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Credit Card Competition Act — What It Is & How It Affects Consumers


Quick Look

  • The Credit Card Competition Act is a bipartisan bill intended to lower credit card processing fees.
  • The goal is to inject some much-needed competition into the credit card network market, lowering prices on retail goods and allowing smaller businesses to compete on a more even playing field.
  • But the law could have some drawbacks, such as negatively impacting credit card rewards. 

There’s already a lot of misinformation out there about the Credit Card Competition Act. For once, most is apolitical, at least for now, since the act is a bipartisan bill. So let’s all just take a moment to rejoice in that little factoid.

Unfortunately, there are still a handful of disingenuous characters out there trying to convince you the bill is either a panacea or a scourge, neither of which is actually true for the average consumer. 

But that doesn’t make the law a neutral one. And before you decide whether you’re in the pro or con camp, it’s important to understand what the law is, how it will work, and who it helps and, yes, harms. (Spoiler: The answer to the latter is probably not you). 


What Is the Credit Card Competition Act?

The Credit Card Competition Act is a bipartisan bill intended to lower credit card processing fees. It plans to do so by giving businesses options when it comes to which credit card processors they use with the goal of increasing competition, which should lower prices and increase the quality of service. 

The law’s sponsors and supporters believe these lower fees will ultimately result in lower prices for consumers since businesses can lower their prices if they pay lower credit card processing fees.

It functions as an amendment to the Electronic Fund Transfer Act of 1978.


How Credit Card Processing Fees Work Now

How Credit Card Processing Works

Every time I renew my vehicle registration, I bring cash. I don’t want to pay by e-check because they make me give my bank account details aloud, and I’d actually have to pay extra to use my credit card or debit card.

That’s because every time you swipe a credit card, the business you’re patronizing pays fees. Those fees are twofold.

  • Network Fees. Network fees go to the network itself. Their logo is on your card, even if you don’t pay your bill to them directly. There are four major networks: Visa, Mastercard, American Express, and Discover.
  • Interchange Fees. Interchange fees go to the credit card issuer, which is the company that approved your application. Some issuers are also networks (such as American Express and Discover). Others are separate financial institutions or banks, such as Capital One or Wells Fargo or even your regional credit union.

Unlike my local DMV, most businesses pass those fees on to consumers in the form of higher prices. And those fees can be significant, between 1.5% and 3.5% per transaction, though the real cost can be higher when you consider factors like chargebacks and equipment costs. 

In fact, a 2022 Wharton School study commissioned by the Hispanic Leadership Fund found that interchange fees eat up 17% to 19% of overall retailer profit, causing some businesses, especially smaller businesses unable to weather significant financial swings, to set higher prices. Those fees are especially problematic in highly competitive sectors like gasoline and groceries.

You can read more in our article about how credit card processing works, but the gist of how the rates for these fees get set goes like this:

  1. Retailers that want to have credit cards choose a bank to be the issuer. For example, Target RedCard is backed by TD Bank. If there is no retailer, this step doesn’t happen.
  2. Banks that want to have credit cards choose a network to help them process it. Most commonly, those are Mastercard or Visa, who process 80% of the credit cards nationwide. Discover and American Express usually issue their own credit cards, acting as both network and issuer.
  3. To keep banks and retailers from having to compete with each other, the networks set the rates. Mastercard and Visa do the rate-setting since they’re massive, though Amex and Discover usually move their rates in line with their bigger competitors.
  4. Merchants are stuck paying the rate of whatever network the credit card issuer chooses. If they don’t like it, they lose access to all the cards on that network. That’s why you may have some merchants that don’t take American Express or even Mastercard.

In an economy based on a free market, that doesn’t seem very sporting for the merchants, does it? It’s certainly not very sporting for the consumers stuck in the middle. And that’s how we got here.

The Credit Card Processing Act aims to change all that.


How the Credit Card Competition Act Works 

I read the Credit Card Competition Act so you don’t have to. Although in this case, there’s really no reason you shouldn’t. As of this writing, it’s really short. I don’t mean short by Congressional standards. I mean short by high school English class standards. 

