The proposed federal legislation has the potential to change the world of credit cards in some way. It could affect your ability to collect points and miles for travel or earn cash back if it passes.
While the bill is far from becoming law, it has raised concerns from those in the credit card industry along with airlines, hotel chains and frequent travelers.
If you maximize your rewards, you can earn 3 points per dollar when dining out, 4 points per dollar on groceries and 5 points per dollar when booking airfare.
It is possible to travel more frequently and discover the world by using popular credit cards. It can mean more cash in your pocket, a better airport experience, and the benefit of purchase protections that aren't found with other payment methods.
With the passage of this bill, this could change.
We put together a primer that explains what the bill would do and how it could affect travelers.
The Credit Card Competition Act of 2022. The legislation is meant to inject more competition into the credit card industry in order to lower the fees merchants pay when shoppers use their credit cards.
According to a bill summary provided by the Congressional Research Service, the law would require credit card issuing banks to offer at least two networks for merchants to process electronic credit card transactions.
Visa and Mastercard are not allowed to be the network with the largest market share of cards. According to a press release issued by the bill's co-sponsors, these two companies processed more than $3.5 trillion in card transactions and collected more than 77 billion in US merchant credit card fees.
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Credit card companies charge interchange fees to merchants in exchange for consumers using their credit cards at their establishments. Merchants are charged a fee when a consumer makes a credit card transaction.
If you go out to eat and use your credit card to pay the bill, the merchant will charge you an additional fee of 3%, which will add up to $3. Merchants are starting to add surcharges for people who don't use cash.
There is a difference between a credit card network and an issuer.
The total amount of card processing fees last year was around $137 billion.
Merchants have seen lower fees in the past. The rate of transactions on credit cards and private-label cards has dropped over the last three years.
The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated that merchants have at least two unaffiliated debit card networks when using their cards.
An amendment was added to the bill by Sen. TheDurbin Amendment established a fixed fee on the processing of debit card transactions.
According to the Federal Reserve, Visa and Mastercard account for more than 80% of general purpose credit cards.
The 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 a looming recession. Competition is the heartbeat of capitalism.
Many are skeptical that the bill would help reduce the costs of doing business.
There are Commandments of credit card rewards.
Evidence from the debit card regulations show mixed results.
According to a study from the University of Pennsylvania, the cap on debit card interchange rates resulted in a drop in revenue of $6.5 billion annually. The study said that banks offset the loss by raising other account fees.
The amendment had some effects.
The study states that low-income consumers who don't have enough money in their account to pay the fees are the ones who pay the highest amount.
An article published by George Mason University stated that the regulation increased the unbanked population in the U.S. The study said that the amendment would lead to a transfer of $1 billion to $3 billion annually from low-income households to large retailers.
Merchants didn't pass along their cost savings to consumers according to a survey by the Federal Reserve Bank ofRichmond. The majority of respondents said they kept prices the same after the new rules. Lower prices were passed on to customers.
The cost-savings went to the bottom lines of shareholders and retailers according to Brian Kelly.
All of the rewards cards have disappeared.
If history is any guide, this bill could have a huge impact on the rewards ecosystems, including those associated with banks and popular airline and hotel programs that rely on their co branded card partners as a key source of revenue
Kelly said that the consequence of the amendment was that it boxed out rewards for lower income people. Debit card rewards were killed.
The potential for history to repeat itself if this bill is applied to credit cards in the same way as the Durbin Amendment was to debit cards is significant.
According to an analysis from the Electronic Payments Coalition, card issuers have lost $106 billion in interchange fees since 2011. According to a study by the International Center for Law & Economics, the cap on interchange fees hit large banks' annual revenues to the tune of $6.6-$8 billion. Free checking accounts and rewards programs were reduced due to the loss of revenue.
Half of the issuers regulated by the cap ended their reward programs in 2011.
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.
Merchants would benefit the most from the legislation. Merchants could use the lower-priced network to process credit card transactions if the banks offered a second option.
Jeff Brabant, senior manager of federal government relations at the National Federation of Independent Business, said in a statement that "competition will result in lower fees, which have increasingly cut into the razor thin profit margins of small businesses." The NFIB appreciates the legislation that will allow small businesses to choose between credit card processing networks.
Local businesses are pushing for this change as well. There are large, big-box stores.
More than 1,700 merchants sent a letter to Congress in support of the bill.
The bill's opponents fear it will have the same effect on credit card rewards as the Durbin Amendment did on debit card rewards. The ability to earn rewards on debit card purchases disappeared after Dodd-Frank.
It could lead to higher fees for a variety of other banking products.
According to Dan Perlin, an analyst at Royal Bank of Canada, banks may have to introduce new annual fees to preserve perks for customers if they have to.
Lower interchange fees would affect the bottom lines of banks, which use this revenue to enhance their services, while also passing some of it onto consumers in the form of rewards. This could hurt people who have never used a credit card.
When credit card companies try to protect their bottom lines, marginalized communities will pay the price. Banks issuing credit cards will now raise interest rates, fees and credit standards in order to save money and restrict access to those deemed a credit risk. The burden will fall on those who can't afford it.
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
Lower-income people are more likely to use cash, pre-paid or debit, while higher-income people are more likely to use credit cards.
According to a study, low-income, less-educated, and minority households are less likely to have bank accounts. There are many reasons why people don't have bank accounts.
Credit card rewards can sometimes be taxed, but don't worry.
The bill was introduced and referred to the Senate Committee on Banking, Housing and Urban Affairs. There has been no call to action from the committee chairman. The committee has not placed the bill on its calendar, where it schedules hearings and markups to act on it.
Most legislative analysts don't see this bill becoming law this year due to the lack of activity, and it seems unlikely that this bill will be brought to committee in the near term.
We'll be keeping a close eye on it here at TPG.
Credit card annual fees are covered in a complete guide.
The Credit Card Protection Act of 2022, which was introduced on July 28, appears to have little chance of becoming law. If the bill becomes law, it is important to understand the consequences.
A company founded in part on the principle of using credit card rewards programs to help save money on travel is one of 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 how rewards programs can unlocked travel that otherwise wouldn't be possible. By making travel more accessible, we help our audience broaden their horizon, open their minds and experience different cultures, all of which would be in jeopardy if the bill were to pass.
Kelly said that allowing retailers to pocket the interchange savings would be disastrous for consumers. Retailers would add to their bottom line while consumers would lose out.
Credit unions, community banks, payment card networks and other banking institutions are members of the Electronic Payments Coalition.
The Credit Card Competition Act is bad for consumers, small businesses, and financial institutions of all sizes according to Jeff Tassey, board chairman of the EPC. Millions of Americans could lose access to credit altogether if the cost of banking goes up, popular cash back and rewards programs disappear, and fraud explodes.
Merchants should have more freedom in processing credit card transactions if the bill is passed, according to those who are lobbying for it.
The National Association of Convenience Stores general counsel said in a statement that the bill would end a part of the Visa-Mastercard duopoly that has blocked competition for decades. Requiring card networks to compete over who gets to process a transaction could bring in reality.
The history shows that a drop in these fees could end up costing consumers.
Nick Ewen reports additional reporting.
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