Acquirers and the CCCA

The Credit Card Competition Act, if it becomes law, will likely have unintended consequences for the businesses that sign up merchants for payment processing. Not all of them are good.

Introduced more than a year ago, the Credit Card Competition Act has quickly become the hottest topic in the payments industry. While it targets issuer practices, its implications for acquirers are deep and potentially rife with unknowns.

The CCCA seeks to ratchet down card-acceptance costs for merchants by requiring that sellers have a choice of at least two unaffiliated networks for transaction routing. If one is Mastercard Inc., the other cannot be Visa Inc., and vice versa.

The bill, which applies to credit card issuers with more than $100 billion in assets, proposes that this choice will inject more competition into credit card processing.

Whether it will do that is unknown. What is known is that the bill, originally introduced in 2022, has sparked a pitched battle between interest groups representing merchants and credit card issuers. Neither its proponents nor opponents have been willing to concede anything, so the fight has continued into 2024.

Co-sponsored by Richard Durbin, D-Ill., and Roger Marshall, R-Kan., the bill differs from the Illinois senator’s decade-old debit card legislation in that it lacks price caps or other interchange controls. It shares with that earlier legislation the routing stipulation. Currently, merchants use only one network to process their credit card transactions.

While proponents argue this will mean competition and potentially lower credit card processing costs for merchants, opponents say consumers will probably see little benefit, but may see their favorite points programs dry up.

These may be the talking points in the very public debate about the CCCA, but it’s acquirers that will likely have to do a lot of the work implementing the measure, should it be approved.

What would that mean for acquirers and the constellation of other service providers that directly attend to merchants’ payments needs? The answer is the impact would be immense on the technical, legal, and sales fronts.

Shifting Costs

Uncertainty about the impact is, well, certain.“If it passes, there is the unknown,” says Glenn Grossman, director of research at Cornerstone Advisors, a Scottsdale, Ariz.-based banking-services firm. “Who are these other networks that will route transactions?”

The issue, as Grossman, a former Bank of America Corp. and FICO executive, sees it, starts with networks even before acquirers (“Who Will Route Transactions?” September). He argues such a network doesn’t exist. Not only that, the standards such networks would have to adhere to do not exist.

With acquirers, others argue the impact will be minimal. “We do not anticipate that there will be a substantial impact on acquirers,” says Ashley Reeve Basnett, managing member at law firm Reeve Basnett LLC. “For acquirers, there could be technology impacts where they have to provide software updates, downloads, development and programming for terminal software. The biggest impact will be on the issuers. The issuers will lose substantial funds as a result of a reduction in interchange.”

Still others see the bill having significant impact on acquirers.

“The passage of the Credit Card Competition Act could significantly impact acquirers by necessitating changes in their processing systems to accommodate multiple credit card routing options,” says Phillip Parker, founder and principal of CardPaymentOptions.com, an Austin, Texas-based merchant account review site.

“This would likely require substantial modifications in both hardware and software, as well as potential adjustments in operational procedures and compliance measures,” Parker adds.

The costs of configuring acquirer services to the CCCA, which would likely have its rules written by the Federal Reserve or other federal financial agency, would be staggering, Grossman says.

One of the largest costs would be developing the technology. “It will require a technology change, since more of the software is homegrown,” Grossman says. “It won’t happen overnight. It could take years.”

While debit routing has been around for many years, creating new credit card transaction routing options would be a major task. For example, while credit card brands generally publish their rules online, the debit networks—viewed as possible contenders to operate a second credit card routing option—do not, Grossman says.

That could contribute to confusion about how fraud protection is handled, especially if the new networks lack the resources to make the same investments that Visa, Mastercard, Discover, and American Express have, he says.

“Today a lot of fraud detection happens in the middle,” Grossman adds. “The front is the acquirer and the issuer at the other end. If you break that up, you can’t get a single view of the transaction. Where would you get that? The front end? The issuer could be doing more fraud detection. No matter where it’s done, it’s shifting costs.”

Incidentally, neither AmEx nor Discover cards would be subject to the CCCA, a summary on Durbin’s Web site says, since in these cases the network also is the card issuer.

‘Sticky Fees’

Acquirers also would have technical challenges setting up their systems to accommodate the CCCA’s likely requirements, sources say.

“Requiring two credit card routing options would directly impact acquirers’ technical services, necessitating the development or integration of specialized software capable of handling multiple routing paths,” Parker says. “This change would not only involve software upgrades but also potentially require hardware enhancements to ensure correct and efficient processing of transactions through different routing options.”

And, while the debit-routing changes required by the Durbin Amendment may provide some insight for acquirers if they transition to dual-credit routing, credit card transactions have their unique challenges and characteristics, Parker adds.

Acquirers already support multiple networks, which could mean a moderate strain on the technology stack, says Nilesh Vaidya, executive vice president at Capgemini, a New York City-based consulting firm.

“However, to navigate this landscape effectively, acquirers will need to incorporate network-specific rules and generate tailored reports,” Vaidya says. “It is also important to realize that many acquirers continue to operate using legacy technologies. This presents an opportunity for newer product companies to take advantage by differentiating themselves and offering additional services.”