It’s no “Beowulf,” but it’s better than almost everything John Steinbeck wrote, so there’s that. Oh, stop your pearl-clutching. (See what I did there?). 

I said, “almost.” And good writer or not, we all know Steinbeck is often an excruciatingly painful read. My point is that the law itself is easy to get through if you’re up for it. If you’re not, these are the basics. 

The Credit Card Competition Act Only Applies Really Big Companies

The new prohibitions outlined in the law apply only to truly massive corporations — issuers that together with their affiliates hold $100 billion (with a B) or more in assets. 

So your local credit union probably isn’t affected because it’s too small. In fact, a lot of really well-known national and regional banks aren’t, either. Only about the top 30 largest banks in the U.S. even have to worry about it.

The law is specifically written to target only very big banks that tend to throw their weight around.

It also applies to payment networks like Visa and Mastercard, who currently have a duopoly, meaning there’s no real competition since they set the fees everyone with those logos on their cards pays, which is 80% of the industry. The law takes aim at that duopoly by forcing them to compete with someone other than each other, including competitors like American Express or Discover or independent networks like Star or Shazam.

Prohibits Exclusive Networks

The first thing the bill does is require the Board of Governors of the Federal Reserve to issue a regulation that prevents major credit card issuers or networks from doing literally anything to force the use of exclusive networks.

And despite Merriam-Webster’s allowance thereof, by “literally anything,” I do not mean “figuratively.” 

The law says they can’t “directly or through any agent, processor, or licensed member of a payment card network, by contract, requirement, condition, penalty, technological specification, or otherwise” force network exclusivity. That’s a lot of commas, meaning they’re trying to close any loopholes.

To understand the importance of that, you must understand two things. Your credit card issuer (bank) decides what network the merchants you patronize use. But the network (usually Visa or Mastercard) is currently free to and does contractually prohibit them from using another network.

Your 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 their goods and services. 

That’s why some merchants don’t accept American Express credit cards. They traditionally involve higher fees than Mastercard- and Visa-logo cards. And that takes a bigger chunk out of their profit.

In terms of how the law prohibits forced exclusivity, it blocks three potential alleyways. 

  • Big banks must choose at least two networks that aren’t owned, controlled, or otherwise operated by networks that are affiliated with each other or the issuer
  • Credit card networks can’t prohibit anyone from having more than one network.
  • The banks can only choose one of the two largest networks (right now, that’s Visa and Mastercard).

Prohibits Routing Restrictions

In an attempt to head major issuers and networks off at the ever-popular corporate tourism destination Legal Loophole Pass, the law’s designers also prohibit routing restrictions. Essentially, they foresee major companies attempting to get around the regulation.

For example, they’ll let you use another network, but there’s a built-in and unnecessary disadvantage to doing so, making it better to stick with them. Or they could require exclusive technology that smaller competitors either can’t afford or simply don’t have access to through seemingly unrelated circumstances.

So the law takes it a step further by forbidding major players from:

  • Doing anything to prevent running credit cards on an otherwise capable network
  • Forcing the use of only networks with specialized (and potentially unnecessary) security technology smaller networks generally can’t afford
  • Inhibiting another credit card processor by utilizing specialized security technology
  • Penalizing or disadvantaging the routing of a transaction to any capable network or the failure to meet a quota with a specific network

Tracks National Security Risks

The law also requires the Fed to start keeping a list of creditors that represent a national security concern or that are owned, operated, or sponsored by a foreign entity. That would enable the government to prevent malicious foreign entities from gaining a foothold in the U.S. credit industry and gaining access to Americans’ private information.


Truth or Consequences: How the Credit Card Competition Act Could Affect Us

If you’re here, you’ve probably read one or more think pieces on the Credit Card Competition Act. One or more of them may have even told you the sky was falling. 

It’s true there are pros and cons. It’s also true some believe it won’t achieve its intended purpose. But there’s no handlebar-mustachioed villain tying a distressed damsel to the railroad track. That’s not to say there are no potential issues.

