Who Will Route Transactions?

The Credit Card Competition Act is back in play. But as Congress debates the bill, a pressing question looms about its biggest requirement: Who are the Visa and Mastercard alternatives supposed to be?

Senator Richard Durbin is back at it. After failing to advance the Credit Card Competition Act out of Congress last year, the Illinois Democrat has reintroduced the legislation in the new Congress. Not only is the bill generating more buzz, it enjoys more bipartisan support in both chambers.

The bill is the latest salvo in Durbin’s long-running battle to break Visa’s and Mastercard’s grip on the credit and debit card business. Boiled down, it says if Visa is one of the network choices offered by issuers to merchants, the other choice can’t be Mastercard, and vice versa.

If passed, the CCCA would apply to financial institutions with $100 billion or more in assets. These are generally the largest card issuers, controlling better than 90% of the credit card market.

U.S. merchants’ fees for credit card acceptance exceeded $90 billion in 2022, making the U.S. one of the most expensive card markets in the world, according to the Atlanta-based consulting and research firm CMS Payments Intelligence Inc.

As expected, large banks, Visa, Mastercard, and bank trade associations are lobbying hard against the bill, while merchants and their respective trade groups are pushing for passage. The latest argument against the bill is that it would strip issuers of the funds needed to support rewards and other cardholder benefits, since competing networks could charge lower merchant fees. Merchant groups and other proponents of the bill say otherwise.

All this political back and forth over the CCCA is to be expected. But a huge unanswered question looms: Which networks would compete with Visa and Mastercard to route credit card transactions?

‘Political Concerns’

The choices that immediately jump to mind are American Express, Diners Club International, Discover, and the regional debit networks. The latter are the most intriguing and, some say, controversial options, as the prevailing belief among payments experts is debit networks would compete for credit card traffic if the CCCA passes.

But the debit networks, some of which are controlled by the nation’s largest transaction processors, aren’t talking about their plans should the CCCA become law. The frequent response is that they are evaluating their capabilities to route credit card transactions.

Fiserv Inc., which owns the Star and Accel networks, said just that: “We are evaluating our technical capabilities which could support the requirements envisioned by the Credit Card Competition Act,” a Fiserv spokesperson told Digital Transactions by email. “This includes the ability for single-message debit networks that can route PINless transactions, such as STAR and Accel, to pursue the credit market for the first time.”

While such a response sounds vague, payments experts argue that at least some debit networks would be happy to jump into the fray. But for now they’re keeping a low profile as the CCCA works its way toward a vote. The reason? They fear they may face a backlash from Visa and Mastercard and their bank customers.

“The skittishness on the debit networks’ part isn’t over business concerns, it is over political concerns,” says Doug Kantor, an executive committee member of the Merchants Payments Coalition and general counsel for the National Association of Convenience Stores.

“The debit networks have the capacity to fill this role,” he adds. “especially since credit card volume will not all flow through one alternative network and the decision on which alternative networks to support will be made on a bank-by-bank basis should the CCCA pass. But the banking industry has worked itself into a frenzy over this issue.”

Indeed, the politics surrounding “this issue” are so messy that Durbin’s office and that of Sen. Roger Marshall (R-Kansas), a CCCA co-sponsor, did not respond to inquiries from Digital Transactions about which networks could serve as alternatives to Visa and Mastercard should the CCCA pass.

Politics aside, one debit network executive who spoke on condition of anonymity says a big reason the debit networks are not tipping their hand is that, until the legislation passes, there are no concrete rules governing network choice or how the law will be enforced.

“As of now, we have no plans to move into credit card processing as we don’t know how it will play out if the CCCA passes,” the executive says. “If our bank customers want to move in that direction, we’d pursue it because we work for them.”

Co-Branding, Anyone?

Payment experts also caution that uncertainty surrounds how the industry as a whole would respond to passage of the CCCA, simply because of the rapidly changing payments landscape. “Who knows what payments will look like in five to 10 years,” the debit network executive says. “This is a complicated business and uncertainties exist around this issue.”

If the debit networks—which also include major systems like NYCE (owned by processing giant FIS Inc.), Pulse, and Shazam—are not inclined to be alternatives to Visa and Mastercard, then who is?

American Express, Discover, and even Diners Club (owned by Discover), are frequently mentioned choices. The prevailing belief among experts contacted for this story is that these three networks would be unlikely to charge cut-rate merchant-processing fees for general credit card processing. That would help protect card-issuer margins but frustrate merchants.

“If a card issuer has to offer the choice of an alternative network, [it] won’t pick one that obliterates [its] pricing structure, [it is] more likely to pick one with a like pricing structure,” says David Shipper, a strRileyategic advisor for Datos Insights, which was formed in June after the merger of the consulting firms Aite- Novarica Group and RBR. “The debit networks have a history of bringing down interchange fees, so [issuers] are likely to prefer AmEx and Discover.”

Because card issuers would be required under the CCCA to include the logos of networks they support on their cards, that stipulation may lead to opportunities for AmEx and Discover to enter into co-branding agreements with issuers.

