The CCCA’s Long Shadow

Will Durbin II rise again, bringing joy to merchants but grief to credit card issuers? Potentially, more than $10 billion could be in play if routing choice becomes law.

Credit card issuers dodged a bullet in late 2022 with the failure of the Credit Card Competition Act to pass the 117th Congress.

The bill would have required large issuers to make a second, unaffiliated network available on their cards to merchants for transaction routing, potentially lowering merchants’ interchange costs—and putting a lid on the hefty income banks get from card programs.

Merchant advocates, however, vow to fight on in the new 118th Congress, which commences work this month. “To me, it’s a question of when, not if, the bill moves through,” says Doug Kantor, general counsel at the Alexandria, Va.-based National Association of Convenience Stores, which goes by NACS.

Those on the pro-interchange side agree the battle is not over. “We would expect them to bring it up again, yes,” says Jeff Tassey, chairman of the Electronic Payments Coalition, a Washington, D.C.-based lobbying group whose members include financial-institution trade associations and payments companies. “I just don’t see the retail side backing down.”

This ongoing merchant-bank payment conflict isn’t exactly top-of-mind for most consumers. But it broke into the public consciousness in November when NACS, with backing from the Merchants Payments Coalition lobbying group, ran a TV commercial that used Visa Inc.’s sponsorship of the FIFA World Cup to decry credit card acceptance fees and advocate for the CCCA.

The 30-second ad used the image of a giant credit card blocking a soccer goal and claimed “unfair hidden fees” add up to almost $1,000 a year in higher prices for each American family.

In December, the MPC and NACS followed up with a holiday-themed 30-second commercial in which the announcer proclaims, “Unfortunately, credit card companies are still stuffing our stockings” with unfair swipe fees. As a Christmas tree crashes to the floor under the weight of swipe fees on cards in a stocking, the narrator urges viewers to tell Congress to pass the CCCA. The commercial is part of a seven-figure ad campaign.

Goodbye Rewards?

If enacted, the CCCA would not impose price controls, but it still could put billions of dollars in interchange and network fee revenue streams in play. Interchange is a transaction fee set by Visa and Mastercard Inc. and paid by the merchant acquirer to the card issuer. Acquirers pass the fee on to merchants with a markup.

In the U.S., interchange fees can range in the neighborhood of 1.3% to 2.9% of the sale, with the precise amount determined by complicated schedules based on a merchant’s volume, the type of card used, whether the card is presented in person or used online, and the technology used for securing the transaction.

U.S. merchants pay nearly $73 billion in interchange annually for accepting Visa and Mastercard credit card purchases. That figure comes from total credit purchase volume for the four quarters ended Sept. 30 multiplied by a blended average interchange rate of 1.8%, as estimated by Atlanta-based research firm CMS Payments Intelligence Inc. (chart).

Interchange is the biggest card cost merchants bear. They pay other fees to their processors and to the networks themselves. Network fees amount to about $10 billion annually, based on 25 basis points (0.25%) of charge volume, CMSPI estimates. In all, merchants are paying in the neighborhood of $83 billion in interchange and network fees. Some merchants say interchange is their second-largest expense, after payroll.

While no one can say definitively how many transactions would move to unaffiliated networks should the CCCA make them available, the shift could impact more than 10% of annual interchange and merchant-fee revenue. “We think at least $11 billion, due to competitive pressure,” says Callum Godwin, chief economist at CMSPI.

If so, consumers can say goodbye to the perks issuers fund with interchange, assert the EPC and its bank and credit-union allies. “Rewards programs, cobrands, would go away, there’s no doubt about that,” says Tassey, adding that the revenue supporting security technology also would be threatened. “You’ve disrupted the economics of the whole program.”

Yet while the American Bankers Association and its state affiliates strongly oppose the CCCA, some individual bankers would like to see routing competition. “Fundamentally, I don’t know how anybody should be against choice,” says one banker who didn’t want to be identified due to the sensitivity of the topic.

Tougher Sledding

The merchants’ champion is a name long familiar to payments players: U.S. Sen. Richard Durbin, D-Ill., author of the so-called Durbin Amendment to the Dodd-Frank Act of 2010 that imposed debit card interchange price controls on large banks and transaction routing options for merchants.

In contrast to most high-profile legislative initiatives in our supposedly hyper-partisan times, Durbin introduced the CCCA with a Republican co-sponsor, Sen. Roger Marshall of Kansas (“Is Everyone Ready for Durbin II?” September 2022). An identical House version also had bipartisan co-sponsors: Rep. Peter Welch, D-Vt., and Rep. Lance Gooden, R-Texas.

As of late December, the CCCA’s sponsors were staying quiet on the slim hope their bill could be attached to must-pass legislation in the waning days of the 117th Congress’s lame-duck session.

