Credit card rewards are in the news again for all the wrong reasons. In late July, Senate Majority Whip Richard Durbin (D-Ill), with the help of Sen. Roger Marshall (R-KS), introduced the Credit Card Competition Act of 2022 (CCCA). Described by its authors as enhancing the “competition and choice in credit card network market,” the CCCA is supposedly designed to save consumers money by prohibiting credit card companies from dictating how many card networks are available to merchants for processing customer transactions.
If put into effect, the bill would do nothing of the sort. Instead, it would destroy the credit card market as we know it today and, as a consequence, the many rewards programs that millions of Americans enjoy.
The CCCA builds upon the Durbin Amendment – an important provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act which effectively ended debit card rewards – by applying similar regulations to the credit market. Much like the Durbin Amendment, the CCCA is an extremely misguided piece of legislation that is certain to have unintended consequences for consumers. Most consequential of these will be the elimination of popular co-branded credit cards, more frequently referred to as reward credit cards, that customers use to receive cash back on purchases and collect and redeem travel points.
This effect would emerge because the CCCA would crack down on one of the primary methods by which credit card-issuing banks generate revenue: charging interchange fees. Interchange fees, also known as swipe fees, are fees that credit card companies charge merchants each time a customer completes a transaction using a credit card. Typically, an interchange fee comprises just 2 to 3 percent of each purchase. These fees play an important role in helping payment networks cover the cost of processing a transaction and card-issuing banks cover the cost of providing popular services like fraud protection and rewards programs.
The CCCA would curtail this practice by requiring credit card-issuing banks to work with at least one alternative payment network besides Visa and Mastercard, which together control 83 percent of the credit market. Presently, merchants are required to process transactions with whatever payment network their bank uses to do business. Sens. Durbin and Marshall hope that by providing merchants with the opportunity to choose between payment networks, they will select the option that provides them the best deal financially. This nudge will in turn force banks to lower interchange fees since they will need to compete with cheaper networks. As a consequence, merchants will theoretically experience cost savings, which will then be passed on to consumers in the form of lower prices.
The problem with this theory is that it completely ignores the cost-saving measures that card-issuing banks will be forced to take to recoup their costs. Numerous studies have found that when caps on interchange fees were imposed following the passage of the Durbin Amendment, banks responded by discontinuing popular services like free checking accounts and rewards programs.
In addition, cost savings were not passed on to the consumer. A 2014 Economic Quarterly article by the Reserve Bank of Richmond and Javelin Strategy Research found that just 1.2 percent of merchants lowered their prices, with 21.6 percent actually increasing them. Only 10 percent of merchants reported experiencing a decrease in debit costs. A separate paper by George Mason University found that the amendment likely led to a wealth transfer of between $1 billion to $3 billion per year “from lower income consumers to the shareholders of big box retailers.”
There’s hardly to reason to think the effects of the CCCA would be any less severe for consumers. If the CCCA becomes law, card-issuing banks will again look for savings in the form of cost-cutting. Rewards programs will be the first to go and consumers will be unlikely to find any relief in the form of lower prices.
The likelihood that the CCCA comes to a vote seems to have increased over the last month. Originally introduced as a standalone piece of legislation and referred to the Senate Committee on Banking, Housing and Urban Affairs, the CCCA was not previously scheduled to receive any hearings. However, this week Durbin and Marshall attempted to incorporate the bill into the National Defense Authorization Act (NDAA) in order to increase the likelihood of its passage. In 2010, Durbin used a similar legislative maneuver to get his amendment added to the much larger Dodd-Frank financial reform package.
Durbin and Marshall were unsuccessful in their initial efforts, but they’re certain to try again next month. If they succeed, the consequences will be devastating for American consumers, 71 percent of whom own a rewards credit card. Congress must not allow this to happen.
The CCCA, far from delivering true competition to the credit market and cost savings to consumers, will only raise prices on American consumers and merchants who can scarcely afford more price increases amid red hot inflation. Lawmakers must do the right thing and reject this well-intentioned but profoundly harmful piece of legislation.