Editor’s note: This story is continually updated with new information.
Proposed federal legislation has the potential to significantly alter — if not completely eliminate — the world of credit cards that we know today. If enacted, it could dramatically change the rewards ecosystem, affecting your ability to collect (and redeem) points and miles toward travel or earn cash back that can offset some of your everyday spending.
While there was momentary concern that this legislation would be included as an amendment to a recent defense spending bill, the Credit Card Competition Act of 2022 ultimately did not make the draft version of the National Defense Authorization Act (NDAA) for fiscal year 2023.
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Even so, the possibility of inclusion sparked heightened concerns from those in the credit card industry along with airlines, hotel chains and (of course) frequent travelers like TPG readers.
Here at The Points Guy, we teach you to maximize your rewards so that you can, say, earn 3 points per dollar when dining out, 4 points per dollar on groceries and 5 points per dollar when booking airfare.
Leveraging these rewards and the perks on popular credit cards means the ability to travel more frequently — or in greater comfort — and discover the world. But it can also mean more cash in your pocket, a better airport experience and the benefit of purchase protections that don’t exist with other payment methods.
This could all change if this bill is approved.
To help answer your questions about the proposed piece of legislation, we’ve put together this primer that outlines what the bill would do and its potential impact on travelers — and your hard-earned rewards.
What is the Credit Card Competition Act of 2022?
On July 28, two U.S. senators — Richard Durbin, D-Ill., and Roger Marshall, R-Kan. — introduced the Credit Card Competition Act of 2022. After two months of inactivity, it was then introduced as a proposed amendment to the NDAA in October, though — as we noted earlier — it didn’t ultimately make it into the draft of the bill.
As its name implies, the proposed legislation aims to inject more competition into the credit card industry in the hopes of lowering the fees merchants pay whenever shoppers swipe their credit cards.
If enacted, the law would amend the Electronic Fund Transfer Act by directing the Federal Reserve to require credit card issuing banks to offer a minimum of two networks for merchants processing electronic credit card transactions, according to a bill summary provided by the Congressional Research Service.
It even specifically prohibits these two networks from being those with the largest market share of cards today — Visa and Mastercard. These two companies processed nearly $3.5 trillion in card transactions in 2021, while collecting more than $77 billion in U.S. merchant credit card fees, according to a press release issued by the bill’s co-sponsors.
Interchange or swipe fees are a primary revenue driver among credit card companies, which set fees for merchants in exchange for consumers being able to use credit cards at their establishments. Merchants are charged each time a consumer makes a credit card transaction, though the exact amount varies based on the type of card, type of transaction and other elements.
For example, if you go out to eat and use your credit card to pay the $100 bill, a merchant may incur a fee of 3% — which translates to $3 of the $100 purchase. This is a key reason why some merchants have begun adding surcharges for those who don’t pay in cash.
Related: What’s the difference between a credit card network and issuer?
Overall, this totaled approximately $137 billion in card processing fees last year, according to a Nilson Report.
However, as a percentage of transaction volume, merchants have actually seen lower fees in recent years. When you compare Nilson data from 2019, 2020 and 2021, this rate has dropped from 2.19% to 2.167% to 2.166% across all transactions processed on credit cards and private-label cards (those tied to a specific retailer and not usable at other merchants).
What is this bill trying to accomplish?
This legislation builds on previous efforts to curb transaction fees imposed on merchants, including a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act, which mandated that merchants have at least two unaffiliated debit card networks when routing transactions.
Dodd-Frank also included an amendment added to the bill by Durbin. Ultimately becoming known as the “Durbin Amendment,” the rule established a fixed fee on debit card transaction processing (previously, the fee was derived based on a percentage of the total transaction).
The bill’s authors claim the proposed legislation would improve competition within credit card exchanges, as Visa and Mastercard account for more than 83% of general-purpose credit cards, according to the Federal Reserve.
“Convenience stores, gas stations and other small businesses in Kansas are being taken advantage of by Visa and MasterCard on behalf of big banks in New York City at a time when they, and the communities they serve, are grappling with crippling inflation and staring down the barrel of a looming recession,” Marshall said as part of the bill’s initial proposal. “Competition is the heartbeat of capitalism and that is what our bill will create, competition.”
The senators also say their bill would help reduce swipe fees while decreasing costs for both merchants and customers — though many are skeptical.
Read more: TPG’s 10 commandments of credit card rewards
Would it be successful in those efforts?
It’s unclear, but evidence from the debit card regulations introduced in 2011 shows mixed results.
The Durbin Amendment clearly lowered costs for merchants, as banks subject to the new cap on debit card interchange rates saw a drop in revenue of $6.5 billion annually, according to a study from the University of Pennsylvania. However, this same study noted that, rather than absorbing this drop in revenue, banks offset the loss entirely by raising other account fees.
Specifically, it found the Durbin Amendment had the following effects:
- The share of free basic checking accounts with no minimum monthly balance requirements dropped from 60% to 20%.
- Average checking account fees increased from $4.34 to $7.44 per month.
