Fighting credit card fees pits payment companies against retailers

A bipartisan push in Washington to curb credit card fees pits retailers against network payment processors — and both sides are working hard to get consumers’ attention.

The Credit Card Competition Act was reintroduced last month in both the House and Senate, after not being brought up for a vote in either chamber during the previous Congress.

The measure aims to strengthen competition for credit card processing networks by requiring major banks to allow at least one network that is not Visa or Mastercard to be used for their cards. This would give merchants who pay interchange fees a choice they rarely get otherwise.

Amazon, Best Buy, Kroger, Shopify, Target and Walmart are among the list of nearly 2,000 retailers, platforms and small businesses urging lawmakers to pass the bill. Retailers in support of the legislation argue that credit card processing costs hurt consumers by increasing the cost of doing business and, in turn, the price customers pay at the checkout.

On the other side of the battle, major credit card processing networks like Visa, Mastercard, Discover and Capital One say the bill will actually hurt consumers by shrinking popular credit card rewards programs and reducing fraud protection.

Bipartisan support for the bill has increased since it was introduced last year. Right now, no vote on the measure is scheduled in either chamber of Congress, but there are indications that a vote could come before the end of the year.

Doug Kantor, a member of the Merchants Payments Coalition’s executive committee, remains “optimistic” that the Credit Card Competition Act could end up as an amendment attached to a larger piece of legislation at some point.

“It’s time to inject real competition into the credit card network market, which is dominated by the Visa-Mastercard duopoly,” Sen. Dick Durbin, D-Ill., said in a statement to CNBC. He is the sponsor of the bill and one of its most outspoken advocates.

Visa and Mastercard account for 80% of all credit card volume, according to data from the Nilson Report, a publication that tracks the global payments industry. Durbin says the legislation would “help reduce swipe fees and keep costs down for Main Street merchants and their customers.”

Swipe fees are often built into the price consumers pay for goods and services and have more than doubled in the past decade, hitting a record $160.7 billion by 2022, according to the Nilson report. On average, US credit card fees account for 2.24% of a transaction, according to the Merchants Payments Coalition. That’s why some companies add a surcharge to bills for customers who pay by debit or credit card to encourage cash transactions.

The new legislation would require banks with assets over $100 billion to give customers a choice of at least two different payment networks to process credit card transactions. The bill also states that Visa and Mastercard can only account for one of the choices as a way to prevent the two largest networks from being the only options offered to merchants.

“Interchange fees are effective attacks on commerce,” said Shopify President Harley Finkelstein. “We started noticing that these fees kept climbing and climbing and climbing, and we felt like something was up.”

The e-commerce platform known for helping businesses create their own customized digital stores operates in the 175 countries worldwide. “”Compared to every other country Shopify operates in, interchange fees are the highest in the Americas,” Finkelstein said.

Major platforms and retailers like Amazon, Shopify, and Walmart, as well as payment processors like Capital One, Discover, and Visa, are funding efforts to pass or block this bill. In all, 26 organizations mentioned the Credit Card Competition Act by name in their lobbying reports for the first quarter of 2023, which were filed before the legislation was reinstated last month, according to data from Open Secrets, a nonprofit group that tracks campaign finance and lobbying data. .

The Electronic Payments Coalition, a group representing major banks, credit unions, community banks and debit card networks, said the legislation “will add billions of dollars to the bottom lines of mega-retailers each year and eliminate nearly all of the funding that goes to popular credit card rewards programs, weakening cybersecurity protections and reducing access to credit,” in a June 9 post on its website.

CNBC reached out to major credit card processors, including Visa, American Express, Discover and Capital One. All declined to comment or referred us to the Electronic Payments Coalition. Mastercard did not provide a response despite several attempts by CNBC to get one.

Shares in Visa and Mastercard are up more than 12% each this year as of Friday’s close.

“Interchange revenue will dry up,” according to Aaron Stetter, the executive director of the Electronic Payments Coalition.

Stetter describes the bill as a “bait and switch that hurts consumers” because it “ultimately gives the decision-making of where the transaction will be directed to the merchant” instead of the card issuer or the consumer.

Opponents say the bill misleads consumers, who may think their Mastercard or Visa credit cards are processed over the Visa network, but may actually end up being routed over a separate, cheaper network with fewer fraud protections and little or no customer rewards programs , according to Stetter.

In 2010, lawmakers passed the Durbin Amendment as part of the Dodd-Frank Act, which sought to tighten financial regulation in the wake of the 2008 financial crisis. The amendment was supposed to cause a trickle-down savings effect, where merchants would pass on debit card processing savings to customers in the form of of lower prices for their goods and services.

But one 2015 survey conducted by the Richmond Federal Reserve found the Durbin Amendment did little to lower costs for consumers and merchants. Only 1.2% of merchants surveyed reduced prices and 11.1% said their payment card processing costs decreased. Nearly a third of respondents reported even higher debit card swipe fees, according to the survey.

Brian Kelly, founder of the travel blog The Points Guy, referred to Durbin as “the grim reaper of debit card rewards” during his July 11 appearance on CNBC’s “The Exchange.”

“When he enacted this change over a decade ago, not only did we see fees increase, but consumers could no longer earn rewards on debit cards,” Kelly said. ThePointsGuy.com is compensated by credit card companies for the card offers listed on its website, according to a disclosure at the bottom of the webpage.

But a new research paper from global payments consultancy CMSPI claims the new bill will not have the kind of severe impact Kelly is warning about. “Credit card rewards are unlikely to disappear based on current issuer margins on rewards and experience from other markets,” according to the CMSPI paper.

The same firm also estimates that the new legislation will save merchants and their customers more than $15 billion a year in swipe fees. That savings would be nearly 70 times greater than any expected reduction in rewards, according to the new study.

Companies are trying other ways to cut fees, regardless of legislation.

Tandym, a startup that offers e-commerce brands the chance to create private label debit and credit cards, similar to big-box retail branded credit cards, is tackling the problem of high interchange fees through technology.

Prior to founding Tandym, CEO Jennifer Galspie-Lundstrom worked at Capital One for seven years. She believes the Credit Card Competition Act will take years and cost billions of dollars to implement, calling it a “massive resource drain.” Instead, she said innovation will provide the answer to lower fees.

“We don’t ride the Visa, Mastercard, American Express or Discover rails,” she said. “We’ve essentially created an alternative network where we can connect directly to a merchant.”

Tandym’s exchange fees are typically 80% lower because it doesn’t use the revenue to fund its own cashback incentives or rewards programs. Instead, Tandym helps small digital businesses like online bike retailer Jenson USA build integrated loyalty programs with the savings.

Jenson began offering Tandym as a payment option to customers earlier this year. Orders processed over Tandym’s network cost about 2% less compared to Visa and Mastercard, according to Jenson’s IT director, Jeff Bolkovatz. These savings are now being used to help fund a 5% rewards program for Jenson USA customers.

“We basically just reversed the savings we got from using Tandym and gave them back to the customer to entice them to use it. The goal is to get them to be more loyal,” he said.

Customers seem to like the program. Each shopper has placed an average of two and a half orders since Jenson USA began offering Tandym as a payment option, Bolkovatz said.