New legislation called the Credit Card Competition Act (CCCA) is being proposed in Congress. The ramifications of the bill have the potential to negatively impact small businesses. In this article we’ll explore why.
What is the Credit Card Competition Act?
The Credit Card Competition Act is a bill in Congress that addresses network access and competition in credit card transactions. The bill sponsors’ stated goal is to increase competition in the credit card industry, with the hope that this will reduce the expenses for merchants during the credit card transaction process.
The bill sets a one-year deadline for the Federal Reserve to establish regulations. These would include a mandate that large banks must enable their credit cards to be processed over at least one alternative network besides the two largest, which are currently Visa® and Mastercard®.
The alternative networks could be smaller, lesser known and have less mature infrastructure. It is interesting to note that while the CCCA purports to introduce more competition in the credit card market, not all credit card networks and issuers are covered by the bill. In fact, two of the largest networks – Discover® and American Express®, who issue cards on their own networks – are excluded from the bill’s requirements.
How could the CCCA harm small businesses?
Advocates of the bill suggest that merchants would benefit from additional choice when it comes to the network they work with. But there are a number of unintended consequences that could result from this legislation, ultimately harming the very merchants this bill is intended to help.
Diminished rewards programs
The biggest unintended impact is that credit card companies may significantly diminish the rewards programs that cardmembers enjoy.
Interchange fees are charged to merchants to facilitate the processing of credit card transactions. Banks, such as Chase, take these dollars and invest more than 90% of them into credit card rewards programs and benefits for their cardmembers.
Small businesses receive the value of interchange fees in the form of rewards or cash back, as well as other cardmember benefits. If merchants choose to route transactions to cheaper, less established networks, interchange fees could decrease. As a result, banks may have fewer resources available to fund rewards programs and cardmember benefits.
Decreased consumer spending and basket size
If rewards programs are diminished, consumers may spend less. Consumers receive roughly $60 billion per year in credit card rewards, enhancing their spending power. If they no longer find great benefit in using their credit cards, overall spending with small businesses may decrease, directly affecting the revenue of small businesses and the economy as a whole.
In addition, studies show that basket size, or the size of an individual transaction, typically decreases when a consumer uses a payment form other than a credit card. Debit and credit card transactions are 2 - 4 times larger than cash transactions, and when a merchant begins accepting card payments, they experience a 10% - 15% increase in average transaction size.
Without the incentive of rewards, consumers may choose other forms, such as cash. Not only could this translate to smaller transactions, but cash is more difficult to track and much less secure.
Less power to negotiate with networks could mean less savings
Larger retailers have the ability to negotiate their interchange terms with credit card networks and small businesses may not. This could mean the savings intended for all merchants tips in favor of the larger, more influential retailers.
An increase in the cost of point-of-sale systems
Small businesses must have a point-of-sale system (POS) in place to accept credit card transactions. As these POS systems become more technologically sophisticated in order to facilitate multiple networks, they may become more expensive to purchase and maintain.
Any decrease in interchange fees that the CCCA hopes to accomplish could be cancelled out by increased costs of POS systems. In this case, credit card rewards could be reduced and small businesses won’t see any net savings in interchange expenses anyway.
Will I still get rewards on my business credit card?
Small businesses tend to be super-users of rewards credit cards — using cash back, rewards points and discounts to reinvest in their business and fuel growth. If the CCCA is enacted, credit card rewards on business cards could be reduced.
Here are a few examples of how losing credit card rewards may look for a small business:
- Travel: Free flights and hotel stays, upgrades and flexible scheduling may be less possible.
- Dining: Client dinners and staff meals may be less rewarding when purchases no longer earn cash back.
- Gas and transportation: It may become more difficult to subsidize transportation costs with rewards if a business can no longer earn cash back on gas or ride share services.
- Business expenses: Earning cash back on recurring business expenses such as office supplies or internet services may no longer be an option.
What small businesses can do
Chase wants small businesses to continue enjoying the benefits of credit cards and their rewards. Learn more about how you can maximize every dollar you spend on your business with a business rewards credit card.
You can also visit the Electronic Payments Coalition website to get updates on the legislation as it moves through Congress.