Say Goodbye to Your Credit Card Rewards — Well, Maybe Not

One big fear is that this change will cripple or altogether eliminate current credit card rewards programs. It will definitely affect them, but I think it’s a bit extreme to say it will kill them.

The support for this argument is that it happened to debit cards already. I know what you’re thinking. “Debit cards don’t have rewards, silly girl.” First, that’s sexist. Second, they used to. 

Then something called the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act limited those fees, causing the debit cards rewards programs to dry up. 

Here’s the problem, though. Those fees are quite literally the only additional income source on debit cards. Debit cards are tied to bank accounts. Banks don’t make money in the form of interest because you’re not borrowing the money but spending your own. They make money on the bank accounts, but it’s the same money they always made, not a new source of income.

Credit cards provide the issuer with interest income too, which is plenty of money to provide for rewards programs. For example, Capital One made around $15.5 billion in interest in 2021. They made only $3.86 billion on credit card fees. 

Plus, credit card rewards programs aren’t all they’re cracked up to be. And that’s not entirely the fault of big businesses. 

There are only a handful of hardcore rewards card users who really get their money’s worth from those programs. Many don’t even get their annual fees back, at least not in rewards. 

My mom is not a rewards card junkie, but she’s also not one to leave free money on the table. Heck, the woman washes and reuses disposable straws and the dishes that come with food — not just jars, but plastic tubs too.

And even she, who is now retired, by the way, doesn’t always have the time or desire to do all it takes to really leverage every dime of her rewards. Every. Single. Month. I’m not trying to be a jerk — just a realist. If my mom can’t or won’t do it religiously, will you? Be honest.

Rewards programs also act as a tool of trickle-up economics, according to the 2022 Wharton School study. The study’s authors found that credit card fees, which most retailers spread out among all transactions, effectively transfer $3.5 billion in fees from those making less than $75,000 to those making more than that amount in the form of rewards. More than $1.9 billion goes to those making over $150,000, and $1.2 billion of it comes from those making less than $20,000.

The good news is they still have rewards programs in countries that already limit credit card fees. That’s because our fees are a bit inflated compared to the rest of the world. A December 2022 New Yorker analysis determined that our prevailing rates are eight times higher than the average of the countries of the European Union. And many of the countries that limit credit card swipe fees still have rewards cards.

For example, in Australia, credit card fees are limited to 0.80% as of this writing. And they still have rewards credit cards. Those rewards aren’t as generous as some of the best ones you see in the U.S. today, but given the much lower swipe fee limit, they’re pretty impressive.

Take the ANZ Rewards Visa. As of this writing, it offers 1.5 points per $1 spent up to $2,000 and 0.5 points per $1 after that. Plus, you get travel insurance, up to one year extended warranty on products you buy, and partner discounts, among other benefits. That’s on top of the 50,000 bonus points you get for spending just $1,500 in the first three months. And the annual fee is only $95.

Those may not be the rewards you’re used to getting, but they’re not bad, either. Bear in mind that while the powers that be clearly think companies are making a bit too much money off swipe fees, that’s not the network’s only source of revenue by any stretch. 

Besides, banks offer rewards to entice customers. Credit card networks just run the cards. And banks still have to compete for customers whether this law passes or not. And they’ll have plenty of money left over to offer rewards if they want thanks to interest.

That said, you should expect less generous airline-related rewards as airlines limit elite perks that became easier to get during the pandemic. Unfortunately, this pull-back has already started and will happen with or without this new law.

They’ll Find Other Ways to Make Money Off Us

Businesses always look for ways to replace lost revenue, and that includes banks. This article is about how it impacts you and me. But the reality is these companies stand to lose billions (with a B). Durbin points out that in 2021 alone, businesses racked up a collective $77 billion in credit card swipe fees. If this law cuts that by only a third (and it could be much more), they could lose around $25 billion. 

When they could no longer make mad cash off debit card transactions, free checking accounts went the way of the dodo and credit card fees increased. Of course, those increases got them to where they are now with potential credit card fee legislation on the table, so maybe one day they’ll learn (LOL!).

It’s definitely true that the negatively impacted companies are going to try to find replacements for that revenue. They have shareholders to report to. 

