The Credit Card Competition Act would mandate that issuing banks offer a choice of payment networks to merchants, intending to create competition and drive down costs. The idea is to enable the issuing bank to use at least two payment networks to process the transaction, with one not being Visa or Mastercard. The legislation’s backers say this would create price competition, leading to lower processing fees for merchants. Then, they say, merchants will pass on those savings to consumers.
Mastercard and VISA say that if this legislation were to pass and be enacted, it could end rewards programs, as a decrease in profits would cause the companies to cut them. However, according to Ben Danner, Senior Analyst at Javelin Strategy & Research, these concerns are overblown, but it may bring more conservative underwriting.
In his report “Understanding Credit Card Rewards: A Successful Model Under Threat,” Danner discusses the current state of credit card rewards and how the Credit Card Competition Act may change it.
“The whole point of the bill is trying to break up what Durbin calls “the duopoly of Visa and Mastercard”—allowing for other networks, non-major networks, to come in and be a part of the process,” Danner said. “Passage of the bill would be a win for large merchants, like Walmart, that are doing lots and lots of card transactions. They’d be able to get cheaper, more competitive pricing.” But you have to wonder- what will it do for borrowers and lenders.
The biggest winners might not be merchants, but Amex and Discover. If the Credit Card Competition Act were to go into effect, the second slot would likely be one of those two networks. The legislation explicitly excludes non-U.S. networks, so it will not be a field day for Union Pay or JCB.
The big question is whether this will benefit consumers at all. Many people are skeptical, as such an outcome relies on merchants passing on their savings, which they haven’t always done.
Comparisons With the Durbin Amendment
Many commentators seeking to understand how the Credit Card Competition Act would affect the industry compare it to the Durbin Amendment of 2010, which capped interchange fees for debit card transactions at 21 cents per transaction, plus an additional fee of up to 0.05%.
As discussed in PaymentsJournal, the goal of the Durbin Amendment was to increase competition in the debit card market and reduce fees for merchants who were paying high costs for the processing of transactions. One clear result is that debit card rewards programs are a thing of the past.
“There was once a burgeoning industry of debit card rewards, but the Durbin amendment killed it,” Danner said. “With the new fee cap, debit cards didn’t make money to fund the rewards programs.”
The Credit Card Competition Act is different from the Durban Amendment in a few fundamental ways, though. First, it doesn’t cap fees but rather forces competition.
Second, many people have credit cards exclusively for the rewards, which is generally not true for debit cards.
Third, there are so many more ways to pay now, such as buy now, pay later loans and P2P apps like Venmo.
After the Durbin Amendment took effect, there were fewer options for payment, so inertia may have been a more powerful factor in keeping debit cards. That seems less true for credit cards today.
“The Durbin Amendment was introduced around a decade ago,” Danner said. “Back then, smartphones existed, but people weren’t using them as extensively for payments as they do today. The range of mobile payment options we have now simply wasn’t as developed.
“If card rewards vanished, many would switch to digital payment options like Venmo or even direct bank payments via QR codes, which could pose a threat to traditional credit card systems.”
How Will Credit Card Rewards Really Change?
Many credit card users today wield the cards for the rewards and could easily switch to using a debit card or direct bank payments if rewards disappear. From a security standpoint, credit cards offer some advantages, but not enough to choose them over other payment methods. All of this makes credit card companies averse to killing their golden goose.
“If credit card companies were to eliminate rewards, it would significantly impact the reason people have credit cards in the first place,” Danner said. “But that seems unlikely. There’s so much infrastructure built around credit card rewards that it’s hard to eliminate them.
“If this proposal passes, it will likely only slightly impact credit card rewards, possibly resulting in smaller introductory offers and reduced cashback rates from 5x to 3x.”
Credit card rewards, especially travel rewards, are deeply embedded in the industry.
“I don’t believe they’ll disappear overnight like debit card rewards did,” Danner said. “The market is just too vast and interconnected.”
Furthermore, unlike the Durbin Amendment, there is no talk of capping interchange rates here, lessening the likelihood of significant changes to rewards.
“Issuers may see a decrease in interchange revenue but should still have enough income from annual fees to sustain their programs, albeit less robustly,” Danner said.
Read more about the types of rewards consumers prefer and the future of credit card rewards here.