All Aboard the Credit Card Showdown Express! Buckle Up!

Fancy a showdown? Well, we got one brewing! A delightful cocktail of lawmakers and industry bigwigs are getting ready for a good old boxing match over a new proposal that could shake the ground underneath credit card transactions in our great nation.

The magic words? “The Credit Card Competition Act”. It’s back in the ring, reintroduced last week by a tough bipartisan roster of legislators and in the lead, none other than Sen. Dick Durbin, D-Ill. (You may recall Durbin’s previous attempt to float this bill last year, but it simply sank without a wave.)

This bill – oh boy, it’s a real Pandora’s Box. It could shake up the world of payment processors, financial institutions, and everyday folks like you and me. It’s been debated for months and has given birth to more opponents and supporters than you’d find at a Super Bowl match.

Breaking Down the Details (Because They Mattered to the Devil)

At the heart of the Credit Card Competition Act is the dance around network accessibility and credit card transaction mechanics. Sounding intense? Well, let’s simplify things.

When you swipe your credit card at a store or pop the digits in for an online purchase, the issuer bank slaps a fee on the merchant. It’s as though you walked into a store and someone at the door charged you for the privilege. This “cover charge” is known as an interchange or swipe fee.

And who gets to decide on these fees? Well, the usual suspects. Card processors like Visa and Mastercard have a firm grip on this game and with their titan-like hold on the transaction networks, merchants feel about as powerful as a kitten in a lion’s den.

Doug Kantor, general counsel for NACS, describes it rather colorfully, “It’s as though a milk cartel told every supermarket exactly how much to charge for milk, and the stores all simply agreed.” Couldn’t have put it better, Doug!

Now those interchange fees – don’t get me started! They’re notorious for their high rates. U.S. interchange fees averaged a sweet 1.8% in 2022, dwarfing the humble U.K. rate of just 0.3%.

As Kantor explains, many merchants offset these fees by serving us customers with higher price tags. Ever seen those ‘credit card surcharge’ signs at small businesses? Well, now you know who to blame!

The proposed legislation is like the knight in shining armor, aiming to combat this issue by preventing credit card issuers from limiting the number of networks for processing transactions. If passed, the bill would urge the leviathan card-issuing banks of America to embrace competition by adding a second, smaller guy to their team along with the behemoths like Visa and Mastercard.

Thanks to this change, merchants could pick from a buffet of network options, breaking the chain between “who sponsors the card and who collects the fees,” as Danielle Zanzalari, an assistant economics professor at Seton Hall University, beautifully puts it.

With competition heating up, Visa and Mastercard might start to sweat a little and might have to lower their fees to keep their spot in the ring. And if the stars align, merchants would benefit from the savings and just might, maybe, kind-of pass these benefits on to us humble customers.

Now What about Our Beloved Credit Card Rewards?

Now, the crystal ball gazers, I mean analysts, predict merchants could save a whopping $11 billion annually thanks to these changes. “That’s a massive deal for retailers, though maybe less of a shock to the big banks and card issuers,” adds Kantor.

But, hey, it’s not all rosy. Zanzalari, for one, is a bit wary. She worries that bringing smaller transaction processors into the playing field could rattle the security cage: “The established companies have honed their security over many years.”

And here’s another brain-tickler worth ruminating over – will merchants share their newfound riches with us, their loyal customers?

Perhaps the most contentious issue, the real hot potato, about the Credit Card Competition Act is its potential impact on credit card rewards programs. If merchants start favoring lower-cost processors, the industry’s profit pie could shrink, forcing companies like Visa and MasterCard to roll back on their lavish points systems.

As Zanzalari quips, “If their earnings take a hit, they may not be able to offer the same lucrative rewards.” It’s like inviting guests to a party and then running out of food, isn’t it?

But hey, let’s not get carried away just yet. Industry advocates like Kantor challenge this bleak picture, pointing to our pals in Europe — where caps on interchange fees haven’t significantly trimmed consumer reward offerings.

“People in Europe still enjoy rewards; they earn airline miles and other perks. The system works even with much lower fees, so there’s every reason to believe rewards will continue here, too,” Kantor reassures. Well, thank heavens for that!

Related Resources:

• Do I Have to Keep My First Credit Card Open Forever?
• The Best Airline Rewards Programs of 2023
• Which Money ‘Rules’ Can I Safely Ignore?

Keywords: credit card rewards, Credit Card Competition Act, credit card transaction fees, credit card processing, Visa, Mastercard, interchange fees, credit card networks, merchant processing fees.