A Guide to Competition in the U.S. Payments Market

In this 3-part blog series, CMSPI’s Insights team unpacks the three Cs of payments: cost, competition, and complexity. In the second installment, we join public authorities around the world in scrutinizing competition in the payments industry, asking how competitive forces – or lack thereof – can impact U.S. businesses.

The Current State of Competition

Competition for credit and debit card acceptance has long been a focal point of public authorities globally,¹ and the same holds true in the U.S. In 2022, the top two global card networks accounted for 86% of U.S. card spending.²

At the same time, the U.S. has some of the highest card rates and total fees globally.³ According to CMSPI estimates, U.S. merchants paid more than $37 billion in debit interchange fees in 2023, increasing to over $105 billion in credit interchange fees.⁴ While card network Defendants (Visa and Mastercard) have committed – via the recent proposed antitrust settlement- to dropping credit interchange fees in the U.S. by approximately $6 billion annually, these changes would only last for five years if accepted.⁵ In the longer term, the U.S. has a strong history of competition-based intervention in the card payment market from which to learn.

Pro-Competitive Reform

U.S. authorities sought to inject competition in debit card acceptance nearly fourteen years ago with the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act in May of 2010. The adopted reforms required that at least two unaffiliated networks be badged on every debit card, introducing competition to every debit transaction over which merchants could access more than one network.⁶ The amendment also required the U.S. Federal Reserve to prescribe regulations determining “reasonable and proportional” fees for every debit card transaction.

In a review of self-reported issuer data provided to the U.S. Federal Reserve, CMSPI observes that interchange and network fees for single-message⁷ debit transactions – which have historically offered more competitive network choice – have remained relatively constant.⁸

Meanwhile, interchange and network fees on dual-message debit transactions increased slightly over the same period. The trend holds across issuers regardless of whether they are subject to interchange fee caps. This evidence indicates that the competitive opportunity enabled by routing choice is an important tool in mitigating rising card fees in both card-present and card-not-present environments.

Growing Payment Channels

While the Durbin amendment aimed to introduce competition for all debit transactions in the U.S., it took more than 10 years for competition to be guaranteed for online transactions. In its October 2022 clarification, the U.S. Federal Reserve made evident that competition should exist for all types of debit payments, including card-not-present (CNP) transactions.⁹ Those transactions have exploded in volume in the last 12 years, representing approximately 32% of debit card payments as of the most recent Federal Reserve reporting,¹⁰ and costing around 65% more to accept on average than card-present (CP) debit transactions.¹¹

Prior to the clarification, most CNP spend was processed via dual-message rails where, historically, there have been fewer routing options. Even with the Federal Reserve’s clarification, the industry does not appear to have reached full enablement of the PINless technology required to enable CNP debit routing. CMSPI estimates that full enablement of CNP PINless debit routing could save U.S. merchants $3 billion annually.¹²

Challenges for Merchant Advocates

Globally and historically, we have seen that competition can put pressure on market participants to seek efficiencies. However, even regulation may struggle to guarantee competition in the face of inhibitors, such as technological change and lack of transparency. In the payments industry, three technological developments stand out as examples.

Network Tokens

There have been ongoing industry concerns around the routing capabilities of network tokenized debit transactions. The concerns have materialized in regulatory intervention, including the 2022 Federal Trade Commission order for Mastercard to make the PAN (a key tool in routing decisioning) available on these transactions for the purpose of network routing.¹³ Additionally, the Department of Justice has scrutinized global card brands’ pricing practices regarding transactions involving tokens.¹⁴ Please visit this article for more information and tokenization strategy considerations.

Limited Card-Present PINless Enablement by Issuers

While crucial in the online space, the aforementioned PINless technology plays an important role in enabling routing options for ‘contactless’ card-present (CP) transactions. Lack of card-present PINless enablement by issuers may therefore result in a lack of merchant routing options. In a sample of the top 10 debit issuers in the U.S., CMSPI has observed that the majority have enabled less than 50% of transactions for Card Present PINless routing.¹⁵

Single-Network Enabled Cards

Some issuers have increasingly only badged one PIN debit network on their cards alongside a single Signature network, which can limit card-present competition by reducing network routing options on the cards. CMSPI has observed, since February 2023, the share of debit cards with only one PIN debit network has nearly doubled to around 8% (Figure 3).

The Road Ahead

For both Card Present and Card Not Present transactions, the data suggests that network competition has introduced more efficient pricing, especially for those with the data necessary to develop a strategic approach to routing decisions. Similar dynamics could be introduced to the credit card market with proposals like the Credit Card Competition Act¹⁶ which CMSPI estimates could save merchants $16.4 billion annually. However, with technologies and customer preferences shifting rapidly, merchants must remain vigilant in monitoring, analyzing, and strategizing around complex changes to the payments landscape.