The study notes that these fees are “disproportionately borne by low-income consumers whose account balances do not meet the monthly minimum required for these fees to be waived.”
This same shift was highlighted in an article published by George Mason University, noting that the regulation increased the unbanked population in the U.S. by nearly 1 million individuals, primarily among lower-income consumers. In fact, the study estimated that the Durbin Amendment would lead to “a transfer of $1 billion to $3 billion annually from low-income households to large retailers and their shareholders.”
Finally, a 2015 economic survey from the Federal Reserve Bank of Richmond found little evidence that merchants passed along their cost savings to consumers. Most respondents (77.2%) indicated they kept prices the same in the wake of the new rules, while a sizable portion (21.6%) actually increased prices. Only 1.2% passed on lower prices to customers.
“With the Durbin Amendment, the cost-savings went to bottom lines of shareholders and retailers, not consumers,” said TPG founder Brian Kelly.
Related: Where have all the rewards debit cards gone?
What does it mean for credit card rewards?
If history is any guide, this bill could have a massive impact on the rewards ecosystem — including those associated with banks and popular airline and hotel programs that rely on their cobranded card partners as a key source of revenue.
“The unintended consequence of the Durbin Amendment was that it boxed out rewards for lower-income and subprime cardholders,” said Kelly. “It killed debit card rewards across America.”
If this bill is applied to credit cards in the same way the Durbin Amendment was to debit cards, there’s potential for history to repeat itself, as credit card companies could significantly scale back (or even discontinue) rewards programs on purchases due to decreased interchange revenue.
Since the 2011 implementation of the Durbin Amendment, card issuers have lost $106 billion in swipe fees from debit card transactions, according to an analysis from the Electronic Payments Coalition. Another study by the International Center for Law & Economics estimates that the cap on interchange fees for debit transactions hit large banks’ annual revenues to the tune of $6.6-$8 billion. The loss in revenue directly contributed to reducing free checking accounts and rewards programs.
In fact, half of debit card issuers regulated by the cap ended their rewards programs in 2011, according to a 2012 study conducted by Pulse and cited by the Federal Reserve Bank of Richmond.
“This bill would take away rewards from consumers, since credit card companies would no longer have the ability to fund the programs and the perks we’ve all grown accustomed to, taking the value away from consumers and putting it in the pockets of retailers,” said Kelly.
Who would (and would not) benefit if the bill became law?
The largest beneficiaries of the legislation would be merchants. By requiring banks to offer a second option for processing a given credit card transaction, merchants could opt for the lower-priced network — thus lowering the out-of-pocket cost of said transaction.
“Competition will result in lower fees, which have increasingly cut into the razor-thin profit margins of small businesses,” Jeff Brabant, senior manager of federal government relations at the National Federation of Independent Business, said in a statement. “NFIB appreciates … this important legislation, which aims to inject competition by allowing small businesses the freedom to choose between multiple credit card processing networks.”
But it isn’t just small, local businesses pushing for this change. Large, big-box stores stand to gain the most.
Not surprisingly, on Sept. 14, more than 1,700 merchants, including Target and Walmart, sent a letter to Congress in support of the bill
However, opponents of the bill fear it would have a similar effect on credit card rewards programs as the Durbin Amendment did on debit card rewards. In the years following the passage of Dodd-Frank, the ability to earn rewards on debit card purchases essentially disappeared.
And it could lead to higher fees for a variety of other banking products like checking accounts — another byproduct of the Durbin Amendment, as noted previously.
“Lenders rely on swipe fees to offer rewards for credit card users, so banks may have to introduce new annual fees to preserve those perks for customers,” Dan Perlin, an analyst at RBC Capital Markets, told Bloomberg.
Lower interchange fees would directly affect the bottom lines of banks, which use this revenue to enhance their services while simultaneously passing some of it onto consumers in the form of rewards. And ironically enough, this could hurt those who’ve never even held a credit card.
“Marginalized communities will pay the price … when credit card companies attempt to protect their bottom lines,” warned Brett Buckner, managing director at OneMN.org, a public policy advocacy group focused on racial, social and economic equity. “Banks issuing credit cards will now begin raising interest rates, fees and credit standards in order to save money and restrict access to those deemed a credit risk. Sadly, the burden will fall heaviest on those who can afford it the least.”
Although many who use rewards programs are upper-income spenders without any balance to carry over and therefore no interest to pay, low-income credit card spenders are disproportionately affected by higher interest rates, fees and credit standards.
“Payment methods are correlated with income: lower-income people are more likely to use cash, pre-paid or debit, while higher income use credit cards,” according to Aaron Klein, a senior fellow at the Brookings Institute, a liberal think tank.
“Low-income, less-educated, and minority households are less likely to have bank accounts — which are essential for households’ financial well-being,” according to a 2022 study by the U.S. Government Accountability Office. “People have cited high fees, minimum balance requirements, and other reasons why they don’t have bank accounts.”
But there’s another group that could lose: travel companies.
