Credit Card Competition Act 2023: Features and Potential Impacts

Authors: Dr. Ling Ling Ang, Dr. Alan Grant and Peter Traber¹

The Credit Card Competition Act of 2023 (“CCCA”) is proposed legislation that would “amend the Electronic Funds Transfer Act to require the Board of Governors of the Federal Reserve System to prescribe regulations relating to online competition in credit card transactions and with respect to for other purposes.”² In a recent article, “Potential Economic Impacts of the Credit Card Competition Act of 2023,”³ We considered the potential economic impacts of the CCCA, drawing on the economic literature on two-sided markets and the effects of previous U.S. payment card regulatory policies. The article analyzes the proposed legislation and tries to base the political discussion on economic tools and arguments.

Key provisions of the CCCA Act

We focus on the following three provisions of the CCCA as currently proposed:

No exclusive network: This provision prohibits networks and covered card issuers – card issuers that, together with their affiliates, have more than $100 billion in assets – from limiting transactions to a single network or only to affiliated networks. Additionally, at least one of the networks through which a transaction may be routed must not be one of the two largest networks in terms of share of credit cards issued.
No routing restrictions: This provision limits restrictions on merchants or acquirers making transaction routing decisions: covered card issuers or networks cannot impose penalties or unfavorable conditions for routing transactions or minimum transaction volumes. Furthermore, the “No Routing Restrictions” provision also imposes restrictions on requiring the exclusive use of security technology that not all networks may use, and prohibits hindering other networks from using security technology.
Application: The “Applicability” provision states that the “No Exclusive Network” and “No Routing Restrictions” provisions do not apply to credit cards issued under the three-party payment system model. So “No Exclusive Network” and “No Routing Restrictions” only apply to a broader subset of credit cards.

Potential impact on credit cards

Our analysis of the potential economic impacts of the CCCA shows that the CCCA’s “No Exclusive Network” and “No Routing Restrictions” provisions apply only to certain issuers (four-party system issuers with consolidated assets exceeding $100 billion) but not others (issuers three-party systems and issuers of four-party systems with consolidated assets of $100 billion or less) and certain networks (four-party networks are included, three-party networks are not included). Based on the requirements of the CCCA and the variations in its scope, our analysis shows that the likely economic impacts of the CCCA include:

Interchange Fees: Interchange fees for covered issuers are likely to decline, but may also increase or remain the same if new networks compete vigorously for issuers or are unable to find an optimal price below those of incumbent networks.⁴ It is important to note that the reduction in internet fees does not mean a reduction in card network revenues, but rather a shift in prices from the merchant side (billers and merchants) to the consumer side (issuers and consumers). In other words, the bill places the onus of making decisions on the network that should be used to process transactions on covered credit cards on the merchant side of the marketplace due to “No Routing Restrictions.”
Network quality: Because network quality associated with higher merchant costs (e.g., higher chargebacks) may not be directly observable, at least for some merchants (or acquirers to which merchants delegate network decisions), networks would likely compete primarily on price to encourage merchants to join networks, i.e. exchange and network fees. For merchants (or delegated acquirers) whose primary focus is price, networks would have less incentive to provide high-quality services or make further costly investments in card network security.
Account terms and credit card rewards: The decline in revenues for interchange fee issuers may be offset by increases in revenues obtained through other channels that are not directly related to transactions, such as interest, annual fees and penalty fees. In terms of consumer benefits directly related to transactions, the reduction in credit card benefits will likely be associated with a decline in interchange fee revenues. The degree to which rewards decline will likely vary among consumers. CCCA is less likely to negatively impact credit card rewards from three-party issuers and non-covered four-party issuers.
Consumer’s choice of payment methods: Reducing the number of Rewards points on a credit card would directly increase the price of the transaction for the credit card consumer, which could prompt them to consider alternative payment methods. Some consumers may turn to other credit cards (e.g. credit cards issued by three-party issuers), debit or cash. All of these payment methods have different costs and benefits for consumers and merchants.
Covered issuer consumer mix: To the extent that consumers respond to CCCA changes by changing payment methods, covered issuers may face an adverse selection problem as consumers may substitute alternatives offering higher rewards from non-covered issuers or three-party networks. The potential increase in consumer risk (i.e., a higher percentage of credit card debt collectors who may ultimately default on credit card debt compared to dealmakers) faced by covered issuers could lead to higher real and effective interest rates for covered issuers.
Four-sided and three-sided networks: CCCA could encourage more consumers to actually use credit cards in a three-party system.

Application

Its adoption would change the structure of the credit card industry in the United States because the proposed regulations require that final routing decisions be delegated to acquirers and merchants. Two-sided markets such as credit cards require balancing action by platforms. Implementing CCCA shifts the choice of network route from the consumer to the merchant, which under certain conditions is likely to lead to lower interchange fees and, therefore, benefits. In this case, the policy implications of the CCCA should be considered in the context of the payments ecosystem, including, but not limited to, debit cards, cash and bank transfers.

Credit cards are not just a transaction tool, but a means by which consumers gain access to typically unsecured revolving credit. The CCCA and its effects may also lead to unintended consequences for the credit function of credit cards. These effects may take the form of price effects (e.g. higher interest rates or a lower promotional annual percentage rate) or changes in the availability of credit. Due to the structure of the CCCA, some consumers may be able to substitute three-party networks that are not covered by the CCCA, but this option may not be available to all consumers.

Interested readers are referred to our detailed analysis titled: “The Potential Impacts of the Credit Card Competition Act of 2023,” which provides context on economic theory, empirical research, and the impact of past policy decisions that have impacted electronic payments.

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1 Dr. Ling Ling Ang ([email protected]) is the managing director; Dr. Alan Grant ([email protected]) is a director and Mr. Peter Traber ([email protected]) is a consultant at NERA Economic Consulting. This study was funded by JPMorgan Chase Bank, National Association; NERA Economic Consulting was commissioned by JPMorgan Chase Bank, National Association to conduct an independent analysis of the potential economic impacts of the Credit Card Competition Act of 2023.

2 Credit Card Competition Act 2023S. 1838, 118^vol Cong. §1 (2023).

3 Ling Ling Ang, Alan Grant and Peter Traber. “The Potential Economic Impacts of the Credit Card Competition Act 2023”, NERA Economic ConsultingFebruary 15, 2024, available at https://www.nera.com/content/dam/nera/publications/2024/NERA_Potential_Economic_Impacts_of_CCCA_0224.pdf.

4 Furthermore, it is possible for the network to have a two-tier interchange fee structure, in which exempt issuers have a different interchange fee schedule.