The United States was built largely on debt, both at the government level and at the level of American consumers. Credit cards are an essential tool in many people’s wallets, however, there are aspects that the US Congress seeks to change through the Credit Card Competition Act.
In principle, it is essential that you understand that the Credit Card Competition Act is just a bipartisan bill aimed at lowering credit card processing fees in the United States. The way this legislation plans to help is by giving businesses choice in which credit card processors they use with the goal of increasing competition, which should lower prices and increase quality of service.
Sponsors and supporters of the law believe that these lower rates will ultimately will result in lower prices for consumersas businesses can lower their prices by paying lower credit card processing fees.
It works as an amendment to the Electronic Funds Transfer Act of 1978.
What are the fees that the Credit Card Competition Law would reduce?
Many consumers are unaware that every time they swipe a credit card, there are a couple of fees that the business they give the plastic to must pay: network fees and interchange fees.
Network fees go to the network itself. What do we mean by network? You can easily recognize that network because it’s the logo on your card, even if you don’t pay your bill directly to them. There are four main networks: Visa, Mastercard, American Express and Discover..
Besides, interchange fees go to credit card issuer, which is the company that approved your application. Some issuers are also networks, such as American Express and Discover. Others, the most common, are independent financial institutions or banks, such as Capital One or Wells Fargo or even your regional credit union.
The problem here is that even though those fees must be paid by the companies you transacted with, they usually pass them on to consumers in the form of higher prices. Those fees can be significant, anywhere from 1.5% to 3.5% per transaction.. And clearly, the actual cost can be higher when factors like chargebacks and equipment costs are taken into account.
A 2022 Wharton School study, commissioned by the Hispanic Leadership Fund, found that interchange fees eat up 17-19% of overall retail profitwhich causes some companies, especially smaller ones that cannot cope with significant financial changes, to set prices higher.
How would the Credit Card Competition Law work?
Like any other law, this proposal seems more complex than it really is. Basically, the legislation proposes changes that directly affect companies that issue credit cardsthe networks that indirectly employ merchants of any size, until reaching the last link in the chain, the main one: the consumer.
The new prohibitions described in the law apply only to corporations truly massive: issuers that, together with their affiliates, have $100 billion or more in assets. Simply put, almost all of the country’s credit unions and local banks will not be affected, only the 30 largest banks in the US have to worry that’s why.
It also applies to payment networks like Visa and Mastercardwho currently have a duopoly, which means there is no real competition, since they set the fees that everyone with those logos on their cards pays, which is 80% of the industry. The law targets that duopoly by forcing them to compete with someone other than the other, including competitors like American Express or Discover or independent networks like Star or Shazam.
Prohibit exclusive networks
The bill requires the Federal Reserve Board of Governors to issue a regulation that prevent major credit card issuers or networks from doing literally anything to force the use of proprietary networks.
The law says that they can not “directly or through any authorized agent, processor or member of a payment card network, by contract, requirement, condition, sanction, technological specification or otherwise” force network exclusivity.
Currently, your credit card issuer, the bank, decides which network the merchants it sponsors use. But the network, usually Visa or Mastercard, is free; but contractually prohibits them from using another network.
The merchant’s only choice is whether or not to accept credit cards that use that network.. Not accepting it means giving up the business of anyone who can’t or won’t use anything other than that credit card to pay for your goods and services.
That’s why some merchants don’t accept American Express credit cards.. They generally carry higher fees than cards with the Mastercard and Visa logo. And that takes a bigger part of their profits.
How would exclusivity be removed from networks?
The law contemplates:
• The big banks must choose at least two non-owned networkscontrol or operation of networks that are affiliated with each other or with the issuer.
• Credit card networks they cannot prohibit anyone from having more than one network.
• Banks can only choose one of the two largest networks (currently Visa and Mastercard).
In conclusion, the Credit Card Competition Law seeks to end the Visa and Mastercard duopoly, opening the market for other networks. By fostering competition, fees could disappear or decreasewhich affect merchants, who currently do not want to play with these rules, damaging their business, and consumers, who always pay for extra transaction charges, often in the dark and without realizing it, since they are in good shape. of higher prices.
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