Aside from the technology impact, Vaidya says the CCCA could increase costs for acquirers, impact rewards programs, and may entice acquirers to wait before reducing fees.

“The smaller merchants may experience sticky fees,” Vaidya says. “Hence, this situation might prompt these merchants to pivot towards alternative payment methods such as account-to-account or QR-code based payments. Such a shift to [account-to-account] payments could further disrupt the conventional cards business model.”

‘The Real Winners’

The acquiring industry is no stranger to adapting, whether it is because of disruption from a new competitor or sales model or a change in regulations.

“One result of that has been consolidation, something the CCCA might further. As the acquiring business consolidates, we can expect fewer intermediaries in the value chain,” Vaidya says. “The advent of digital technologies will gradually replace certain functions performed by agents and [independent software vendors], exerting downward pressure on the revenue of these intermediaries. Some acquirers may opt to enhance their digital platforms, and showcase an innovative business model to adapt and thrive.”

What might the CCCA mean for acquiring revenue models? “That is a really good question,” Grossman says. “If you ask Marshall and Durbin, they would probably say no impact.” Would acquirers be dragged along with issuers if revenues were compressed because of the CCCA? “Maybe, maybe not,” Grossman says.

The biggest issue would be managing merchants that use a blended rate. Merchant pricing under the CCCA might not show much impact. For example, merchants with a blended rate now pay the same for a credit or debit card transaction, though debit card interchange is regulated and could go lower than its current 21-cent rate. That could be the case in the future. Merchants on a cost-plus model, where they pay the interchange and a set fee, might fare better.

Accommodating both debit and credit rules could mean even more complicated pricing charts, Grossman says, who says a covered/not-covered pricing chart might be one development.

Diving deeper, the CCCA may present a boost in the short term for sales agents, independent software vendors, and other referral partners, says Jay Reeve, a managing member at Reeve Basnett.

“In the short-term, many agents, ISVs and other referral partners may be the real winners if the CCCA becomes law,” Reeve says. “Lowering interchange costs will directly benefit merchants that are on a ‘cost-plus’ pricing model with their acquirer, but merchants paying a fixed rate for payment processing will not see any benefit. Those cost savings will go into the pockets of the acquirers, agents, ISVs, and other referral partners.”

There could be further impact, suggests CardPaymentOptions’ Parker. “The adoption of the CCCA could lead to a re-evaluation of existing revenue-share models with agents, ISVs, and other referral partners. Changes in transaction fees, processing costs, and the competitive landscape might necessitate renegotiating terms to align with the new financial realities and regulatory requirements brought about by the CCCA,” he says.

As Basnett says, “Advocates for the CCCA believe that the reduction in interchange fees will create lower costs for the consumer. With that being said, the CCCA does not require merchants to pass along the savings to the consumer. We believe that the merchants will more than likely not pass along the savings to the consumer. Instead, the consumer will likely feel no real positive impact by
the CCCA.

“Consumers may actually be negatively impacted by the CCCA. Like with the Durbin Amendment, banks will look for ways to make up for the loss caused by the lowered interchange. If the CCCA becomes law, banks will likely cut credit card rewards programs,” she adds.

‘Major Retooling’

Another acquiring impact would be the revision of merchant-account contracts.

“It will require wholesale re-writing of hundreds of millions of contracts,” says Piret Loone, chief business officer and general counsel of Link Money, a San Francisco-based open-banking platform. “This is far from costless and will be borne by issuers and merchants, and to some extent consumers, as the costs are passed down.”

“Eventually,” Loone continues, “there will also be a redistribution of revenue, so credit card loyalty programs, especially Visa and Mastercard’s lucrative co-branded cards with major airlines, might be at risk or would require major retooling.”

Most observers say near-term passage of the CCCA is unlikely—though Grossman notes 2024 is an election year and “the messaging plays well in a political year—but should that happen, the impact will probably be strewn over time.

First, no networks have come forward to champion their value as another credit card network. Putting that together, and figuring out how it will handle fraud, chargebacks, authorizations, and a host of other elements will take time.

“The point-of-sale process for the consumer is expected to remain largely unchanged despite shifts within the industry,” Vaidya says. “New networks will need substantial investments to accommodate and support the processing scale. They might strategically focus on specific segments such as commercial cards or other high-value, low-transaction-volume segments. These shifts in the industry structure will drive contractual changes across the board.”

Grossman foresees smaller issuers being potentially discriminated against by merchants that don’t want to pay the higher interchange they could assess. What if the vaunted price competition materializes, but merchants continue to collect a 3% surcharge fee? “What if your interchange goes down but you’re still surcharging at 3%? Now, you’re making money.”

‘Political Dynamics’

The unknowns of the CCCA may remain even if the bill doesn’t advance. Another unknown is just how it would be implemented. Which rules and procedures would the payments industry be obliged to follow?

The Credit Card Competition Act, as written, would probably be modified should it advance into regulation.

“Predicting the likelihood and timeframe of the CCCA becoming law is challenging due to the complexities of the legislative process and the influence of various stakeholders,” says Parker.

“The passage of such legislation depends on political dynamics, lobbying efforts, and the legislative agenda, making it difficult to ascertain if or when it might become law,” he adds. “If it does become law, it will likely be modified under significant influence from the banking industry.”