Credit Card Competition Act Puts Merchants, Not Consumers, in Charge of Card Rewards and Payments Security Decisions

If at first you don’t succeed, try, try again. That seems to be the prevailing sentiment Wednesday (June 7) when it was announced that the Credit Card Competition Act legislation is being reintroduced on Capitol Hill.  

This time around, there will be more sponsors across the aisles, as reports came that U.S. Sens. Dick Durbin (Democrat of Illinois), Roger Marshall (Republican of Kansas), Peter Welch (D, Vermont), and J.D. Vance (R, Ohio) are reintroducing the bill in the Senate. Reps. Lance Gooden (R, Texas) and Zoe Lofgren (D, California) introduced and will be backing the House companion bill.

At a high level, the reintroduction has the same intent as had been seen last year with Durbin and Marshall’s initial push for the Credit Card Competition Act a little less than a year ago. Banks would be mandated to enable card payments to be routed over at least one network that competes with Mastercard and with Visa.  

Proponents say the legislation would give merchants a greater range of choice — because they’d have the option to embrace networks with fees, including interchange (or “swipe”) fees cheaper than those seen with Mastercard and Visa, which together account for 80% of the credit card market. Those alternative networks include the likes of Star, PULSE and NYCE. The merchants, lawmakers and merchants say would, ostensibly, pass those savings on to consumers. 

Except we know that they don’t — or at least they haven’t in the past.

It is well documented that post-Durbin 1.0 in 2010, which was reported to have saved merchants $6.5 billion annually in debit fees as a result of transaction caps, there was no evidence that merchants lowered prices to consumers. As we spotlighted last year, and as estimated by data from the Federal Reserve in the five years ending in 2015, 77% of merchants did not change prices post-regulation, and only 1.2% of merchants actually reduced prices.   

The elephant in the room that no one has discussed is the confusion on the part of the consumer when they whip out their card at the point of sale, only to discover, after the fact, that the merchant has the power to decide whether they are paid rewards on that transaction or whether they can expect the same level of payments security when the transaction is processed.

Merchants, without disclosing to the consumers, can decide to route the transaction over a network that was not built to handle the volumes and types of transactions that now ride the card network rails, potentially putting that transaction at risk. And that when they make that decision, consumers will likely forgo the rewards they are now used to getting when their cards are processed over existing card rails.  

Dueling Statements 

As you can imagine, both sides are lining up for the fight.   

“It’s time for big banks and global card networks to compete the same as small businesses do every day,” National Retail Federation Chief Administrative Officer and General Counsel Stephanie Martz said in a statement provided to PYMNTS. “Skyrocketing swipe fees have been driving up prices for consumers for far too long, and we are confident this is the year Congress is going to say it’s time for that to stop. Competition will bring these fees under control and strengthen security at the same time.”

In a separate statement, National Association of Federal Credit Unions (NAFCU) President and CEO Dan Berger said that, “Expanding interchange price controls and routing mandates to credit cards is bad policy, pushed by big box retailers who are looking to pad their bottom line. Contrary to merchants’ deceptive claims, data shows consumers end up paying more across the board — from higher prices of goods, to more expensive card products at their financial institutions, and fewer rewards and benefits on their card purchases.”

One of the unintended consequences of the 2010 Durbin Act was an increase in the cost of keeping a DDA account at a bank, as the debit interchange used to subsidize those costs was sharply reduced.

A Merchant-First Approach

At the moment, the CCCA has taken a very merchant-first approach to its proposal to rewire the credit card landscape.

There is very little, if any, reference to how consumers will benefit if the legislation is successful and no commitments on the part of the merchants advocating for change that they will innovate to make their own products more competitive, safer and more valuable for their customers.

That’s been a struggle for merchants over the years, as store card penetration seems to have plateaued. According to PYMNTS data, only 59 million consumers have a store card. Even the Target REDCard, an innovation in a merchant-centric payments program launched in 2013, has captured only 20% of spend on those cards after a decade.

Ultimately it may be the case that credit cards have fewer of the features coveted by consumers if the cards become less profitable to issue or increases in fraud create more cost and risk to the issuer in doing so. Also an issue is if they become more expensive to get, which could hurt the consumer and make credit less accessible longer term. The proposed CCCA legislation comes as PYMNTS’ research shows that a third of consumers have increased the use of credit cards through the past six months in a world where 77% of consumers, overall, have cards in the field.

And nearly a third of card holders, we found, value rewards and cash back features as the features that matter most. More than 59% of consumers value features that detect and alert holders to fraudulent activity.

Innovation is the desired outcome, say the lawmakers proposing the legislation and CCCA advocates. If successful, it will be the merchants, not the consumers who use the card products, who will decide the innovations in features, functions, rewards and security, including installment payments. Those innovations have made cards so attractive to consumers and driven billions of dollars of sales to merchants across physical and digital channels are not that important after all.