That scenario could keep those networks from undercutting Visa and Mastercard since they would have a stake in the interchange earned on a cobranded card transaction processed through their respective networks. Such a scenario can be a dealmaker, but may not please merchants.

“If an issuer puts a Discover bug on a card as an alternative network choice, it can open the door to co-branding opportunities,” says Brian Riley, co-head of payments at Javelin Strategy & Research. “A bank needs a partner as an alternative network.”

So Long Rewards?

While offering a lower price can quickly net debit networks lots of credit card volume should the CCCA pass, there are risks involved in that strategy.

“Competing on price can be effective initially, but over time you need a margin to service the operation, otherwise processing becomes a loss leader, and when that realization hits, that’s the wakeup call when a processor starts thinking, ‘is this a good business model,’” notes Riley.

Some experts also argue that lower transaction costs for merchants through network choice could hurt issuers’ ability to dip deeper into the risk pool when offering cards to consumers.

As interchange revenues decline, issuers may have to look for new ways to generate income to cover the shortfall, such as raising interest rates for high-risk cardholders, reducing credit limits, or cutting back on the number of potential new customers they target. In any of these scenarios, consumers would feel the effects of those moves.

“Inflation is still occurring, and if the economy tanks and issuers see lower margins, they will start to rethink where they take risk with consumers,” Riley says. “Issuers know the processing pricing model affects income which goes to operations, collections, and customer service.”

Another area where issuers might make up lost revenues from more competitive network pricing is in the business of cardholder rewards. That argument has been loudly trumpeted by the Electronic Payments Coalition, a trade group that represents banks in opposing the CCCA.

Research from CMSPI claims passage of the CCCA would have a minimal effect on card issuers’ ability to continue funding credit card rewards. But in July, the EPC redoubled its argument that the bill would strip issuers of the funds needed to support rewards.

In its statements on the issue, the EPC argues that “historical evidence, demonstrated through myriad academic studies, shows that the proposed credit card routing mandates will likely lead to a drastic reduction of rewards programs.”

For its part, CMSPI acknowledges that card issuers would see an average 37-basis-point reduction in interchange revenues on Visa and Mastercard transactions if the CCCA is passed. But consumers would incur, at most, a less than 0.10 percentage-point drop in rewards benefits, the research firm says. CMSPI’s projections are based on data from Australia, where card swipe fees were capped at 0.8% in 2003.

“We estimate there is an average margin of 30% on interchange revenues net against rewards expenditures,” says CMSPI chief economist Callum Godwin. “CMSPI estimates that merchants could save $15 billion annually from CCCA, which equates to a 16% reduction in fees.”

“Given the size of the U.S. credit card market,” Godwin adds, “there is a strong incentive for multiple parties—including domestic debit networks, global credit card networks, and possibly new solution providers—to participate as alternative network providers.” In that scenario, those alternative networks will have to compete for issuers’ favor.

A Tipping Point

The prospect that passage of the CCCA would attract new solution providers is an argument that is beginning to gain traction. The most likely new providers would be fintechs, which provide technology to payments providers to better manage their operations and processes.

“What constitutes a network is different today from what it has historically been,” says Steve Mott, principal at payments consultancy BetterBuyDesign. “There comes a point in time where new networks come along that can say to banks, if card issuers want to control the economics around the Visa and Mastercard networks, they can.”

When that tipping point is reached, Mott argues, large banks will begin to rethink Visa and Mastercard’s one-size-fits-all network approach. Mott says he has had discussions with some large banks that are ready to begin exploring the idea of what more network competition would mean for their card business.

“The CCCA can open the door for banks to wait and see what happens when it comes to network competition,” Mott says. “If true network choice is there, the technology is there for new players to boost competition. There are several large banks in a position to take steps to get intermediaries out of the revenue stream. The role of the network is to serve, not enslave.”

If the CCCA passes, however, Mott does not see a wave of players charging out of the gate vying to launch new technologies as alternative networks. “It takes a lot of money to bankroll these types of initiatives,” he says, “and for the first year or so, I think a lot of players won’t be looking to be the first to jump off the diving board.”

As with any legislation, a big question is what kind of teeth regulators will put behind enforcement of the CCCA. Payments executives note that even after passage of the Durbin Amendment to the Dodd-Frank Act in 2010, which capped debit card interchange, there was a lot of foot-dragging by the industry when it came to implementation, and additional rule-making and clarification was needed to plug holes.

One such clarification came from the Federal Reserve and took effect July 1. The Fed’s move came in response to years of hesitation by banks on compliance with the Durbin Amendment’s requirement that merchants have a choice of networks in debit card routing for e-commerce transactions, not just in-store sales.

“Debit routing rules haven’t always worked so well,” says Bob Steen, chairman of Mechanicsville, Iowa-based Bridge Community Bank, which is a member of the Des Moines, Iowa-based Shazam debit network. “Many small merchants don’t know they have a routing choice.”

Proponents are confident the bill will pass during the current session of Congress. If nothing else, passage could open the door to increased network competition that might potentially save merchants $15 billion a year in acceptance costs, according to CMSPI.

“If there is a path, the free market works,” Steen says. “What the sponsors of the CCCA are saying is that the market should allow for competition.”