What The Credit Card Competition Act Means for Open Banking

Every transaction made using a credit card comes with an interchange or “swipe” fee for the merchant, a non-negotiable cost of doing business that can add up. Since accepting card payments is virtually a necessity, many merchants are beholden to the fees set by the card networks. The recently reintroduced Credit Card Competition Act aims to break up the dominance of Visa and Mastercard in the card payments ecosystem and remove rail-owner limitations on card payments.

By requiring large credit card issuers to allow merchants to access a credit network other than Visa or Mastercard, this act brings the added benefit of competition to what has traditionally been a closed, small market. Other networks offering lower prices to merchants for credit transaction processing will reduce interchange rates for merchants and force Visa and Mastercard to lower their interchange rates if they wish to compete for that payment volume.

Overview of the Credit Card Competition Act

The Credit Card Competition Act, a bill introduced by Senator Dick Durbin (IL-D) and Senator Roger Marshall (KS-R), “would require the largest credit-card issuing financial institutions in the country—those with assets over $100 billion–to enable at least two credit card networks to be used on their credit cards instead of just one, and at least one of those networks must be a network other than the Visa/Mastercard duopoly.

In 2022, A nearly identical bill to the Credit Card Competition Act was introduced. Since its recent reintroduction in June of this year, there have been additional co-sponsors of the act, reflecting a bipartisan interest in promoting competition and reducing the amount of fees merchants have to pay to accept consumer payments.

By encouraging competition and choice, the act aims to reduce the rising costs of interchange fees and discourage the dominant duopoly created by Visa and Mastercard. Since Visa and Mastercard often change and set these fees yearly, rising costs can detrimentally impact merchants. According to Forbes, average credit card processing fees can range from 1.5% to 3.5%. The rate paid depends on transaction volume, Merchant Classification Code, and other factors.

Visa and Mastercard have had outsized control of the payments landscape for decades. This act effectively breaks these two networks' hold on the credit market. It allows competition to be introduced by mandating banks that issue these cards provide merchants with access to alternative networks.

A Necessary Shake-Up in the Payments Landscape

Card processing fees are challenging to manage, with little reprieve for most merchants. Merchants either absorb the cost of accepting cards, surcharge their items when consumers use them, or raise their prices to address increasing interchange costs. In certain instance, like consumer to government payments, institutions even pass on the cost of interchange directly to the consumer. According to the Merchant Payments Coalition, credit card processing fees are the second highest cost for merchants after labor.

None of these options benefit the merchant nor the consumer, as the rising cost is only to meet an already thin margin in most retail and service-based businesses, and consumers dislike having to front the bill for payment processing fees. It is further stated by the Merchant Payments Coalition that swipe fees created $1,024 in extra costs for the average household in 2022.

Reducing Interchange Fees for Merchants

The “take-it-or-leave-it” environment that Visa and Mastercard have fostered with their dominant positions in the credit card markets has put lots of strain on merchants, specifically smaller merchants and those with low-dollar transaction sizes. As mentioned in Senator Durbin’s one-pager on the act, merchants typically receive only $98 to $97 on every $100 they make, whereas in contrast, during 2022, Visa made $93 billion off of network fees.

Over a year, merchants can pay thousands of dollars to accept card payments. CNN reported that in 2021, as a whole, merchants paid $138 billion in these fees. As evident, merchants pay these exorbitant fees year after year and have little say in how they get set.

Despite these high fees, merchants have no choice but to accept these cards in their stores due to their ubiquity and widespread usage among consumers. Not accepting card payments, especially when they’re so popular in North America, would mean merchants would lose significant revenue.