Credit Card Competition Act

Posted by Mike Messmore on Sunday, November 26, 2023

I’m disappointed in the bias and logic in articles on the Credit Card Competition Act. I’m Not saying the law is good or bad, just an example of poor media writing and practices.

Generally, I don’t talk politics. And reading it, I just more based on logic and the internal consistency of an argument.

This just seems to be a very good example of bad.

If you Google the act, the highest hits are by the Credit Card processing lobby groups. But publications that would appear to favor consumers are full of lobby talking points, factually incorrect information, and logical fallacies.

I’m going to pick on one particular article on Nerd Wallet a company that helps consumers navigate credit cards to fit their needs.

They may be biased by the fact that they benefit from the complexity of credit programs. I don’t know.

The Entities

Credit card processing is more complicated than most consumers understand.

A card is provided as a service and funded by a financial institution.

That card is associated with a network provider. Mastercard and Visa are 80% of the market. Discover and American Express are the majority of the remainder. They charge the financial institution and the processing companies to use their network, but also provide incentives to each to choose their network.

A processing company connects a retailer to the larger network providers. They charge retailers fees, typically for every transaction. These rates are negotiable, primarily based on volume. Small and mid sized businesses are hit the hardest by this. They also provide the hardware you swipe your card through (well, insert or tap these days).

Previously, consumers were unaware of these largely regional companies. Some, like FreedomPay were national. These days you see Swipe and Clover adopted by many small companies because they didn’t jack up rates, provide ease of use, and cheap or sophisticated hardware; even removing the need for separate point-of-sale systems (cash registers).

Businesses typically pay 2-3% per transaction on Mastercard or Visa. More on American Express. And usually a flat $0.10-$0.25 per debit transaction.

The latter information is described accurately, but the complexity is glossed over.

Slippery Slope

The conclusion of all arguments I see against the bill is that it kills rewards programs.

But the bill has no correlation to that. This presupposes that increasing competition will decrease credit card companies profits, therefore they will not be able to provide rewards.

This is odd to me in a capitalist system. Rewards are an inducement by banks to choose their card programs. Fees are charged by processors and networks.

The “trickle” of this flow is as difficult to predict, as is evidenced by the next argument.

Passing the Buck

Previously, processor contracts universally prevented businesses from charging higher prices for credit vs cash transactions. This was made illegal as it wasn’t negotiable industry wide.

After this a minority of businesses started passing the fees to customers. This is used as evidence that fees to do functionally impact consumer prices.

That’s a false conclusion. Many small businesses started charging fees only to back off due to customer complaints. Too few customers use cash in the modern environment to bother with the hostility and the operational complexity. Point of sale systems often didn’t support it.

Heck, the rise of Swipe and Clover PoS systems illustrates this. They don’t support cash transactions, and operationally require another mechanism that runs the risk of tax liability.

If expanded network competition allowed for increased competition for fees, businesses are incentivized to pass that to consumers.

The real question is if the law would cause increased competition and lower transaction fees. I have no idea if this is true.


Near the end of the article is this quote heavily loaded with pure falsehoods

This bill would allow these large merchants to use the cheapest credit card processing option, with no requirement to keep consumers’ data safe or return savings back to them,” said Jim Nussle, president and CEO of the Credit Union National Association, in a June 2023 statement. “Interchange is the cost of doing business. Merchants like Target and Walmart reap the benefits of credit card usage with immediate payments, protection from fraud, and typically larger purchases by consumers — but don’t want to pay the cost of accepting credit cards.

Customers data being kept “safe” is a requirement of PCI. The number of credit card data breaches shows the effectiveness of this. Processors and banks are not held to this industry regulation (not law). They are required to pay for a 3rd party audit… which adds even more to the overhead of businesses dealing with cards.

Which leads to the out-and-out lie. Both Walmart and Target do enough volume that they have become their own credit card processor. They don’t pay a FreedomPay. They don’t pay the significant costs of PCI compliance. They payed lower rates than small businesses prior to this because of volume, and pay even lower now.

In terms of advantages in pricing competitiveness, this is an extremely minor example. They also run their own product distribution networks, negotiate (or run) their own manufacturers, etc.

They are not the “big evil” part of this plan. Yes, they may save a fraction of a percent.

But if companies like Clover and Swipe are able to leverage their overall volume, small businesses may see rewards as well. Or they don’t and someone else reaps the profits.

Self Defeating Conclusion?

The threat of lost rewards programs assumes banks see less profit because the networks see less profits. That implies that there would be necessarily less overhead and that preserving lack of competition keeps that overhead in place…. It assumes the situation is anticompetitive.

It also asserts that banks fund reward programs out of network fee kickbacks, which are also anticompetitive.

It’s all just odd.

General Weirdness

I don’t see the banks themselves asserting this conclusion. From my experience, cards with rewards charge higher interest rates. That would imply that the rewards are funded by people not paying their bills and paying interest.

The networks using this as their primary argument with flimsy notes about how they don’t hurt is odd when combined with banking being silent on the issue. Banks’ loss of this lure would seemingly be more of an issue to them than to the networks and processors.

My Personal Thoughts

Generally I’m against passing laws unless absolutely necessary. Too often they are too late to be effective and have unintended consequences. Legal code is like software. The more code, the more bugs. And law is mostly append only. Refactoring is rare.

I’m also a bit confused. In official press statements, the industry seems to have admitted to price fixing and kickbacks. Both of which are illegal, although I definitely don’t understand the nuances.

Could the desired state be accomplished within the existing body of law? Or is the duopoly too difficult to challenge in the court today?