An end to credit card fees?

By Keith Olson, VP of Sales ACH & Online Banking

‍In an era marked by soaring inflation and escalating costs, the Credit Card Competition Act of 2023 (CCC Act) emerges as a beacon of hope for both merchants and consumers in America. This proposed legislation seeks to alleviate the financial burden imposed by credit card swipe fees. However, as with any significant change, there are possible ripple effects, including the elimination of rewards programs for consumers. As payment regulation evolves, account-to-account (A2A) payments are seeing a growth of their own and can serve as a lifeline in navigating the fast-paced financial climate in the US.

What is the Credit Card Competition Act of 2023?

The CCC Act 2023 is a proposed legislation in the U.S. aimed at reducing credit card swipe fees, which are fees that merchants pay card networks every time a customer uses their credit or debit card.  These fees range between 1% to 3+% of every transaction and can amount to a significant cost for merchants. In 2022, merchants paid a combined $160.7 billion in swipe fees, which is 16.7% higher than what they paid in 2021. Some of that fee is kept by the payment network companies as network fees, but most of it is an interchange fee which is fixed by the card network and paid to the financial institution that issued the payment credential attached to the account.

The CCC Act would enhance credit card network competition and acceptor choice in order to reduce excessive credit card fees. It would require the largest credit-card issuing financial institutions in the country—those with assets over $100 billion – to enable at least two available networks on their issued payment credentials instead of just one. One of the chosen networks can be either Visa or Mastercard, but the other must be an alternative network. This would give merchants the power to decide which of the available networks to route the transactions over.

How will this legislation impact stakeholders?

Merchants

It is estimated that the CCC legislation could save businesses $15 billion in annual interchange savings. It would also give merchants the option to embrace networks with cheaper swipe fees. This increased choice would enable more control over payment processing costs and could potentially lead to lower prices for consumers.

Card networks

If passed, the CCC legislation would mean that networks, such as Visa and Mastercard, would have incentive to hold down their fees in order to encourage merchants to choose to route transactions over their network instead of the second network on the card. It is, however, essential to view the impacts of this legislation from all angles. For example, according to Visa, overall interchange fees on Visa transactions have been flat for the past decade. In addition, last year Visa lowered interchange 10% for 90% of U.S. businesses to help with their recovery and growth.

While introducing competition to a market that is often described as a “duopoly” may have positive impacts on consumers and merchants, we shouldn’t forget what these network fees pay for. The fees associated with card networks directly fund essential safeguards like fraud prevention, risk management, and regulatory compliance, all of which serve to protect consumers while they shop. As an example, in the past five years, Visa spent $10 billion on security innovations that have helped prevent more than $30 billion in fraud over the past 12 months alone.

Consumers

• Reducing costs - With reduced swipe fees comes the opportunity for merchants to lower the prices of their goods and services, which will likely drive sales and increase customer loyalty. In the current climate of high inflation costs, more affordable prices would come as a relief to consumers. It is important to note, however, that there is no empirical data validating that consumers benefitted from a reduction in costs for goods and services and it is possible that merchants may have taken the expense reduction to the bottom line.
• Data security - In our recent study with PYMNTS.com, a majority of 20% of respondents cited data security as their top reason for using a credit card for online payments. The advantages offered when all credit cards come down one pipe is a single view of the transactional fraud landscape. A change to this format could result in the fraud landscape becoming fragmented, leading to increased fraud operating costs for payment networks and issuers, a charge that would likely fall on consumers.
• Elimination of rewards - Earning rewards motivates 7 out of 10 consumers to use their credit cards. If credit card account interchange revenue paid to issuers is regulated and reduced, there is a very significant chance issuers would reduce or eliminate credit card rewards in order to make up for lost profit. This is because interchange fees largely fund credit card reward programs.

Banks

Most banks and credit unions in the U.S. – all but the biggest thirty - would not be subject to the bill’s requirement to add a second credit card network. In addition, the CCC Act legislation would not force banks to add any particular network to their cards, rather they would select which second network to add based on the service, security, and value that networks offer.

Account-to-Account (A2A): The future of online payments

A possible solution to the challenges posed by the CCC Act could be the freshly advanced direct Pay-by-Bank also known as account-to-account (“A2A”) payments. A2A payments refer to direct electronic money transfers from one bank account into another, a proven method that eliminates all traditional networks and associated fees for merchants on debit transactions.A2A payments are growing in popularity in the U.S., with 71% percent of consumers having paid a recurring bill online in the last month, and 66% making an online purchase. This increase in popularity emphasizes consumers’ continuing reliance on digital commerce and their need for payment options when purchasing goods online.

Consumers love rewards. PYMNTS data shows that 69% cite credit cards as their preferred payment method for online purchases to earn reward points. What’s more, 32% cite the ability to receive rewards as reason to make a payment with their preferred payment method. This is a significant incentive, and one that should not be ignored by merchants when choosing the payment methods offered at checkout.When it comes to A2A payments, while only 5.5% of consumers used this method for the first time in the last year, 27% cited the ability to earn rewards as the reason they started using the payment method. Though the uptake of A2A among American consumers is in its early stage, this should not deter merchants from implementing this method of payment.

Let’s take contactless payments as an example. When this payment method was introduced, adoption was low because consumers did not trust the concept, and payments are inherently habitual.  Tap-to-pay technology was added to some cards in the early 2000s, but the idea didn’t fully take off until the pandemic.In the meantime, merchants should view A2A payments as an opportunity to ensure that the CCC legislation, if passed, does not impact their business or their customers. By implementing this payment method, merchants can avoid card interchange fees altogether while still ensuring customers get their rewards. Everyone wins.

To conclude

The proposed Credit Card Competition Act of 2023 represents a significant step towards addressing the financial challenges faced by both merchants and consumers in an era of rising inflation and mounting costs. While this legislation – if passed – holds the promise of reducing burdensome credit card swipe fees, it also brings the potential for changes such as the elimination of rewards programs, raising questions about the future of payments in the U.S. A2A payments not only offer a lifeline for merchants to bypass excessive card fees, but also may very well end up providing consumers with reward programs. As the financial landscape evolves, A2A payments are poised to play a pivotal role in ensuring that businesses and consumers alike continue to thrive in the digital commerce realm.