“Reduce Excessive Credit Card Fees”: Why Visa and Mastercard Investors Should Keep an Eye on Congress

Congress is putting major credit card processors on notice. This year, it reintroduced legislation called the Credit Card Competition Act, which aims to break up the credit card duopoly between Visa (V 1.96%) and Mastercard (MA 1.29%), and mandate that all large banks allow electronic credit transactions to be processed over at least two networks.

According to one of the bill’s sponsors, the legislation would “enhance credit card competition” and “reduce excessive credit card fees.” Here’s what investors need to know about this hotly debated bill.

“It’s time to inject real competition into the credit card network market”

According to the Merchants Payment Coalition, the average credit card processing fee in the U.S. is around 2.24%. These fees, also known as “swipe fees,” are paid to the credit card’s issuing bank, the payments network, and the payments processor. Legislators have set their sights on these fees, which they say place an unfair burden on retailers and consumers.

Last year, U.S. Senators Dick Durbin (D-Illinois) and Roger Marshall (R-Kansas) introduced the Credit Card Competition Act, which aims to increase competition in the payments processing market. The bill would require banks with more than $100 billion in assets to offer a choice of at least two networks upon which to process electronic credit transactions. Here’s the catch: One of those choices must be a network run by a company other than Visa or Mastercard.

Visa and Mastercard dominate the payments industry. According to the Nilson Report, which tracks the global payments industry, the two companies account for 80% of all credit card volume. Durbin told CNBC, “It’s time to inject real competition into the credit card network market, which is dominated by the Visa-Mastercard duopoly.” 

The bill would not require banks with less than $100 billion in assets to allow transactions to be routed through a second network. In addition, companies like American Express and Discover Financial Services, which both issue credit cards and process transactions, would not be required to add a second network choice. 

Supporters say the bill will save families nearly $900 per year

The Credit Card Competition Act failed to gain traction in Congress last year, but was reintroduced in the Senate earlier this year with Senators Peter Welch (D-Vermont) and J.D. Vance (R-Ohio) as additional co-sponsors. In the House, its cosponsors are Representatives Lance Gooden (R-Texas) and Zoe Lofgren (D-California).

Proponents of the legislation say the bill would save consumers and merchants money while increasing competition in the market. According to the National Federation of Independent Business, 92% of small business owners believe they should be able to choose between multiple credit card processing networks. 

Image source: Getty Images.

Many large retailers came out in support of the bill, including Amazon, Walmart, Target, and Shopify. Doug Kantor, chief counsel for the National Association of Convenience Stores, says the legislation could reduce swipe fees by $11 billion annually. Christine Pollack, vice president of government relations at the Food Industry Association, says hidden processing fees cost the average U.S. family $900 annually. 

Opponents say the act will lead card issuers to end customer reward programs

Visa and Mastercard have pushed back on the bill, saying that it could have negative consequences for consumers, including compromised security and a loss of rewards programs.

U.S. airline companies recently came out against the proposed bill as well, likewise asserting that it could lead to fewer loyalty programs offering rewards such as frequent flyer miles.

“Those cards could no longer receive the funding to be able to invest in rewards-back opportunities,” Delta Air Lines Chief Executive Officer Ed Bastian told Bloomberg.

Some studies back up those claims. In 2010, Congress passed legislation that reduced swipe fees for debit card transactions, based on a similar premise — that cutting those fees would save consumers money. Banks such as JPMorgan Chase and Capital One Financial partner with Visa and Mastercard to issue debit cards and earn a cut of every transaction. After the debit card legislation passed, banks reduced the number of free checking accounts they offered, increased fees on accounts, and offered fewer debit card rewards programs.

Additionally, in 2015, the Federal Reserve Bank of Richmond released a study that showed that 21% of merchants increased prices after the bill cutting debit card fees went into effect. 

What Visa and Mastercard need to know

Regulators have had credit card processors in their crosshairs in recent years, and investors will want to pay attention to how this plays out. The Senate could potentially include the Credit Card Competition Act as an amendment to a government funding bill. However, if it’s not attached to other legislation, the act would need to be brought up for standalone votes later this year to pass. 

Although these potential new regulations would undoubtedly reduce revenue for Visa and Mastercard, the bill’s future remains unclear. While investors should be aware of the proposed legislation, I don’t believe the news of its reintroduction in this session of Congress is enough to justify long-term investors in Visa or Mastercard selling their shares today.