Credit Card Fees: Merchants and payment processors find themselves locked in heated debates concerning credit card fees, as the race for customers amongst retailers and payment companies intensifies. In a bid to level the playing field, the government has recently taken action by slashing credit card rates for all.
The Credit Card Competition Act, which had lain dormant for some time, was revived by the Senate and the House just last month. Its core provision requires major banks to adopt a credit card handling network other than the dominant players, Visa and Mastercard, thereby offering businesses that pay exchange fees a fresh and unique alternative.
Numerous players, including retail giants like Amazon, Kroger, Shopify, Goal, and Walmart, along with more than 2,000 sellers, websites, and small enterprises, are advocating for Congress to embrace the Act. Their contention is that credit card handling fees escalate their costs, leading to higher prices at the cash register, ultimately burdening the customers they serve.
As expected, Visa responded with its counterarguments, asserting that curtailing credit card rewards and fraud prevention measures would be detrimental to buyers. However, last year witnessed the beginning of a collaborative effort between both sides, and Congress is now poised to vote on the proposal before the year’s end.
Doug Kantor, a prominent member of the Merchants Payments Coalition, remains sanguine about the Credit Card Competition Act’s prospects for becoming law. Adding his voice to the chorus of support, Senator Dick Durbin, D-Ill., expressed the need for genuine competition in the credit card network market, which currently hinges on the duopoly of Visa and Mastercard.
The Nilson Report, a global payments authority, reveals that Visa and Mastercard handle a staggering 80% of credit card transactions. Senator Durbin believes that the Act will aid in reducing swipe fees and subsequently maintain costs at a reasonable level for both Main Street merchants and their customers.
Indeed, the Nilson Report predicts that swipe fees, often covertly included in consumer prices, will reach a staggering $160.7 billion in 2022. To address this issue, the Act stipulates that banks with assets exceeding $100 billion must provide two different credit card payment options, while merchants cannot exclusively accept Visa and Mastercard.
Exchange fees, referred to as an “attack on commerce” by Shopify CEO Harley Finkelstein, have been a cause for concern as their continuous rise raised eyebrows. Finkelstein revealed that their e-commerce platform, operational in 175 countries, experienced the best exchange rates in the United States.
The Act has garnered both support and opposition from major players like Amazon, Shopify, Walmart, Capital One, Discover, and Visa. Notably, 26 lobbying groups mentioned the Credit Card Competition Act in their first-quarter 2023 papers before its revival.
The Electronic Payments Coalition (EPC), representing significant financial institutions and payment networks, staunchly opposes the Act. EPC argues that while it may boost profits for mega-retailers, it comes at the expense of popular credit card rewards programs, cybersecurity measures, and access to credit.
Predictably, Visa and Mastercard’s stocks rose by over 12% this year, reflecting the potential impact of the proposed Act. However, Aaron Stetter, the executive head of the EPC, forewarns that interchange revenue would dry up, leading to a bait-and-switch scenario that negatively affects consumers. Stetter asserts that customers might unknowingly experience transactions routed through less secure networks lacking rewarding programs.
Drawing parallels, the 2010 Dodd-Frank Act and the Durbin amendment imposed stricter banking regulations, which led to reduced costs for handling debit cards by merchants. Yet, a poll conducted by the Richmond Federal Reserve in 2015 showed that it did not substantially lower consumer or merchant prices. Some businesses even increased their prices for swiping debit cards.
Brian Kelly, from The Points Guy, harshly criticizes the Durbin amendment, associating it with the demise of debit card rewards. However, CMSPI, a research group, suggests that credit card benefits are not in jeopardy as issuers continue to profit and are experienced in other markets. Additionally, they forecast that businesses and customers will collectively save $15 billion in swipe fees due to the new Act.
A remarkable example of cost-cutting comes from Tandym, a company founded by Jennifer Galspie-Lundstrom, formerly associated with Capital One. Tandym manages to reduce interchange expenses by a whopping 80%, refraining from offering points or cashback. Through this strategy, Tandym supports small digital businesses like online bike retailer Jenson USA, empowering them to create robust loyalty programs.
The initial results of adopting Tandym are promising, with Jenson USA’s IT director, Jeff Bolkovatz, affirming a 2% reduction in network costs compared to Visa and Mastercard. These savings translate into supporting Jenson USA’s 5% incentives, promoting customer loyalty.
In conclusion, the ongoing debate surrounding the Credit Card Competition Act highlights the complexities of balancing competition and consumer interests in the payments industry. With diverse stakeholders voicing their opinions, the Act’s eventual outcome remains uncertain. However, its potential to disrupt the Visa-Mastercard duopoly and revolutionize credit card processing cannot be underestimated.
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