US Senators want to inject more competition into the credit card industry through new legislation called the Credit Card Competition Act. The reasoning is that more competition will lower fees paid by merchants (i.e., interchange or swipe fees). Merchants aren't absorbing 100% of these fees since these costs are passed on to the consumer in the form of higher-end product prices or surcharges. By lowering merchant fees, end-user costs should also fall. At least, that is the general thinking behind the legislation.
Additionally, the legislation will force more credit card network choices onto merchants. Instead of mainly VISA and Mastercard, there will be a variety of other processors to choose from.
Some might recall a similar proposal passed in 2010 called the Durbin Amendment. It required that fees be fixed rather than a percentage of the transaction cost. However, the amendment's intent was never met as fees increased. This led to many debit card rewards disappearing.
A 2014 George Mason study found that the Durbin Amendment caused many smaller banks and credit unions to raise fees in other areas to offset the loss in processing fees, crowding out nearly 1 million households. Ultimately, the consumer did not come out as the winner.
How will lowering merchant fees affect consumers with the current proposal? Let's assume that merchants pass the savings on to consumers. This should mean a lower-priced end product. However, it's those same fees that allow merchants to offer their credit card rewards. These rewards come in many flavors, including airline miles, cash back, hotel points, etc. Many consumers select their credit cards based on the rewards programs offered.
If fees are lowered, it will likely lead to fewer reward programs. It could also reduce the value of programs that remain since consumers will probably need to earn more miles and points to get the equivalent value as before. Just as we saw with the Durbin Amendment, there's no guarantee that consumers will see lower costs. Additionally, those fees may, once again, pop up in other banking services.
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