailer associations have primarily welcomed the proposed legislation. Doug Kantor, general counsel for the National Association of Convenience Stores, stated that the act could lead to lower fees, better security, and help merchants keep prices down.
The Flip Side: Banks’ Perspective
However, not everyone is convinced of the proposed legislation’s benefits. Banks have voiced concerns that the act could decrease credit card rewards and compromise security.
The American Bankers Association referred to the bill as 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 Potential Impact on Credit Card Rewards
Another concern surrounding the Credit Card Competition Act is its potential impact on credit card rewards. If the act results in lower interchange fees, banks could be forced to reduce the rewards they offer cardholders to compensate for this loss in revenue.
Stephanie Martz, general counsel for the National Retail Federation, argues that rewards are unlikely to disappear as they are a critical marketing tool for banks. She also noted that while banks threatened to cut rewards when swipe fees were lowered in Europe and Australia, this did not happen.
However, institutions such as the National Association of Federally Insured Credit Unions have countered this argument, stating that consumers could end up paying more across the board, from higher product prices to fewer rewards and benefits on their card purchases.
Lessons from the Past: The Durbin Amendment
In assessing the potential impact of the Credit Card Competition Act, the Durbin Amendment to the Dodd-Frank Act of 2010 provides some insight. This amendment, which aimed to contain interchange fees in the debit card market and introduce network choice, led to significant reductions in interchange income for impacted banks.
While these banks could not compensate for lost income by shifting consumers to credit cards, they managed to recover around 30 percent of their lost income by raising deposit fees. A 2019 study also found that banks compensated for their losses by charging higher product fees, such as reducing free checking accounts.
Bankrate’s senior industry analyst, Ted Rossman, expressed concerns that a similar fallout could occur with credit card rewards if the Credit Card Competition Act passes.
What Can Consumers Do?
Consumers concerned about the potential impact on credit card rewards can act by reaching out to their elected representatives to voice their views. They can also express their opposition to the act through the “Hands Off My Rewards” project run by the Electronic Payments Coalition.
In Conclusion
The Credit Card Competition Act of 2023 aims to increase competition in the credit card processing landscape by requiring banks to offer an additional network for processing transactions.
While this could potentially lower costs for merchants, it might also have a consumer impact, such as reduced credit card rewards. As with any legislative proposal, it’s essential to remain informed and engaged to understand the potential implications.