An earlier effort to get the proposal hooked to a major defense bill fizzled. “We think it has little chance of being added to anything else during the lame duck because lawmakers in both parties increasingly recognize that it would harm, not help, their constituents,” says one financial-industry Capitol Hill observer, speaking on background.

A revived CCCA could face even tougher sledding in 2023. Democrats controlled both houses of Congress for the last two years, but now less regulation-friendly Republicans are taking over the House in the wake of November’s elections.

Durbin’s office did not respond to a Digital Transactions request for comment. Welch, meanwhile, was elected to the Senate seat vacated by Vermont’s long-time Sen. Patrick Leahy, leaving the CCCA on the House side without an apparent Democratic chief advocate.

A spokesperson for Gooden did not respond to a Digital Transactions request for comment about the Congressman’s plans for a CCCA redux.

Nonetheless, it would surprise no one if Durbin and his allies put a new CCCA in the hopper this year. The issues that spawned the bill—what merchants view as excessively high card-acceptance costs and the dominance of the Visa and Mastercard networks—haven’t changed. Visa and Mastercard command about two-thirds of U.S. credit card purchase volume on the four major networks—themselves and American Express Co. and Discover Financial Services—and their brands prevail among banks.

“In this market, Visa and Mastercard compete with each other to raise interchange rates to get more banks to issue their cards,” says Kantor.

Visa didn’t respond to a request for comment, and Mastercard punted to the EPC when asked for comment.

‘Pretty Good Padding’

The CCCA would have required credit card issuers with $100 billion or more in assets to offer at least one unaffiliated network other than one of the top two (Visa and Mastercard) for transaction routing in hopes of inducing competition for merchant business through lower costs. There are only 33 such banks, but they issue the vast majority of U.S. credit cards.

The bill also would have banned penalties assessed to merchants for failing to meet specified transaction numbers on a network. And akin to the Federal Reserve Board’s role in carrying out the Durbin Amendment’s requirements, the CCCA would have appointed the Fed to oversee the new credit card regulatory regime.

The apparent network alternatives would include the so-called PIN-debit networks such as Fiserv Inc.’s Star and Accel, FIS Inc.’s NYCE, Discover’s Pulse, and bank-owned Shazam Inc., along with a few others, and possibly AmEx and Discover. The debit networks have been broadening their product offerings in recent years, with many now offering so-called dual-messaging capabilities.

In contrast to PIN-debit transactions that use a single message for authorization and clearing, dual messaging uses separate authorization and settlement messages. That’s the basic structure of most transactions with Visa and Mastercard-branded debit cards, as well as credit cards.

But just how such alternatives would work in reality isn’t any clearer now than it was in July when Durbin and Marshall introduced the CCCA. Despite their enhanced capabilities, the PIN-debit networks aren’t necessarily ready to compete in the credit card market, at least not right away, according to one network executive who asked not to be identified because the issue is a hot one in the industry.

“There’s a difference between a credit network and a debit network,” the executive says. “There is a difference between a dual-message debit and a dual-message credit…there is a difference in the complexity of the message.” Credit’s greater complexity, the executive adds, arises in part from the rewards-related
data to be transmitted.

“Some of the networks may be ready to start competing,” says researcher Godwin, “but others may require a grace period and some investment for it to be a truly competitive environment like the one we see in debit.”

Godwin, however, discounts the idea that rewards will disappear under the CCCA. He points to Australia, where the central bank, the Reserve Bank of Australia, has regulated credit card interchange since 2003. The RBA currently sets a benchmark of 50 basis points (0.5%, less than a third the U.S. average) as a weighted average and a cap of 80 basis points.

Yet rewards cards haven’t gone away in Australia, and Godwin doesn’t think they will in the U.S. either. That’s because transaction revenues will still be substantial despite a potential $10-billion-plus shift. “There’s some pretty good padding there,” he says.

Godwin adds that issuers chop rewards programs at their peril, since it’s much easier for consumers to swap out credit cards than debit cards, most of which are linked to checking accounts. “The credit card market is a lot more fluid,” he says. “Any issuers who want to cut rewards have to determine if it’s worth the potential loss of customers.”

Big Box Benefit

But if the Durbin Amendment is any indication, it will be Walmart, Target, and other big-box retailers and national merchants that will benefit the most if interchange regulation were extended to credit cards, according to the EPC.

The Durbin Amendment has saved merchants an estimated $102 billion since 2011, but they have passed little of that relief on to consumers in the form of lower prices, the group says. Eyeing even more savings, “big-box stores are all over the Hill” lobbying for the CCCA, says Tassey.

If anything, Durbin’s salvo against the credit card status quo confirms the confounding nature of payment pricing and operations. “I personally believe that Durbin was on the right track on requiring two networks on a debit card,” the banker says. “I wasn’t crazy about the price fixing. How is that different than credit card?”

—Jim Daly