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1 1 (December 13, 2023)

handle is hein.crs/govenrm0001 and id is 1 raw text is: A Congressional Research Service Inforrning the legislative debate since 1914 6 December 13, 2023 How the Credit Card Competition Act of 2023 Could Affect Consumers, Merchants, and Banks When a consumer makes a payment with a credit card, a small portion of the transaction is used to compensate the merchant's bank, the payment processors, the payment network, and the consumer's bank-each of which play a role in facilitating the transaction. (More on transaction fees, or swipe fees can be found at CRS In Focus IF11893, Merchant Discount, Interchange, and Other Transaction Fees in the Retail Electronic Payment System, by Andrew P. Scott.) Credit card fees have been a long-standing subject of debate, including in the 118th Congress. Merchants argue that card network operators use market power to charge higher-than-competitive fees. The industry argues that participants are in tight competition and fees closely reflect the costs of providing fast, reliable, and secure transactions. Proposed legislation-including the Credit Card Competition Act of 2023 (S. 1838/H.R. 3881 or CCCA)- is aimed at lowering the fees. This In Focus explains how credit card transactions are processed, examines competition in the industry, and analyzes the proposed changes in the CCCA. Retail Payments Infrastructure The basic structure of a card payment involves a customer, the customer's bank (called the issuing bank), a card network, the merchant, the merchant's bank (called the acquiring bank) and payment processors that facilitate the flow of transaction data. Before a transaction occurs, these parties make several decisions about how payments will be accepted. For example, when a merchant starts a business, it needs to decide how to accept payments. Most merchants want to accept electronic payment cards (as opposed to just cash) due to their popularity among consumers. Further, merchants generally choose to accept cards that can be run on at least one of the most popular networks, such as Visa, MasterCard, Discover, or American Express. (There are also a number of smaller networks.) In order to accept certain cards, it needs to procure the hardware (e.g., a card reader), software (e.g., payment app), and services necessary to use a certain payment network. Accepting payments for multiple networks is also an option, but these services cost money and so there is a trade-off between the costs and benefits of accepting payments over more than one or two card networks. Before a consumer can use a card, a bank or credit union has to issue one to him or her. The financial institutions that issue credit cards belong to credit card networks. A bank that is a member of the Visa network would issue a Visa card, for example. Issuers can belong to multiple card networks, however, and they would issue cards specific to a particular network in accordance with their membership agreements. (Discover and American Express each own both a network and a bank and issue their own cards, so a number of topics discussed below do not apply to them. The rest of this In Focus concentrates on Visa and MasterCard.) Credit Card Processing Although a retail purchase appears instantaneous, there are a number of discrete steps involved in processing a single transaction that take place over the course of a few days. (See Figure 1.) Figure 1. The Credit Card Payment Process The Pdymert Prc&ss A a -- Aq x Source: Skift Research, The State of Hotel Payments 2021, September 2021, https://research.skift.com/report/the-state-of-hotel- payments-202 I/. First, the cardholder provides his or her credit card information to the business. For in-person transactions, this means swiping, inserting, or tapping the card. Then, the business's point of sale system or payment gateway (the online payment portal) captures the transaction details and securely transmits this information to the credit card processor, which forwards the transaction data to the

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