Testing the Retailer's Swipe Fee Case: A Historical Lens

The scale of the problem is staggering. In 2024, U.S. credit card companies earned a record $148.5 billion from merchant swipe fees. That cost American families an average of $1,200 annually. For retailers, these fees are not a minor administrative charge but a top-line pressure point. They argue that interchange fees, typically ranging from 2% to 4% of a transaction, represent one of their largest controllable costs after labour and rent. With Visa and Mastercard controlling an estimated 80% to 85% of the market, merchants say they have little negotiating power, leaving them to absorb these fees or pass them on.

The proposed solution is the bipartisan Credit Card Competition Act. Its core mechanism is straightforward: it would require large banks to offer at least two unaffiliated network options for routing card transactions, including one outside the Visa-Mastercard duopoly. The goal is to force competition where it doesn't exist, thereby lowering the fees merchants pay. Retailers contend that reducing these costs would directly benefit their margins and, ultimately, lower prices for consumers.

This sets up the central investment question. The legislation promises savings, but the path from lower fees to shareholder returns is not guaranteed. The real test is whether the cost relief translates into lower prices for shoppers or simply flows through to higher corporate profits. Given that retailers have opposed even modest fee reductions from past settlements, the pressure to boost margins may be strong. Yet, in a competitive retail environment, the ability to pass savings to consumers could be a strategic advantage. The coming debate will hinge on which outcome the market believes is more likely.

The Market Structure: A Duopoly's Profit Engine

The proposed legislation is a direct response to a market structure that has become a powerful profit engine for a handful of banks. Visa and Mastercard currently control about 85 percent of the credit card market. This dominance translates into staggering industry profits, with banks earning $111.2 billion annually from swipe fees. The scale of this revenue stream is what makes the duopoly so entrenched-and so vulnerable to a policy challenge.

This market power is the core of the problem the Credit Card Competition Act seeks to solve. By controlling the vast majority of transaction routes, Visa and Mastercard have effectively insulated themselves from competitive pressure. The bill's mandate-that large banks must offer at least two unaffiliated network options, including one outside the duopoly-is a structural intervention. It aims to break the link between market share and pricing power, forcing a competitive dynamic that has been absent.

The implication for bank profitability is clear. A sustained reduction in interchange fees would directly compress the revenue stream that funds a significant portion of their credit card operations. For investors, this introduces a new variable: the risk that a legislative fix could permanently alter the economics of a high-margin business segment. The duopoly's profit engine is not just a cost to merchants; it is the central asset that the proposed law is designed to disrupt.

Historical Precedent: The Durbin Amendment's Lessons

The most direct test of the proposed legislation's consumer impact comes from a past intervention: the Durbin Amendment. This law capped interchange fees for debit card transactions, creating a clear historical parallel. The key finding from that episode is instructive. After the fee cap took effect, a study found that merchants largely kept the savings as higher profits rather than passing them to consumers. The expected price cuts for shoppers did not materialize.

This sets up the central uncertainty for the Credit Card Competition Act. The historical pattern suggests a strong likelihood that any fee reductions will first flow to retailer margins, not consumer wallets. The average American family already pays $1,200 annually in costs tied to these fees. If the new law delivers a similar windfall to merchants, the benchmark for potential savings is high. Yet, the outcome is not predetermined. The Durbin experience shows that without a powerful competitive dynamic, merchants may choose to protect their bottom lines.

The proposed legislation aims to change that dynamic by forcing competition. But history cautions that the path from lower fees to lower prices is often blocked by corporate incentives. The coming debate will hinge on which force prevails: the structural pressure to pass savings on, or the entrenched tendency to keep them. For investors, the Durbin lesson is a reminder that regulatory wins for merchants do not automatically translate into consumer benefits.

The Banker's Counter-Argument: Unintended Consequences

The debate over the Credit Card Competition Act is shifting from a simple cost debate to a broader discussion of unintended consequences. While retailers focus on their bottom lines, banks and consumer advocates warn that forcing down interchange fees could trigger a chain reaction that harms the very consumers the bill aims to help.

The most immediate threat is to credit card rewards. Payment networks fund a significant portion of the cash back, points, and miles consumers earn through interchange fees. If those revenues shrink, issuers may have to slash rewards to maintain profitability. As one analysis notes, credit card companies also may end up slashing the rewards they offer to make up for the revenue they'll lose. For cardholders, this could make premium cards less attractive and reduce the value of everyday spending, effectively turning a fee reduction into a benefit cut.

Beyond rewards, there is a deeper concern about access to credit. A tighter regulatory environment could push some banks to become more cautious in issuing cards. The result might be a risk for consumers who get shut out of credit cards, forcing them toward riskier, more expensive alternatives like payday loans or subprime credit products. This outcome would undermine the bill's stated goal of helping everyday Americans, creating a new vulnerability for those with thin credit files.

This counter-argument has gained new political momentum. The recent endorsement of the Credit Card Competition Act by President Donald Trump has reinvigorated the bill's prospects, prompting senators to reintroduce it this week. While merchant groups are applauding the move, the political alignment is also amplifying the warnings from the banking industry. The debate now centers on whether the cost savings for retailers are worth the potential downsides for cardholder benefits and credit access. For investors, this introduces a layer of regulatory and consumer behavior risk that was not part of the initial cost-of-capital calculus.

Catalysts and Watchpoints

The retailer's thesis now faces its first major test: translating political momentum into tangible market signals. The catalyst is clear and unusual. After years of bipartisan attention, the bill has gained fresh force with President Trump's endorsement via Truth Social. This political alignment, especially from a traditionally skeptical party, has prompted senators to reintroduce the act this week. For the market, this raises the immediate question of passage probability. The unusual bipartisan support, now backed by the White House, is the primary near-term catalyst that could validate the bill's path to law.

Yet, the real test for investors will come after any legislative win. The Durbin Amendment provides the benchmark. Its legacy shows that merchants largely kept savings as higher profits rather than passing them to consumers. The first watchpoint is therefore early merchant statements. Retailers will need to demonstrate a clear shift in behavior-whether they are using lower fees to boost margins or to lower prices. The market will scrutinize earnings calls and guidance for any mention of pass-throughs, using the Durbin precedent as a lens for skepticism.

Simultaneously, the issuer response will be a critical indicator of the law's broader impact. The counter-argument is that reduced interchange revenue will force a cut in cardholder benefits. Watch for changes in credit card rewards programs, such as lower cash-back rates or fewer points per dollar. Evidence suggests credit card companies may end up slashing the rewards they offer to offset lost revenue. This would be a direct cost to consumers, potentially offsetting any price relief from lower merchant fees. Another key signal will be new account approvals. If banks become more cautious in issuing cards, it could signal a risk of shutting out consumers from credit, creating a new vulnerability that the bill's advocates may have underestimated.