U.S. Credit Card Routing: Unleashing Market Forces
If passed into law, CMSPI estimates that the Credit Card Competition Act (CCCA) has the potential to save merchants over $11 billion in annual costs.¹
While the buzz and excitement surrounding the CCCA and its potential impact continues to grow, the U.S. isn’t the first market to step in on credit card costs.
Here, CMSPI’s experts take the opportunity to compare the CCCA to similar reform globally – what makes it different, what it could mean for merchants, and whether it offers the key to unlocking competition.
The Global Picture
Worldwide, merchants are simultaneously being impacted by a wide variety of payments regulation and broader regional and national market forces. Although no approach taken by other governing bodies has utilized a strategy identical to that of the CCCA, moves in other regions have reduced card acceptance costs relative to the U.S., as demonstrated by the graph below.² As several markets are now well past the implementation phase, there are many insights we can take from their experience to understand what the CCCA could mean for merchants.
Figure 1. Estimated Average Interchange Rates by Market
Source: CMSPI estimates and analysis
What is the CCCA?
The CCCA, first introduced by Senators Durbin and Marshall in July, looks to increase competition by requiring many credit cards issued in the U.S. to be co-badged with at least two unaffiliated networks.³ Not only would the CCCA actively expand competition between card networks for the U.S. card issuance market, but it would also directly help merchants by creating opportunities to route co-badged credit card transactions to least cost networks. But how does this stack up against other regions’ interventions in the card market?
The Australian Approach
Effective in late 2006, the Reserve Bank of Australia (RBA) established that the total value of interchange fees assessed by each network over a 12-month period should not exceed 0.5 percent of the relevant transaction value. Put more simply, the weighted average of interchange fees on all credit card transactions is capped at 0.5 percent.⁴ The RBA then went a step further in 2016, enacting regulation to cap credit card interchange fees for any single transaction at 0.8 percent of the transaction value.⁵ These interventions from the RBA, as well as broader guidance issued, have aimed to support the wider effort to expand co-badging and least-cost routing within Australia, thereby promoting merchant choice.⁶
Europe’s Take on Interchange Regulation
In 2015, slightly predating the RBA’s second regulatory change, the European Union capped interchange fees on most consumer credit card transactions at 0.3 percent of the transaction value. Comparatively, the EU’s regulation of interchange is one of the strongest – pushing fees significantly lower for merchants operating in Europe than in other regions of the world.⁷
Why is the U.S. approaching it differently?
Payments regulation in Europe and Australia has grown increasingly multi-faceted over time, but the initial pieces of legislation were largely focused on implementing caps. This prioritized a singular and instantaneous reduction of interchange fees across all transactions. We also saw caps enacted in the U.S. through the Durbin Amendment in 2011, but with an important caveat, as the caps were only applicable to the U.S. debit market.⁸ Even so, the Durbin Amendment’s prohibition of network exclusivity arrangements for debit card issuance led the world in competition-focused regulation.⁹ Through co-badging, merchants are effectively given routing choices and the chance to negotiate directly with the networks; over time, CMSPI has observed continued competition in the debit market that creates downward pressure on payments acceptance cost, even controlling for caps.¹⁰
It might’ve been the first to focus on competition in the debit market, but it won’t be the last. Competitive trends are also appearing and expanding in other regions, particularly into the spaces that the CCCA looks to address. While not mandated, credit card co-badging in France, for example, already provides the potential for merchants to secure lower interchange rates than the existing caps.¹¹ Similarly, 2021 saw the Reserve Bank of Australia issue expectations that acquirers implement least-cost routing functionality, as well as the introduction of an interchange ‘sub-benchmark’ to disincentivize the issuance of single-network cards.¹²
Although much of the existing reform has produced cost savings for merchants, either through caps or co-badging requirements, CMSPI estimates that these savings have largely eroded over time, in both the U.S. and European markets.
Downward pressure on the various transaction fees continues to exist, but the CCCA presents an exciting opportunity to unlock competition and merchant cost savings for a sizeable segment of the U.S. market that is non-route-able today. The total non-route-able portion of the U.S. market is currently valued at around $84.35 billion.¹³
What does the CCCA’s approach mean for merchants?
Instead of opting to set hard limits through the implementation of capped rates, the CCCA aims to utilize the free market in order to drive efficiencies for all stakeholders – pushing card networks to compete and strike a balance between interchange revenue for issuers and payments acceptance costs for merchants. When supported by the right expertise, data analysis, and market insights as card issuance evolves, merchants would gain access to an entirely new channel for their routing deals. By opening these doors, CMSPI estimates that the CCCA would give merchants the potential to realize over $11 billion in annual savings over and above their current payments arrangements. Importantly, the CCCA would look to bring competition similar to what exists in today’s U.S. debit market into the credit market segment, where organic competition has lagged behind. Merchants should begin preparing now for the potential passage of the CCCA, ensuring they are ready for data-driven engagement with their payments partners and leaving no savings on the table as the U.S. payments market swiftly evolves.
¹CMSPI estimates and analysis
¹⁰Source: CMSPI analysis of Federal Reserve data
¹³CMSPI estimates and analysis