Bill aimed at reducing credit-card ‘swipe fees’ puts Chinese company in crosshairs

An overlooked provision in proposed legislation to reduce credit card “swipe fees” would crack down on a Chinese company that critics fear has infiltrated American payment networks to mine consumers’ sensitive financial information.

The Credit Card Competition Act is set for a Senate vote before Congress ends its legislative term in January, said one of its co-sponsors, Sen. Roger Marshall, Kansas Republican.

A small provision in the bill requires the Federal Reserve to identify and track payment networks deemed national security risks or operated by foreign entities. It would prevent those networks from being used to process credit card payments, though the bill doesn’t specify how they would be blocked.

That would put UnionPay, a Chinese state-owned financial services company, directly in its crosshairs. UnionPay controls 45% of the global market for credit card spending, according to company data. More than 80% of U.S. merchants accept UnionPay debit or credit cards.

Visa, MasterCard, Discover and American Express are among the companies that could outsource their credit card processing to UnionPay. The Chinese company already has deals in place with some of the largest credit card companies to process payments in other countries as well as co-branded cards in the U.S.

Critics say that could allow China to collect personal financial information of U.S. citizens.

Visa and MasterCard brought UnionPay into EMVCo, the consortium that drafts the standards and regulations for processing credit cards. Critics say that allows Beijing to write the rules on how credit cards are used.

“If UnionPay is writing the standards, they may be able to work things so they have access to data, or they can do things none of us want them to do. We don’t even have transparency in EMVCo. What is China pushing for?” said Doug Kantor, general counsel at the National Association of Convenience Stores.

Supporters of the bill include a diverse crew of senators across the political spectrum, including Democrats Richard J. Durbin of Illinois, Jack Reed of Rhode Island and Peter Welch of Vermont, and Republicans J.D. Vance of Ohio, Josh Hawley of Missouri and Mr. Marshall.

Supporters say the bill would save consumers money by lowering swipe fees, which are the costs that payment networks such as Visa and MasterCard charge merchants to process credit cards. Those fees are merchants’ second-highest operating cost, behind labor, according to data from the National Association of Convenience Stores, which supports the bill.

The proposal would require banks to give merchants a choice of payment networks to process credit cards. If a customer uses a Visa card for purchase, a merchant could choose the Visa payment network or select one that is less expensive.

The thinking is that if merchants pay less for swipe fees, they would pass those savings to consumers. Swipe fees reached a record $172 billion last year, costing families an average of $1,000, according to data from the Merchants Payment Coalition, which supports the legislation.

Groups favoring the bill include the National Retail Federation, the International Brotherhood of Teamsters, the National Restaurant Association of Convenience Stores and the Retail Industry Leaders Association.

Opponents say the bill’s goal is nothing more than a theory. The bill doesn’t require merchants to pass along the savings and they could use that money to reinvest in their businesses. Others say it would eliminate reward programs, which give cardholders discounts on hotel, air travel and other leisure activities, largely funded through swipe fees.

The Electronic Payments Coalition, the American Bankers Association and the National Association of Federally-Insured Credit Unions oppose the bill.

No one has raised concrete allegations that UnionPay is pilfering Americans’ financial data, but Beijing requires businesses operating overseas to share their data with government officials, including sensitive financial data and personally identifiable information.

A group of Republican senators, including Sen. Tim Scott of South Carolina, the ranking member of the Senate Committee on Banking, Housing and Urban Affairs, and Sen. Mike Crapo of Idaho, sent a letter in October to Treasury Secretary Janet Yellen expressing concerns about UnionPay’s increased footprint in the U.S. financial sector.

“The risks to data, privacy, cybersecurity and financial stability must be accounted for and treated accordingly,” they wrote.

Elaine Dezenski, senior director and head of the Center on Economic and Financial Power at the Foundation for Defense of Democracies, said fears of UnionPay are part of a broader concern over Chinese companies operating in the U.S. as part of Beijing’s military and intelligence apparatus.

China’s national intelligence law requires all Chinese businesses and citizens operating overseas to gather sensitive information from host countries and provide that data to the government.

Ms. Dezenski said UnionPay represents a potentially small threat to U.S. consumers’ data but could pose a larger problem in combination with Huawei, TikTok and other Chinese companies.

“Whether we are talking about UnionPay or TikTok, or any of the hundreds of thousands of Chinese companies, we don’t have any way to manage them and can’t go one by one,” she said. “We simply have no idea where this information is going, and we can’t go one by one with companies, or it will be a game of whack-a-mole.”

Opponents say the bill would eliminate credit card rewards and reduce credit availability and that costs to businesses and consumers would be too much to justify.

Bryan Bashur, director of financial policy at Americans for Tax Reform, disputes that the legislation would effectively crack down on UnionPay. He said simply putting it on a list wouldn’t do anything to curb Chinese aggression and would exempt the three payment networks, such as AmericanExpress and Discover, that use UnionPay.

“ATR views China UnionPay, a state-owned payment card network, as a threat to Americans’ financial privacy,” he said. “If UnionPay converted to a three-party model, they would be exempt from CCAA regulations. UnionPay can also already bypass the CCAA because it previously inked partnerships with Discover and AMEX,” Mr. Bashur said.

Americans for Tax Reform estimates that the bill would cost businesses and consumers $1 billion in rewards and shrink credit lines by as much as $700 billion.

The group argues that the bill would make American technology unsafe by forcing credit card companies to open their proprietary technology to other networks. Fraud and cybersecurity protections would be at risk, it said.

“If Roger Marshall wants to introduce a bill to actually take on UnionPay, that would be fine with us, but the CCAA does not do that,” Mr. Bashur said. “The CCAA is a green light for the Federal Reserve to target Visa, Mastercard, consumers, small businesses, and small community banks and credit unions that all rely on electronic payments for privacy security, rewards, and affordable credit.”

Mr. Kantor called those claims “completely unfounded.” He noted that banks make $170 billion annually in swipe fees, contributing to their 30% profit margins.

“Inflation has been a huge problem in this country, and it continues to be. These swipe fees are an inflation multiplier because they increase the cost of every transaction, sometimes multiple times throughout the supply chain,” he said.

Correction: An earlier version of this story inaccurately characterized the ties that UnionPay has to U.S. credit card payments.