As both consumers and investors try to navigate the challenging market conditions against the backdrop of a wounded post-pandemic economy still in recovery, new legislation imposed by the federal government could bring sweeping changes to the credit card processing network market.
In an effort to ease the burden of fees for both consumers and businesses, the Credit Card Competition Act (CCC) would look to increase the competitiveness of the credit card network, rerouting transactions through a range of wider networks.
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The idea behind CCC would see some of the market's biggest players such as Visa (NYSE:V) and Mastercard (NYSE:MA) share the space with smaller credit card companies, which could result in lower swipe fees for merchants and minimize the cost burden on consumers.
Recent findings from Ascent revealed the true cost of credit card processing for merchants. Typical fees can range between 1.15% + $0.05 to 3.15% + $0.10 in interchange fees. There is also an additional 0.14% to 0.17% in assessment fees that get added on top.
While this might not look like a lot, for small businesses this quickly starts to add up. Additionally, these are only the financial burdens carried by merchants. Other restrictions call for merchants and business owners to also pay interchange, assessment, and processing fees.
While the inner workings of this network are complex, the understanding behind CCC would help to increase the breathing room to allow for more balanced competition between credit card companies and to force the largest players to lower their routing fees to help them remain competitive.
Big box retailers, including Amazon (NASDAQ:AMZN), Walmart (NYSE:WMT), and Target (NYSE:TGT) have been lobbying the government to bring sweeping changes to how credit card processing is controlled after the major failed attempt of the Durbin Amendment.
There are however two sides to the story, and on the one side, you have some who argue that the act will serve as a sort of government price control. On the other hand, some feel that the changes could bring another string of challenges and complications to an already tight-knit industry.
While there are cost-saving benefits that will be passed onto consumers, and merchants, in this case, there hasn't been much talk surrounding the long-term changes the Credit Card Competition Act will have on consumers.
For starters, there’s the possibility that the new cost savings could lead to an increased number of consumers taking out credit cards as a way to help offset pandemic-driven costs and the high cost of living. Banks issuing credit cards will be left to increase annual fees, and credit standards as a way to protect their bottom line, and tighten access to those applicants deemed a credit risk.
The underlying costs, which could potentially see banks raising interest rates in an attempt to adjust for price changes, would fall heaviest on consumers who can afford the adjustments the least.
Although we can consider how the Durbin Amendment, which forms part of the Dodd-Frank Act 2011 removed key funding of debit and credit card rewards, many felt that it was the major retailers who ended up pocketing more from the routing mandates.
In this case, we could see the same thing happening again, where the mandates would rather play in favor of big box retailers while pushing consumers and small businesses only further into the abyss.
Research on the Durbin Amendment by the Federal Reserve Bank of Richmond found that roughly 77.2% of merchants did not make any price adjustments post-regulation. Only 1.2% of merchants did end up reducing their prices, while 2.16% increased their prices.
This brings into question whether the new routing regulations will make a difference for consumers who are already struggling to keep up with the soaring cost of living.
Higher costs and eye-watering inflation figures have left many Americans relying on their credit cards according to the Consumer Financial Protection Bureau (CFPB). Most recent figures revealed that many consumers owned an average of about 20% more on their credit cards in June 2022 than compared the same period in 2019.
On top of that, major credit unions have also come under fire as the number of complaints about inaccurate credit reports has been soaring in recent months. Consumer Reports policy analyst Syed Ejaz told CBS News that “Mistakes on credit reports are all too common and can have serious consequences, especially for those who are already struggling to make ends meet.”
These costly mistakes have only made it more important for you to know which credit report you should request and how you should go about dealing with any inaccuracies.
Unsure, and afraid to fully see the bigger picture of how routing mandates will impact the consumer market in the long term, lobbyists and big box retailers are pushing forward, planting themselves firmly behind legislators.
The argument becomes increasingly confusing and even more complicated when you start looking at how new routing mandates will impact investors.
To start on a positive note, some investors might enjoy the fact that credit companies such as Visa and Mastercard, which accounts for 83% of the general-purpose credit card market, may perhaps see a change in bottom-line performance if new regulations come into effect.
As competition widens in the market, credit card companies might look to adopt new methods as a way to remain competitive in the network. In this case, key performance indicators and market share will ultimately impact investor sentiment in the near-term results.
On the other hand, economists argue that if new regulation is extended to the credit card industry, community banks, and local credit unions could end up losing between $5 and $10 billion in annual revenue.
Shrinking revenue not only plays out on the company’s bottom line performance but more so impacts overall performance in terms of consumer reward programs, credit costs, interest rates, and tighter credit restrictions. Ongoing cutbacks would also mean that companies would be forced to lower their standing in the market, leaving investors bearish over their performance.
The savings that new regulations will bring will only push the involved parties, in this case, consumers, investors, and small merchants only further into the woods, shifting billions to the big box retailers.
An underlying feeling which has left some investors with a bad taste in their mouths is that new regulations could lead to the federal government interfering in private contractual agreements.
A similar argument that some investors have already pointed to is how the Securities and Exchange Commission (SEC) has been attempting to prescribe provisions on contracts between private fund advisors and investors.
Several proprietary factors have complicated how new regulations could influence investors' performance and the overall marketplace sentiment, which has already experienced major headwinds throughout the last few months.
The Bottom Line
Having the federal government support the entire reengineering of the payments system is a dangerous, yet compelling anecdote. For consumers, it leaves them at the mercy of retailers, who at this point have already taken a massive beating as economic conditions further erode.
On the other hand, investors will also have a tough call to make, especially against the backdrop of a possible recession and an even more tumultuous market performance.
Though it’s possible that the Credit Card Competition Act could bring sweeping changes that will help to force a more competitive network among the dozens of credit card companies - it’s still leaving too many questions unanswered.
If we consider the previously failed attempts prompted by regulators, it becomes difficult to see how any possible changes will drive a positive impact, especially in a time when consumers and small business merchants are in a tight financial position.
There are adverse consequences that affect all involved parties, though instead of viewing this as the enemy, consumers, investors and merchants would need to start understanding that this is the cost of doing business in the post-pandemic economy.