Cobranded credit cards, including those that offer rewards in specific loyalty programs, are also potentially at stake warned industry groups, including Airlines for America, a trade group representing major North American airlines including United, American Airlines and Delta.
“This legislation would also unnecessarily increase the annual fees associated with participating in these programs, or otherwise harm our ability to reward our most enthusiastic customers’ loyalty,” A4A said in a letter to Congress on Oct. 11 (a copy of which was shared with TPG). “We are also concerned that the legislation will reward networks who invest the least in technological innovation and fraud protection — putting our valued customers’ financial security at risk.”
Read more: New ruling means some credit card rewards may occasionally be taxable — but don’t panic
Do veterans face greater harm from credit card fees?
As noted previously, roughly two months after introducing the Credit Card Competition Act as a standalone piece of legislation, the two authors submitted the bill as a proposed amendment for consideration to the 2023 NDAA, hoping it would move to the floor for a vote as part of the annual defense spending bill.
Although the Credit Card Competition Act seemingly has very little, if anything, to do with a defense spending bill, legislators commonly use amendments as a way to circumvent the normal legislative process and potentially speed a bill’s passage by attaching it to a piece of legislation likely to pass. This can be a successful strategy when the legislation in question is not likely to pass as a stand-alone.
But the link between merchant interchange and the armed services is tenuous at best.
“This legislation has nothing to do with defense spending,” Jeff Tassey, board chairman of the Electronic Payments Coalition, said in a press statement on Oct. 3.
The Electronic Payments Coalition, a group representing credit unions, community banks, payment card networks and other banking institutions involved in the electronic payment process, has been outspoken against the bill and co-signed a letter with more than 140 organizations expressing concern over the bill.
The Credit Union National Association, also known as CUNA, was among the other groups publicly opposing the amendment, including for its irrelevancy to the defense bill.
“The CCCA will not increase competition in the credit card marketplace, but it will benefit multi-national retailers at the expense of consumers and community financial institutions, including those serving members of the military,” the letter reads.
The reality is that interchange fees apply to all credit card transactions in the U.S. — it’s not limited to those at military commissaries.
What are the next steps for this bill?
In its current form, the standalone version of the bill seems to have little chance of moving out of committee. Since being referred to the Senate Committee on Banking, Housing and Urban Affairs in July, which has jurisdiction over the subject matter, there’s been no call to action from committee chairman Sen. Sherrod Brown, D-Ohio.
It also seems unlikely to move forward as part of the NDAA, though debate on the draft NDAA bill (and its whopping 900 amendments) is expected to continue throughout October. A final vote will come after November’s midterm elections.
That said, Durbin has used the amendment tactic in the past (it’s how the Durbin Amendment to Dodd-Frank originated), and he could try again in the not-too-distant future.
Aside from the NDAA, the other major legislative priority for Congress in the last part of the year is the spending bill for fiscal year 2023 — which is on the docket for later this fall and must be passed to avert a partial government shutdown. The current continuing resolution funds the federal government through Dec. 16, 2022, and like the NDAA, this spending bill typically attracts an array of amendments from legislators.
If the Credit Card Competition Act doesn’t make it through as an amendment to the NDAA or the larger spending bill, it’ll then be up to the Senate Banking, Housing and Urban Affairs Committee to decide whether to take any action on the standalone bill. However, this would likely not occur until 2023, after the start of the 118th Congress, which convenes on Jan. 3, 2023.
We’ll be watching it all carefully here at TPG to see how, if at all, the Credit Card Competition Act of 2022 moves forward.
Related: Complete guide to credit card annual fees
Bottom line
The possible inclusion of the Credit Card Competition Act of 2022 in the NDAA spending bill reignited debate on the proposed legislation, making it more important than ever to understand the full ramifications of what could happen if the bill were to become law.
As a company founded partly on the principle of using credit card rewards programs to help save money on travel, TPG is among the many organizations with a vested interest in this cause. While we do partner with major credit card issuers, our staff members and millions of our readers have seen firsthand how rewards programs can unlock travel that otherwise wouldn’t be possible. By making travel more accessible, we help our audience broaden their horizons, open their minds and experience different cultures — all of which would be in jeopardy with this bill’s passage.
“This would be disastrous for consumers, especially those who get immense value from rewards and protections on credit cards by allowing retailers to pocket the interchange savings,” said Kelly. “Consumers would lose out on rewards, purchase protections and fraud protections, while retailers would add to their bottom line.”
In contrast, those who are lobbying for the bill, including the Merchants Payments Coalition, believe merchants should have more freedom in processing credit card transactions, including by choosing networks with lower fees.
“This landmark bill would end a part of the Visa-Mastercard duopoly that has blocked competition for decades,” MPC Executive Committee member and National Association of Convenience Stores general counsel Doug Kantor said in a statement. “By requiring card networks to compete over who gets to process a transaction, exorbitant fees that have skyrocketed could finally be brought in touch with reality.”
However, history has shown that any drop in these fees could wind up being a windfall for merchants — and could ultimately cost consumers.
Additional reporting by Nick Ewen.
