Last week, US Senators Richard Durbin and Roger Marshall introduced a bill known as the Credit Card Competition Act of 2022. It would require financial institutions with over $100 billion in assets to offer merchants much more say in how credit card transactions are routed. The bill states that at least two unaffiliated networks must be available, and they cannot be Visa and Mastercard (the two largest credit card networks) together.
Either can be associated with American Express or Discover, for example. It is also possible that smaller networks will enter the fray. These may include Shazam, STAR, and NYCE, which currently process a small portion of ATM and debit card transactions. Or new competitors could emerge.
Senators act as if they have the consumer’s back, 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.
For starters, it would have a devastating effect on credit card rewards programs. Debit card rewards all but disappeared after Senator Durbin’s eponymous Durbin Amendment (part of the Dodd-Frank Act) took effect in 2011. It capped debit card interchange fees , removing a key funding source from debit card rewards. Senator Durbin and others argued that consumers would benefit from lower prices. Traders won’t admit it, but most pocketed the savings.
“Averaging across all sectors, it is estimated that the vast majority of traders in the survey (77.2%) did not change prices after regulation, very few traders (1.2%) did reduced prices, while a significant fraction of traders (21.6%) increased prices,” the Federal Reserve Bank of Richmond concluded.
Reducing credit card rewards programs — taking money and travel benefits away from ordinary Americans so that big retailers can enjoy lower card processing fees — would be bad enough. But there are also other problems with this proposal.
Major card networks such as Visa and Mastercard invest billions of dollars in secure and reliable payment networks. This bill would remove many of their economic incentives to do 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 the U.S. payments system and put consumers in a vulnerable position,” explained Jeff Tassey, Chairman of the Board of the Electronic Payments Coalition. “The proposed legislation will lead to even more private consumer information being made available to foreign networks in countries like China and Russia.”
Access to credit
Even 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.
“More than 70% of US GDP depends on consumer spending, and credit cards are driving 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 significantly disrupt credit-issuing credit unions, particularly how they manage operational risk and credit extension, making credit availability less certain. for consumers and small businesses.”
If banks and credit unions have less incentive to offer credit cards, people with low incomes and low credit scores will likely be the first to lose access.
The bottom line
Don’t be fooled by these policy talking points on 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 will use their scale and influence to obtain lower fees which they will use to line their pockets.
We are not returning to a cash-based economy. Credit cards are an important part of in-person and online commerce. There’s even plenty of evidence that people spend more when they use cards. The same goes for 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 offer retailers and consumers many advantages. Disruption of this market would have many adverse consequences for all parties.
Have a question about credit cards? Email me at [email protected] and I’d be happy to help.