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Sometimes things sound a lot better than they really are, and that’s definitely the case with the Credit Card Competition Act. If it passes, I’m worried that consumers will lose access to valuable credit card rewards programs. Data security could also be compromised, and access to credit could be limited.
This bill was introduced in the U.S. Senate last year by Senators Richard Durbin and Roger Marshall and subsequently in the U.S. House of Representatives. The proposed legislation didn’t go anywhere last year, but it’s now back with additional bipartisan sponsors in both houses of Congress — and it seems to be gaining momentum. While it sounds friendly, I believe this proposal is a wolf in sheep’s clothing.
How it would work
The Credit Card Competition Act would require financial institutions with more than $100 billion in assets to offer merchants much more say in how credit card transactions are routed. The bill stipulates that at least two unaffiliated networks must be available — and they can’t be Visa and Mastercard (the two largest credit card networks) together.
Either of those could be paired with American Express or Discover, for example. There’s also the possibility that smaller networks could enter the fray. These might include the likes of SHAZAM, STAR and NYCE, which currently process a small share of ATM and debit card transactions. Or, new competitors might emerge.
The senators are acting like they have consumers’ backs, employing rhetoric such as Senator Marshall’s statement, “When it comes to Main Street versus Wall Street, I’ll choose Main Street every time.”
Here’s the problem: This legislation would harm consumers in multiple ways. It’s a revenue grab being pushed by large retailers and their political allies.
The Credit Card Competition Act would have a devastating effect on credit card rewards programs. Debit card rewards all but disappeared after Sen. Durbin’s eponymous Durbin Amendment (part of the Dodd-Frank Act) took effect in 2011. It capped debit card interchange fees (the processing fees that retailers pay banks every time a customer pays with a card), removing a key funding source of debit card rewards. Sen. Durbin and others argued that consumers would benefit from lower prices. Merchants won’t admit it, but almost all of them pocketed the savings.
“Averaging across all sectors, it is estimated that the vast majority of merchants in the survey (77.2 percent) did not change prices post-regulation, very few merchants (1.2 percent) reduced prices, while a sizable fraction of merchants (21.6 percent) increased prices,” the Federal Reserve Bank of Richmond concluded.
While the Credit Card Competition Act would not explicitly cap interchange rates — a tactic that devastated debit card rewards in the U.S. and credit card rewards in other countries, such as Australia and members of the European Union — the intent is to lower fees by incentivizing competition. On the face of it, that’s a noble goal, but rewards would vanish, retailers would pocket the difference and consumers would be left empty-handed. Other fees might go up, too. After the Durbin Amendment, it became harder to get a free checking account and overdraft fees and ATM fees rose.
Reducing credit card rewards programs — taking cash back and travel benefits away from everyday Americans so that large retailers can benefit from lower card processing fees — would be bad enough. But there are other problems with this proposal, too.
Major card networks such as Visa and Mastercard invest billions of dollars into secure, reliable payment networks. This bill would take away many of their economic incentives for doing this important work.
“The proposed routing mandates on credit cards will shift billions in consumer spending to less secure, less innovative, and higher-risk transactions that would weaken America’s payment system and put consumers in a vulnerable position,” explained Jeff Tassey, board chairman of the Electronic Payments Coalition. “The proposed legislation will lead to even more private consumer information being made available to foreign networks.”
There’s no guarantee these nascent competitors would be as reliable or as secure as the card networks we know and trust.
Access to credit
Even the smaller financial institutions that would be exempt from these new rules acknowledge that the proposal is a bad idea that could limit Americans’ access to credit.
“Over 70 percent of U.S. GDP depends on consumer spending, and credit cards are what drive that,” said Dan Berger, president and CEO of the National Association of Federally-Insured Credit Unions. “Efforts to extend new routing requirements to credit cards would create significant disruption to credit-issuing credit unions, specifically how they manage operational risk and the extension of credit, making the availability of credit for consumers and small business less certain.”
If banks and credit unions have fewer incentives to offer credit cards, people with lower incomes and lower credit scores will probably be the first to lose access.
The bottom line
Don’t be fooled by these political talking points about competition and consumer benefits. There is already healthy competition between Visa, Mastercard, American Express and Discover. This benefits consumers in areas such as rewards, data security and access to credit.
The only beneficiaries of these proposed changes will be large retailers who’ll use their scale and influence to secure lower fees and line their pockets.
We’re not going back to a cash-first economy. Credit cards are an important part of in-person and online commerce. There’s even ample evidence that people spend more when they use cards. The same is true of buy now, pay later providers such as Affirm and Afterpay — and retailers seem happy to pay them much higher processing fees than credit card networks.
Instead of viewing credit cards as the enemy, merchants should view these processing fees as a necessary cost of doing business. Credit cards provide retailers and consumers with many advantages. Disrupting this market would lead to many adverse consequences for all parties.
Have a question about credit cards? E-mail me at firstname.lastname@example.org and I’d be happy to help.