One would hope the new revenue would come from new, exciting, and useful products they can sell us, but it could very well be choking off freebies and raising prices elsewhere. The only thing I think we can all agree on is that it probably won’t come from slashing executive salaries. 

That said, as cynical as I am, deciding you may as well resign yourself to giving them your money just sounds defeatist to me. If they’re going to do it, at least make them jump through the hoops. You might get something out of it.

In fact, I’d point out that after all they did to recapture that debit card fee revenue, a bunch of fintech startups came along and threw a monkey wrench into their plans with fee-free checking and fancy apps, and now even the big boys are backpedaling on things like overdraft fees and truly online banking.

And those kinds of advances only happen when the little guy stands a chance of getting a foothold. 

Your Information Security Is for Sale — But It Always Was

I’m not a giant fan of some of the language regarding information security. 

Don’t get me wrong. I can totally see a big corporation trying to step on the little guy by inventing some security function that only works with their special flux capacitor, which they’d be glad to sell access to for a bazillion dollars.

And the CEO would testify to Congress with a straight face that they really, really weren’t trying to limit competition. The flux capacitor really does cost that much, and it’s for the good of the people and patriotism, ‘Merica. 

But our government really needs to work out how to prohibit competition-blocking nonsense cosplaying as security without accidentally stepping on actual security features too. And that’s why this made me nervous. 

Why would the law not be something closer to “everyone has to have free access to that DOD-level security you see in TV shows that only the indomitable Penelope Garcia can break through with her funky glasses, adorable pens, and fake squish-typing”? 

And I’ll remain worried about that until I see the outcome. But that’s primarily because I trust few companies with my information and trust the government with it less.

That said, the law will lead to prohibiting them from using companies overseen by potentially hostile foreign powers, and technically, it’s up to the issuer to choose the alternative, meaning it’s on the issuer if your information is compromised. And the merchant has incentive to use the more secure network to avoid negative outcomes like fraud-related chargebacks. 

Merchants Will Be Able to Charge Less — Theoretically

If it costs money, merchants have to pass on that cost to customers if they want to stay in business. That’s true of their rent, their electric bill, and yes, their credit card fees. 

To oversimplify, that means that 1.5% to 3.5% of everything you purchase would have to be able to go to credit card fees without the business losing money. That doesn’t sound like a lot, but imagine charging everything you buy in a month on a single credit card. How much is that? Say, $4,000?

Now, imagine you’re the business owner who has to pay the credit card fees on that — per customer. If you own a big company like Target, you probably negotiated really low fees. That’s $60 per customer. Not too bad. 

But now, imagine you own a mom-and-pop shop. You have zero leverage to negotiate your fees, so you pay the highest rate. You’re looking at $140 per customer. How are you supposed to compete with the big boys if you have to pay double what they do in credit card fees? 

And that’s no exaggeration. According to payment processing gateway Square, small businesses with credit card sales between $10,000 and $250,000 per month pay between 2.87% and 4.35% per transaction between transaction and other credit card-related fees. 

This act would ensure small businesses don’t need leverage to get lower rates. And theoretically, that should mean lower rates to the consumer.

The problem a lot of people have is that it didn’t work that way when they lowered debit card rates. 

I tend to think they’re both right. While some prices are likely to come down soon, especially at mom-and-pop shops as they strive to compete, others will stay right where they are. In part, that will happen because the market has already proven it can bear that price point, so why change it? Just pocket the cash and move on. Nothing to see here.

There’s also the fact that the prices don’t fall immediately. It takes time for retailers to see the benefits and be confident it’s safe to lower prices. It’s also possible prices only go down in response to direct competition or market changes or prices take longer to rise during periods of inflation. 

But even if none of that happens, if the savings enables small businesses to hire employees or offer better pay or benefits — or just keep their lights on — it’s still worth it.


Pros & Cons of the Credit Card Competition Act

It’s hard to pin down the pros and cons of the Credit Card Competition Act, in part because it really depends on how big banks and the Visa-Mastercard duopoly respond. That said, there are a few things we can guess.

