The Credit Card Competition Act Is Not A Good Deal for Consumers

The fact that Congress is considering legislation that would potentially make credit cards less useful as well as more difficult for working class households to obtain them is wholly unsurprising, given its predilection for facile and counterproductive gestures.

Last week Richard Durbin, Peter Welch, Roger Marshall and J.D. Vance introduced the Credit Card Competition Act, which would require credit card companies to provide merchants the ability to process their transactions over networks besides their own. (A companion bill in the House has also been introduced.)

The reason this legislation is needed, the bill’s authors state, is that the processing fee that credit card companies charge is too high and contributes to inflation. Allowing merchants to process a transaction on another network would ostensibly result in more competition and lower interchange fees.

However, while this bill is supposed to help small retailers—and shoppers—at the expense of Visa
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and Mastercard, it would end up doing little but reducing or eliminating credit cards rewards programs and reducing credit card access for low-income households.

Most transactions in the United States are done with a credit card, and almost 85 percent of American households have at least one card, and a majority of households with an income below $25,000 have at least one credit card. Over the last three years their prevalence has greatly increased, as households shifted towards more online shopping—and touchless smartphone/credit card transactions within stores.

While usage has gone up, the cost of providing credit cards has also increased. Issuers cover the majority of fraud costs—which will total over $160 billion over the next decade—as well as take elaborate steps to protect its data, combat fraud, and maintain and update its network: Witness the raft of contactless readers that are now in place in most stores these days.

A decade ago Congress enacted legislation—the so-called Durbin Amendment—that limited fees that banks could charge with debit card usage. Predictably, the price caps and routing mandates ultimately made it more difficult for low-income households to obtain a debit card, and it did nothing to help those users who kept their cards. A similar outcome would no doubt happen here.

Also, the contention that credit card reward fees raise prices via higher interchange fees is up for debate: A study I wrote with Chris Richardson, a financial economist and former colleague, found no evidence that the cap on interchange fees on debit cards affected consumer prices, but it did result in fewer consumers with debit cards, since it made millions of low-income households unprofitable for banks to keep as debit card customers.

And the notion that credit card fees cause inflation, as the bill’s co-sponsors assert, is risible: Inflation is an overall increase in the price level over time, and interchange fees have been more or less stable the last few years. For these fees to be inflationary they would have had to be drastically increasing.

One indication of the motivation of the legislation is the fact that American Express
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and Discover, the second and sixth-largest issuers, are inexplicably exempt: Amex is only slightly smaller than Mastercard so its exemption is baffling, but Discovery’s exclusion makes perfect sense: Its headquarters happens to be in Senator Durbin’s home state of Illinois.

Credit cards help facilitate safe and secure transactions, and the providers spend a lot of money to provide such a service—one which protects us from liability from fraud or theft, among other things. Allowing merchants to use another network to process credit card transactions will ultimately result in credit card issuers eschewing those who cost them the most—namely, the lower-income households who are more likely to declare bankruptcy or make relatively few transactions. A reduction in interchange fees may cut off more low-income people from credit cards altogether, which is precisely what happened when we cut the interchange fees for debit cards.

Access to credit is more important than ever for U.S. households to fully participate in the economy. The Credit Card Competition Act would reduce access for millions of Americans.