By: Jack Gagner
When U.S. Senate Majority Whip Dick Durbin (D-IL) and U.S. Senator Roger Marshall, M.D. (R-KS) introduced the bipartisan Credit Card Competition Act of 2022, Senator Marshall likened the bill to injecting competition, “the heartbeat of capitalism,” into a market dominated by a few large networks.
Both for American consumers and merchants, the convenience of credit comes at a cost. In addition to the annual fees and interest payments that consumers pay directly to credit card companies, banks and credit networks take a small percentage of every credit transaction handled by merchants – often referred to as “swipe fees.” The swipe fee itself consists of a number of smaller fees, including interchange fees between banks for accepting credit transactions, network fees charged by large credit networks, and acquirer fees charged by the merchant’s bank. The fees ostensibly cover the cost of processing the transaction, contribute to extensive fraud protection, and fund credit rewards programs. Currently unregulated in the United States, credit card fees are typically between 2 to 3.5% of a transaction, but can rise to as high as 4 to 5% for the most premium rewards cards. These costs are then passed on indiscriminately to consumers. One study published by the Federal Reserve Bank of Boston estimates that retailers in the United States raise prices by 1.4% to offset the costs of swipe fees
The U.S. credit card market is currently dominated by a select few networks and banks. Of the four large credit networks, Visa and Mastercard account for over 80% of all general-purpose credit cards. Recently, a rise in online shopping during COVID-19 has driven growth for the biggest networks. Between 2016 and 2021, the percentage of retail transactions completed with credit rose by 12% and the annual swipe fees paid by American merchants and consumers grew to a record $137.8 billion.
Visa and Mastercard are uniquely situated to benefit from America’s tolerance for high interchange fees, some of the highest of any major economy. The European Union has capped interchange fees for credit cards at 0.3% of a transaction’s value, and intense competition in the Chinese market has driven fees down to around 0.1%. American lawmakers are not completely unfamiliar with the regulation of interchange fees, however – the “Durbin Amendment” to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 gave the Federal Reserve the authority to cap debit interchange fees at a flat rate of 21 cents, plus 0.05% of a transaction’s value.
Now, 12 years after the Dodd-Frank Act was signed into law, Senator Durbin aims to address similar problems in the credit market with the Credit Card Competition Act of 2022. Because credit fees are more variable than those previously associated with debit transactions, the Credit Card Competition Act hopes to lower interchange fees not by introducing a hard cap, but by encouraging competition in the market and breaking established links between card networks and banks. Currently, every transaction conducted with a particular credit card is processed by the network stipulated by the issuing bank, which guarantees that a bank will receive the rate set by the affiliated network. The Credit Card Competition Act would force banks to offer merchants a choice between at least two different card networks, one of which would have to be a network outside of “the 2 … networks that hold the 2 largest market shares with respect to the number of credit cards issued in the United States” – Visa and Mastercard.
In a press release following the introduction of the legislation, Senator Marshall framed the issue as a choice between “Main Street” and “Wall Street,” noting that the introduction of competition to the credit market would be a vote for Main Street at a time when small businesses are “grappling with crippling inflation and staring down the barrel of a looming recession.” The National Retail Federation, long a staunch advocate of swipe fee reform, highlighted the “transparency and competition” the reforms would bring to the payments market.
The bill has also engendered strong opposition – one estimate has the number of organizations that have voiced opposition to the bill at over 140. Opponents highlight that the regulations would burden consumers with the risk of untested and unestablished credit networks and rising costs associated with the use of credit. Others point to the debated effectiveness of the original Durbin Amendment, and raise concerns that similar regulation would decimate credit rewards programs while the resulting savings are pocketed by merchants rather than reaching consumers. There are also potential ramifications for marginalized communities, who could pay the price if banks react to the proposed regulations and subsequent revenue losses by reducing services and accessibility in less profitable communities.
Whether the Credit Card Competition Act drives down consumer costs or lines the pockets of big retailers, it may come too late to hedge burgeoning momentum in the U.S. payments industry. Inspired by the success of cheap, app-based payment technologies around the world, new financial systems seek to operate outside of, and disrupt entirely, the American credit market. There are both private and public efforts to introduce consumers to instant payment via bank transfer, a technology independent of credit networks. In 2020, Visa attempted to acquire one such payment technology startup, Plaid, but abandoned the deal after the Department of Justice filed an antitrust lawsuit. Be it compliance to increased regulation or adaption to interrupting technology, large American credit card companies may soon be forced to change their swipe fee model.
Student Bio: Jack Gagner is a second-year student at Suffolk University Law School. He is a staff writer on the Journal of High Technology Law. Jack received a Bachelor of Music Degree in Classical Trombone Performance from the University of Toronto.
Disclaimer: The views expressed in this blog are the views of the author alone and do not represent the views of JHTL or Suffolk University Law School.
