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 reduce transaction fees, saving merchants and consumers money.
The move would be particularly significant for Visa (V -0.66%) And MasterCard (BUT -2.02%), the two largest credit card processors in the world. Here’s what’s in the account and what it could mean for their profits.
The Credit Card Competition Act
According to research by 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% and 0.17% in valuation fees. These are fees paid to the card issuing bank, the card payment network and the payment processor.
To reduce these taxes, Senators Dick Durbin (D-IL) and Roger Marshall (R-KS) have tabled a bill that aims 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 less than two affiliated networks, one of which must be outside the Visa or Mastercard network. Proponents say the bill would save consumers money by increasing competition, breaking Visa and Mastercard’s dominance. Several organizations have come out in support of the bill.
“Credit card transaction processing shouldn’t be limited to two companies when there are a dozen that can do the job just as well,” said Leon Buck, Vice President of Government Relations, Banking and Financial Services. at the National Retail Federation. “The choice of routing has saved retailers and their customers billions in the debit card market and can do even more in the much broader credit card market.”
The National Association of Convenience Stores also came out in favor of the bill, saying the average “sliding fee” of 2.25% is seven times the amount paid by retailers in Europe and five times higher than Chinese ones. According to Christine Pollack, vice president of government relations at The Food Industry Association, hidden processing fees cost the average U.S. family $ 900 per year.
Here’s what Visa and Mastercard have to say about the bill
Visa and Mastercard account for 83% of general-purpose cards and charged $ 77 billion in merchant fees last year alone. These fees include interchange or sweeping fees, which partner banks earn and network fees paid by credit card companies.
The companies rejected the legislation. According to Vasant Prabhu, Visa’s chief financial officer, there is already a lot of competition in the market. He says most Americans have multiple credit cards, such as American Express, Mastercard, and other types of co-branded cards.
One of Prabhu’s concerns is that the credit card payment infrastructure is not ready for multiple networks and there would be a cost of reissuing the cards and upgrading the technology to achieve this. He said the bill would also harm consumers because it could lead to the end of customer loyalty programs. This would ultimately hurt co-branded credit cards issued by airlines or retailers who may have to reduce their customer rewards for using their credit cards.
Craig Vosburg, Mastercard’s chief product officer, also expressed concern about the security of routing transactions across different networks. Vosburg said merchants may choose the cheapest networks that may not have the best security measures to protect consumers. Mastercard CEO Michael Miebach said other payment processors haven’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 advisor to the National Association of Convenience Stores, the move could cut swipe fees by $ 11 billion or more per year.
As competition in the payments industry increases, additional regulation would make it difficult for Visa and Mastercard to replicate the success they have had over the past decade. The credit card giants have enjoyed good profit margins over the years. If multiple payments are processed through alternative networks, Visa and Mastercard could see their margins under pressure. The bill would also impact banks and credit unions that rely on interchange fees for their co-branded payment products.
Where does the proposed bill go from here
With the growing popularity of credit cards, it’s no surprise to see lawmakers put 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 do not see the bill become law during this session of Congress, which ends on January 3. However, Visa and Mastercard investors will want to keep an eye on the proposed bill, which could eventually dent their earnings.