The U.S. credit-card market is the oldest and largest in the world. It’s also the least regulated and most expensive. In other countries, policymakers keep card companies in check by setting price caps or by funding public sector alternatives. The result is lower prices. In the U.S., credit-card fees stand at between 1.3 percent and 2.7 percent of transaction value; in Europe, they are as low as 0.3 percent.
Dick Durbin, the senior senator from Illinois, wants to change that. Last week, alongside Kansas Republican Roger Marshall, he unveiled the Credit Card Competition Act of 2022. “It’s time to inject real competition into the credit card network market, which is dominated by the Visa-Mastercard duopoly,” he said.
Whatever its merits, Durbin is likely to find passage of his bill tough. Swiping a card may look simple enough at checkout, but in the background, the interests of multiple parties — consumers, merchants, banks and network companies — must be reconciled. Over the years, bonds have formed among these parties, making the model hard to change.
Initially, the closest alliance was between the network companies and the banks. Before their initial public offerings in the mid-2000s, network companies were owned by banks. Visa’s founder, Dee Hock, who died last month, was an employee of National Bank of Commerce in Seattle, when he was charged with bringing together the interests of card-issuing banks. The fees banks charge are set by the card networks at a level that encourages them to invest in payments technology.
Increasingly, the stronger ties have been forged between the card companies and consumers. Although they invest heavily in marketing, it’s not Visa or Mastercard advertising that cements the relationship. Rather it’s rewards, funded by card-issuing banks from the fees they capture from merchants.
Ever since Diners Club introduced an airline miles program in 1984, rewards have been a powerful mechanism to drive card usage — and Americans love them. For many, they represent a tax-free source of income. Card companies now direct about two-thirds of their gross fees back to customers via rewards. One of the largest card issuers, Capital One, paid out $6.4 billion — almost 20 percent of total revenue — in 2021. And the rate has been going up. Discover’s reward rate has increased from less than 1 percent of sales volume in 2013 to 1.38 percent in 2021.
Rewards are not without controversy. In 2020, economists at the Federal Reserve Bank of Boston concluded that because merchants don’t differentiate prices at checkout, more expensive transactions are subsidized by cheaper debit and cash payments. With higher-income consumers more likely to hold rewards cards, such subsidies become a transfer from lower-income to higher-income groups.
Yet so entrenched is the reward culture that it’s hard to unwind. Durbin likely knows this, which is why his bill doesn’t propose price caps, unlike his debit card reforms of 2011 and similar price controls introduced in Europe, Australia and elsewhere.
Indeed, Durbin’s foray into the debit-card market underscored the complexities and unintended consequences built into this opaque space.
Debit fees fell dramatically. In his 2021 shareholder letter, Jamie Dimon, chairman and chief executive officer of JP Morgan Chase, estimated that the impact on his bank was about $17 billion over 10 years. But according to researchers who reviewed the impact in 2019, banks offset their losses by charging higher fees on other products, leaving consumers no better off.
In the credit-card proposal, large banks would have to offer merchants an alternative network over which the transactions could be routed — one that’s not Visa or Mastercard.
The problem is that no credible alternative exists. And the investment required to build one is vast. In Europe, 31 banks signed up last year to an initiative to create an alternative to Visa and Mastercard, but banks have since been loath to put up the 1.5 billion euros ($1.53 billion) of initial funding.
“Public funding would be nice,” said the project’s chief executive, Martina Weimert. “Let’s not hide it, it’s going to be a massive investment. It’s expensive.”
Given their 77 percent market share of U.S. credit-card volume, it’s no surprise Visa and Mastercard aren’t keen on the tinkering. “It’s an attempt by the government to get involved in pricing in private markets,” Al Kelly, chairman and CEO of Visa told investors recently. “That’s not the job of the government. Markets should determine price, not governments. And I feel very strongly about that, and that’s something we will continue to make our case for.”
Kelly may not have to worry — he has the American consumer on his side, and there are fewer allies as strong.