The National Retail Federation (NRF) has thrown its support behind legislation introduced by the U.S. House of Representatives that is designed to ditch “swipe fees” that increase prices for consumers paying with a credit card.
Representatives Peter Welch (D-Vt.) and Lance Gooden (R-Texas) introduced the Credit Card Competition Act in the House on Monday last week, two months after it was introduced in the Senate by Senators Richard Durbin, (D-Ill.) and Roger Marshall (R-Kan.).
The measure would require that credit cards issued by the nation’s largest banks be able to be processed over at least two unaffiliated networks. One of which would be either Visa or Mastercard, while the other would be either a competing card network like American Express or Discover, or one of several independent networks such as Star, NYCE or Shazam.
If this bill were to pass, merchants would then be allowed to choose which of the two networks to use, with the goal of encouraging the networks to compete over fees, security and service.
Swipe fees, also known as interchange fees, are a per-use fee charged by banks to merchants using credit or debit cards. When fees increase, retailers may be incentivized to raise prices to make up for the fees. In many cases, smaller businesses are hit hard by the fees, and may often limit consumers to a threshold that a consumer can pay via card.
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Swipe fees for Visa and Mastercard credit cards currently average 2.22 percent of the purchase amount, according to data from The Nilson Report. The fees amounted to $77.5 billion in 2021, triple the $25.6 billion charged in 2009, the payments expert added.
When all brands and types of cards are included, the fees totaled $137.8 billion in 2021, more than double the amount a decade earlier, according to Nilson.
“Lawmakers from both sides of the aisle and both chambers of Congress are alarmed by how much skyrocketing swipe fees are driving up prices for consumers and recognize the need for competition,” said Leon Buck, vice president for government relations, banking and financial services for NRF. “Making networks compete over who gets to process transactions will make a huge difference in bringing these fees under control and will strengthen the security and reliability of the credit card system at the same time.”
Welch believes the bill will “bring much needed competition to the Visa-Mastercard duopoly” while Gooden said it will ensure that major credit card companies “can no longer use their monopolistic power to crush their competition.”
Competition over the processing of credit card transactions could save retailers and their customers at least $11 billion a year, according to payments consulting firm CMSPI.
The measure would apply only to banks with $100 billion or more in assets and would have no effect on local community banks or small credit unions. Credit card rewards would not be affected because those are determined by banks that issue cards, not the networks that process transactions.
“Representative Welch is a long-time champion of swipe fee transparency and competition, and Representative Gooden is an influential member of the House Financial Services Committee in a pivotal position to help this measure become law,” Buck said in a statement. “Working together with Senators Durbin and Marshall, they can see to it that big banks and global card networks finally have to compete the same as small businesses do every day.”
The controversy surrounding Visa and Mastercard, which control approximately 83 percent of the U.S. credit card market, according to the U.S. Federal Reserve, stems from the argument that their large share currently restricts competition. Both card companies carry a policy in which they only allow transactions made on their brand-issued cards to be processed over their own networks.
About $3.49 trillion was transacted on the 576 million total Visa and Mastercard credit cards in the U.S. in 2021, the Fed said.
The U.S. currently has four major credit card networks: Visa, Mastercard, American Express and Discover. Visa and Mastercard are known as “four-party” networks, meaning they act as agents for thousands of card-issuing banks and mandate the fees and terms that the banks receive from merchants for each transaction.
Many merchants, trade associations and payments experts argue that retailers effectively have no leverage to negotiate fee rates and terms in four-party network systems, because they cannot risk losing access to all the consumers served by Visa’s and Mastercard’s member banks.
Independent networks usually charge lower fees than Visa or Mastercard’s networks and, according to the Federal Reserve, have about one-fifth as much fraud, leading NRF to point out that the legislation could lead to both lower costs and better security.
In addition, the bill would bar networks controlled by foreign governments like China’s UnionPay from handling transactions, closing a potentially significant security gap in the current system.
The NRF also pointed to another argument in favor of the bill, saying that adding a second network to credit cards would provide a backup in the event of disruptions to Visa and Mastercard’s networks, ensuring continuity at a time when consumers rely on cards rather than cash.
The bill isn’t without its drawbacks, one being that the payment infrastructure for credit cards may not be ready for multiple networks, and there would be a cost of reissuing cards and upgrading technology to accommodate the updates. The legislation could also impact customer loyalty programs, as retailers may have to scale back the offering of co-branded credit cards.
Aside from the NRF, another trade association, the National Association of Convenience Stores, also supported the bill’s introduction.