ProsCons
Leaves most institutions aloneLowers the generosity of credit card rewards programs
Lowers credit card feesLarge loss of revenue for affected businesses
Gives smaller banks a competitive advantageLess-than-robust information security protocols
May give smaller or even new networks a competitive advantageSmaller banks may lose some revenue
Lowers retail rates and diminishes inflationPeople in rural areas could pay the price
Reduces credit cards’ contribution to inequalityCredit card interest rates could go up
Effectively ends the visa-mastercard duopolyGives a big advantage to massive retailers

Pros

The pros are numerous and apply broadly to consumers, merchants, and all but the very largest businesses. The Credit Card Competition Act:

  1. Leaves Most Institutions Alone. Contrary to some of the anti-Credit Card Competition Act hullabaloo, this law doesn’t apply to most of the banks in the U.S. and only negatively impacts the two largest networks, which must set more competitive rates moving forward.
  2. Lowers Credit Card Fees. Required competition would lower the rates merchants have to pay and may improve the service they get. That would allow them to do other things with that money, such as lower costs or create local jobs.
  3. Gives Smaller Banks a Competitive Advantage. Large banks must comply with all the rules set forth in the new regulation, but medium and smaller banks have more leeway. That may allow them to compete more equally to be retailer card backers and to become the providers of consumers’ credit cards of choice.
  4. Gives Smaller and Independent Networks a Competitive Advantage. Since larger networks can no longer require exclusivity, they must compete with smaller and independent credit card networks for business.
  5. Lowers Retail Rates and Diminishes Inflation. Most retailers won’t lower prices on most products immediately. But it should happen over time that we’re effectively paying less than we would have if credit card fees were still higher, whether it literally lowers prices or just keeps them from going up as much as they would have.
  6. Reduces Credit Cards’ Contribution to Inequality. Because swipe fees are built into the cost of all products whether you use them or not and swipe fees help subsidize rewards programs, lower-income consumers essentially transfer money — to the collective tune of $3.5 billion annually — to higher-income consumers. This act may be the kick in the pants economists at the Wharton School referenced when studying the upward redistribution phenomenon in 2022. 
  7. Effectively Ends the Visa-Mastercard Duopoly. That’s the ultimate goal of the legislation. Opolies of any kind reduce competition and raise prices for consumers because they result in de facto price fixing. 

Cons

The cons are less extreme and apply to fewer people. But they may still be anywhere from annoying to troublesome for those affected. 

  1. Lowers the Generosity of Credit Card Rewards Programs. Credit card rewards programs don’t have to go away since issuers make so much more money on interest than fees. But it’s still a fairly large hit to their bottom line, meaning even if they don’t disappear, the programs’ generosity will wane.
  2. Large Loss of Revenue for Affected Businesses. Only about 35 U.S. businesses, including banks and networks, have to comply with the law. But they’ll lose quite a bit of revenue. Even if it’s not their main source of revenue, it could result in consequences like slower growth or layoffs. 
  3. Less-Than-Robust Information Security Protocols. The law prohibits the use of information security protocols to prevent a particular network from running the transaction. That theoretically means your card could run less securely because the merchant chooses the cheaper network. That’s no guarantee security will go out the window, but it does become a factor for concern.
  4. Smaller Banks May Lose Some Revenue. It’s possible the lowered interchange fees may also cut into money that used to go to medium and smaller financial institutions in the form of revenue since banks do share in those profits. Unfortunately, it’s difficult to say how much since most anti-act literature has focused on issues impacting larger banks or disingenuously implied the law impacts both institution types the same way. For its part, the National Association of Federally-Insured Credit Unions is concerned about the law since the debit card version negatively impacted them. But credit card revenue is different from debit card revenue, so the situations may not be analogous. 
  5. People in Rural Areas Could Pay the Price. Similar and related to the potential issues with credit unions, there’s some concern that the lack of revenue from interchange fees could hit rural areas hardest, especially those with lower credit scores. While revenue from credit cards isn’t all based on swipe fees like it was for debit cards, it’s a valid concern if rural banks have been using funds from interchange fees alone to fund loans to near-prime or subprime customers. However, neither opinion I read on this matter gave any hard numbers about how interchange fees really contribute to these smaller institutions’ bottom lines versus interest rates.
  6. Credit Card Interest Rates Could Go Up. When this happened to debit cards, checking account fees made a comeback. So it wouldn’t be totally unexpected if credit card interest rates went up. On the plus side, that ensures the people actually using the credit cards are the ones paying for it instead of spreading out the cost among all customers. Of course, those fees also led to upstart fintechs disrupting the industry, which could happen again.
  7. Gives a Big Advantage to Massive Retailers. One of the biggest red flags for opponents of this law is just how much big retailers like Walmart and Target are chomping at the bit for this law to pass. And that’s a fair concern. When big companies are excited about a law, you should be worried. I tend to think it’s one of those things that helps them precisely because it helps small businesses, but we should be mindful of how it impacts them versus their smaller competitors. 

