When you think of credit card networks, Visa and Mastercard are probably the first — and maybe the only — brand names that come to mind. The Credit Card Competition Act of 2022 aims to change that.

The legislation, proposed by U.S. Senate Majority Whip Dick Durbin (D-IL) and U.S. Senator Roger Marshall, M.D. (R-KS), seeks to expand competition within the credit card network market.

Credit Card
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A network is different than an issuer. Issuers — like Capital One, Chase, and Bank of America — provide the credit card. Networks — like Visa and Mastercard — facilitate the behind-the-scenes elements of transactions, like routing the money securely. American Express and Discover are unique because they are both issuers and networks.

Businesses pay fees to credit card issuers and networks every time a customer swipes a credit card. Interchange (swipe) fees go to the credit card issuer, while network fees pay the network. The average credit card processing fees range from 1.5 percent to 3.5 percent of each transaction.

The credit card competition act seeks to lower those fees by requiring large credit card-issuing banks to offer a choice of at least two networks over which an electronic credit transaction may be processed. Some, including the senators who proposed the legislation, think that these lower processing fees would allow businesses to lower their prices of goods and services, passing savings on to consumers. While this may sound like a win for all, not everyone is convinced. In fact, many business owners are concerned about potential ripple effects that may impact credit card security, rewards, and more.

A small business owner’s perspective

To get a small business owner’s perspective, we spoke with David Collado, co-owner and CEO of Happy Howie’s All Natural Dog Treats about the proposed law.

You’re a long-time Capital One customer. Why are you a dedicated cardholder?

Yes, I’ve had the 2 percent Capital One Spark Cash Plus for about 12 years. It’s a Visa, and the cash back is great. This card has evolved with my business.

It also has excellent fraud protection. If it falls into the wrong hands, Capital One is quick to respond and correct. They understand our buying patterns. I get an email asking if this is me before an unusual transaction goes through. That’s huge. Having to replace a stolen card is really disruptive, because it means we have to update the numbers with all the businesses that are attached to the account.

Since your card uses the Visa network, what is your perception of that company? Would you prefer to have options?

There are times when you don’t need competition. As a cardholder, I care most about the best cyber security and fraud protection. Visa and Mastercard do that. I want a high degree of accuracy and don’t want to hand that off to any company.

I look at it this way: The two biggest aircraft companies are Boeing and Airbus. They’re established and have a strong history. I’m not going to jump onto a new aircraft because it’s innovative. I’m interested in safety. There is a good and a bad time to be innovative.

Do you believe small businesses have been calling for the freedom to choose between multiple credit card processing networks?

No, I’ve never heard that before. Visa and Mastercard have been part of life for a long time. The system works.

So let’s go back to fraud. If this legislation is passed, merchants would be able to choose which card network to process a transaction. The company with the lowest rate may not be the most secure. Does this concern you?

Definitely. Cyber security of financial transactions is something a lot of people take for granted, and maintaining that security comes at a substantial cost. It’s extremely important, though. There are a lot of sophisticated hackers who try to break into accounts. Visa and Mastercard can handle it. You can’t say that for a startup.

Small businesses typically operate on thin margins. Do you think this bill favors large companies or would be equally advantageous for all?

Walmart and Target are big supporters of the bill, so they obviously see it favoring them. But small businesses tend to be reliant on rewards programs. The rewards they earn help their business because most do run a lean ship. The cash back and points they get by charging make a big difference.

How do you maximize your cash back earnings?

Just this week we were considering purchasing a very expensive piece of equipment for operations. I accepted the proposal but only after making sure they would let me use my credit card so I could get the 2 percent cash back. I find every opportunity to use my card, from the smallest to the biggest purchases.

What do you do with the accumulated rewards?

Early on I used to redeem them for gift cards that I used for office supplies. That cut down on costs. As Happy Howie’s grew, we saved the cash for equipment purchases. We redeemed over $20,000 in cash back! In the past six months, we have been using the rewards to fight inflation, redeeming them for normal expenses so we don’t have to increase prices.

Final thoughts on the proposed Credit Card Competition Act?

It’s not good for small businesses. The politicians behind the bill would be better off educating owners on how to use credit cards to their benefit.

Small business advocacy group is concerned by the Credit Card Competition Act

Others share Collado’s dubious outlook. Raymond J. Keating, chief economist with the Small Business & Entrepreneurship Council, is concerned about the impact on business owners far and wide — especially in regards to security.

“Small businesses face the risks of diminished fraud protection for themselves and customers, including monitoring and preventing fraud, the development of new fraud prevention technologies, as well as the continuous maintenance and improvement of the U.S. electronic payment system infrastructure.”

There are other potential downsides to changing the credit card network dynamic, Keating says. If banks have less money, there may be fewer dollars for lending to small businesses. It could impede future innovations and technological developments.

And then there are the unknown costs of setting up and having interoperability (the ability of different systems, devices, applications or products to connect and communicate in a coordinated way, without effort from the end user) with the other mandated networks, as well as the tangible costs of reissuing new cards.

“Government certainly has fundamental duties it must undertake to ensure that free enterprise can flourish,” says Keating. “Such undertakings include establishing the rule of law via a sound legal and court system, protecting property rights, and enforcing contracts, among others. But this is not the case here.”