Credit card companies have come under increasing scrutiny from the federal government, and Congress recently proposed a bill to increase competition in credit card processing networks. The goal is to lower transaction fees, saving merchants and consumers money.
The move would be particularly meaningful for Visa (V -0.66%) and Mastercard (MA -2.02%), the world’s two largest credit card processors. Here’s what’s in the bill and what it might mean for their bottom lines.
The Credit Card Competition Act
According to research from Ascent, credit card processing fees for merchants range from 1.15% plus $0.05 to 3.15% plus $0.10 in interchange fees, plus another 0.14% to 0.17% in assessment fees. These are fees paid to the card’s issuing bank, the card’s payment network, and the payment processor.
To reduce these fees, Senators Dick Durbin (D-IL) and Roger Marshall (R-KS) introduced a bill that looks to open up the payment processing market and increase competition. The bill is called the “Credit Card Competition Act of 2022.” The bill would require banks with more than $100 billion in assets to process electronic credit transactions on no fewer than two affiliated networks, one of which must be outside of Visa’s or Mastercard’s network. Supporters say the bill would save consumers money while increasing competition, breaking up the dominance that Visa and Mastercard enjoy. Several organizations have come out in support of the bill.
“Processing credit card transactions should not be limited to two companies when there are a dozen that can do the job just as well,” said Leon Buck, vice president for government relations, banking, and financial services at the National Retail Federation. “Routing choice has saved retailers and their customers billions in the debit card market and can do even more in the much-larger credit card market.”
The National Association of Convenience Stores has also come out in favor of the bill, saying that the average “swipe fee” of 2.25% is seven times the amount retailers in Europe pay and five times more than those in China. According to Christine Pollack, vice president, government relations at The Food Industry Association, the hidden processing fees cost the average U.S. family $900 per year.
Here’s what Visa and Mastercard have to say about the proposed bill
Visa and Mastercard account for 83% of the general-purpose cards and charged $77 billion in merchant fees last year alone. These fees include interchange or swipe fees, which partner banks earn, and network fees that credit card companies make.
The companies have pushed back on the legislation. According to Vasant Prabhu, chief financial officer at Visa, there is already a lot of competition in the market. He says that most Americans carry multiple credit cards, like American Express, Mastercard, and other types of co-branded cards.
One of Prabhu’s concerns is that the payment infrastructure for credit cards isn’t ready for multiple networks, and there would be a cost of reissuing cards and upgrading technology to accomplish this. He said the bill would also hurt consumers because it could lead to the demise of customer loyalty programs. This would ultimately hurt co-branded credit cards issued by airlines or retailers that may have to scale back their rewards to customers for using their credit cards.
Craig Vosburg, chief product officer for Mastercard, also voiced concerns about the safety and security of routing transactions through different networks. Vosburg said merchants could choose the cheapest networks that may not have the best security measures to protect consumers. Mastercard Chief Executive Officer Michael Miebach said that other payment processors hadn’t made the same investments as Visa and Mastercard in the safety and security of their networks.
The bottom line
According to Doug Kantor, chief counsel at the National Association of Convenience Stores, the move could reduce swipe fees by $11 billion or more annually.
With competition heating up in the payments industry, additional regulation would make it difficult for Visa and Mastercard to replicate the success they’ve had during the past decade. The credit card giants have enjoyed healthy profit margins over the years. If more payments get processed through alternative networks, Visa and Mastercard could see their margins come under pressure. The bill would also impact banks and credit unions that rely on interchange fees for their co-branded payment products.
Where the proposed bill goes from here
With credit cards growing in popularity, it’s not surprising to see lawmakers putting the industry under the microscope. The Credit Card Competition Act has been referred to the Senate Committee on Banking, Housing and Urban Affairs but has not yet been placed on the committee’s calendar.
Most legislative analysts don’t see the bill becoming law during this congressional session, which ends Jan. 3. However, Visa and Mastercard investors will want to keep tabs on the proposed bill, which could ultimately put a dent in their earnings.