Is the Credit Card Competition Act Good for Consumers?

Overall, I’d say yes. 

I’m concerned about the information security implications. But I’m also aware that historically, the government’s attempts at protecting our information haven’t been as bulletproof or as valiant as you’d hope, so it’s not really all that good a reason to oppose the law. Plus, you can always write your congresspeople to ask them to shore that language up.

There are some potential downsides. 

It’s likely to at least make a dent in rewards programs. I’m of the mind that if they go away, it’s more posturing from big credit card issuers than the revenue actually drying up so much they can’t. But it could also make smaller banks more competitive in the rewards arena or even invite new fintech startups to the party. 

I’d also keep an eye on what really happens to smaller credit unions and rural financial institutions after the law passes. There may need to be further amendments to keep them competitive on their own terms.  

All that said, a lack of competition in this arena ultimately hurts consumers and small businesses in the form of higher overall prices. It also discourages the kind of innovation that led to some of the new trends in banking after debit card competition was protected, such as fee-free checking, interest-free paycheck advances, and apps with cool features like advanced automated savings tools. 

This law aims to bring that same competition back to the credit card industry. But expect growing pains. All these amazing new bank account perks and features couldn’t have happened without the banks’ initial negative reactions to the debit card version of this law that opened the door for fintech startups to turn the industry on its head.

But you never know. If they’re paying attention, those small financial institutions could be the driving force behind similar changes to the credit card industry — and we won’t have to wait for startups at all. 


Credit Card Competition Act FAQs

It’s very possible this article will be outdated soon, as these laws frequently change before they pass in their final form. But if that changes or you have any questions, I’ll do my best to update this article or answer them here.

How Do I Tell My Congresspeople I Love/Hate This Law? 

If you want to ensure this law gets passed or have concerns about any aspects of it, write to your Congresspeople. You only have to write one letter to send to both your senators and your representative

Why Does American Express Charge So Much More in Swipe Fees? 

One word: rewards. American Express’ business model was built on attracting more affluent cardholders who spend more and expect more in return. That was supposed to be more appealing to merchants because if they accept those cards, they supposedly attract more discriminating customers with more money to spend. As such, they charge higher swipe fees to help subsidize their rewards programs. 

However, these days, many other rewards cards are just as if not more generous. And technically, some Visa and Mastercard rewards cards also charge higher swipe fees. 

However, rewards are offered by the issuer, not the network. Since Amex is an issuer and its own network, all the cards have higher swipe fees.  


Final Word

The Credit Card Competition Act could become a reality in 2023. If so, it’s unlikely to be obvious how that impacts merchants and may take some time to influence the prices you pay for goods and services. 

But it’s sure to impact your rewards programs fairly quickly, which is why it’s imperative you stay tuned to Money Crashers to learn how to leverage your rewards and which rewards programs might be a better fit. So scroll to the bottom of this page to sign up for our newsletter.

Heather Barnett has been an editor and writer for over 20 years, with over a decade committed to the financial services industry. She joined the Money Crashers team in 2020, covering banking and credit content for banking- and credit-weary readers. In her off time, she enjoys baking, binge-watching crime dramas, and doting on her beloved pets.
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