The Credit Card Competition Act Would Shrink Card Security

A bill currently being considered by Congress that claims to reduce credit card swipe fees is, at first glance, appealing, but could cost American businesses far more than just a small fee in the long run. Given high inflation and ever-increasing data breaches, lawmakers cannot risk passing legislation likely to put additional strain on Americans’ security and harm small businesses. 

The ill-named Credit Card Competition Act (CCCA) attempts to “mandate competition”––and theoretically lower swipe fees––by forcing credit card issuers to process transactions on alternative payment networks. What this means in practice is that the legislation would require credit card companies to allow transactions to be routed through a different payment system than the one native to the credit card brand. This could put consumers’ private data in an even riskier position and increase the financial burden on merchants and financial institutions. 

It’s also notable that one, very big name in politics and a CCCA co-sponsor doesn’t seem to want it in the national spotlight. Senator J.D. Vance is reportedly “cooling” on it in the wake of his nomination as a vice presidential candidate. If he doesn’t want it scrutinized too closely, perhaps the whole country should take a fresh look at its negative implications.

Advocates of the CCCA believe mandating reduced swipe fees will benefit small businesses. The methods used to achieve this, however, will produce unintended consequences. In order to comply, credit card companies would be forcibly opened up to additional, unaffiliated payment networks for processing. But swipe fees aren’t just some boon to the bottom line, they fund things that are top of mind for both merchants and consumers: fraud prevention and card security. 

Credit card companies and the banks that issue the cards dedicate significant resources toward fighting security breaches and getting out ahead of new avenues for fraud. For example, the implementation of chip technology, which was spearheaded by credit card companies, led to an 87 percent reduction in fraud over a four-year period. In order to fund this and other security measures, they rely on swipe fees charged to merchants at the time of sale. 

But chip technology only provides protection for transactions when a card is used in person. With annual e-commerce sales of more than $1 trillion annually, increasing security for online credit card sales is vital. As of 2023, credit card fraud was the most common form of identity theft in the United States, with nearly two-thirds of American credit cardholders saying they have been subject to fraudulent charges. Credit card fraud has been on the rise for years, and with rapid advancements in artificial intelligence contributing to increasingly sophisticated scams, rates are likely to continue climbing. 

The financial burden of these scams falls on either the issuing bank or merchant, depending on the type of transaction and the specific circumstances. Typically, the issuing bank covers the cost for in-person transactions while merchants foot the bill for online or phone sales. Fortunately, due to federal protections, consumers are rarely on the hook financially when fraud occurs. But anyone who has suffered from a data breach or stolen information knows the time, effort, and headache that comes with cleaning up the mess.

While big box retailers are likely to benefit greatly from reduced credit card swipe fees, just as they did with capping debit card fees over a decade ago, small retailers should think twice. With reduced transaction security, the financial burden on merchants, especially those with online stores or who accept transactions over the phone, could be severe. Multibillion-dollar businesses can easily absorb these hits, and do have full departments dedicated to order issues. Smaller retailers typically lack the capitalization and manpower necessary for an onslaught of fraud claims, and with as much as nine percent of revenue lost to fraud, they cannot be put at further risk. 

Credit card fraud remains a major concern among cardholders and merchants, and the next big scam is always just around the corner. Americans and small business owners cannot afford to deal with more economic challenges. Fortunately, advancements in fraud detection, especially those utilizing AI, are heavily researched and invested in by credit card companies and banks. Hopefully their funding won’t be forcibly reduced by federal mandate.