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® or 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.
What is the difference between a credit card issuer and a credit card network?
When consumers choose to make a purchase using their credit card, there are three important parties that work behind the scenes to process credit card transactions. They are credit card issuers, merchants, and credit card networks. Let’s break down the functions of each of them below:
- Credit card issuers are lenders. These are banks, like Chase®, that extend credit to consumers through credit cards. Card issuers take on the inherent risk of lending unsecured credit to consumers. When you apply for a credit card, you do so through the issuer.
- Merchants are sellers of goods or services. Merchants provide goods or services in exchange for payment by consumers. At the point of sale for these goods and services, consumers choose their preferred method of payment, like cash, checks, or electronic payments, including debit cards or credit cards associated with a specific network. For a merchant to be able to accept an electronic payment like credit cards, they must connect to the network(s) that can process those payments.
- Credit card networks are facilitators. Credit card networks create virtual payment infrastructures in which merchants can receive payment for purchases consumers make using a credit card. The largest U.S. networks are Visa®, Mastercard®, Discover® and American Express®. They facilitate credit card transactions between merchants and card issuers. Networks charge the merchant an interchange fee for processing the transaction.
Today, a customer chooses a credit card linked to a specific network — e.g., the customer’s preferred Visa® or Mastercard card®. The CCCA, if enacted, would force a second network to be enabled on the consumer’s card and allow the merchant to choose the network through which the consumer’s purchase is processed. Currently, issuers only enable their credit cards to be processed through a single network.
What are interchange fees and how will the CCCA affect them?
Credit card merchant fees are charged to merchants to facilitate the processing of credit card transactions. A portion of the credit card merchant fee is remitted to the issuing bank (such as Chase). This fee is called “interchange fee” and is set by the network (e.g., Visa or Mastercard). Interchange fees in the U.S. typically range between 1% and 3% of the transaction amount.
Interchange fees are used to cover the expenses incurred by banks to process, accept, authorize and maintain data security, as well as to invest in fraud prevention. Interchange fees also largely help fund credit card rewards programs.
Some policymakers in Washington feel that forcing more networks into the credit card transaction process will result lower fees charged to merchants.
Could reduced interchange fees impact credit card rewards?
It’s possible that if interchange fees are reduced, credit card issuers could reduce rewards programs.
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.
Cardmembers receive the value from 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.
Opponents of this bill cite the Durbin Amendment, which introduced capped interchange fees and dual routing requirements on debit cards in 2011. Subsequently, debit card rewards were eliminated. It’s worth noting that history could repeat itself if the CCCA results in reduced interchange fees for credit cards, as they did for debit cards.
The CCCA is a bill that seeks to introduce competition among credit card networks, which some Members of Congress feel will subsequently lower interchange fees charged to merchants. If this bill becomes law, there could be changes to the rewards programs of some financial institutions that cardmembers enjoy.
If you’re interested in learning more about how credit card rewards could help you earn cash back, travel rewards, gift cards and more, check out our Education Center.
You can also visit the Electronic Payments Coalition website to get updates on the legislation as it moves through Congress.
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