The Credit Card Competition Act (CCCA) has been reintroduced and if passed, will force credit card issuers and banks to provide a non-Visa and Mastercard alternative to merchants. The bill’s proponents posit that the increased competition will bring down swipe costs for the consumer. Sen. Richard Durbin (D-IL) was not the one to introduce the bill this time, although he still holds the namesake for the bill’s debit card counterpart, the Durbin Amendment. After the Durbin Amendment was passed in 2011, debit card reward programs declined drastically while savings from lower swipe fees were never passed down to consumers. These losses represent a transfer of savings from low-income cardholders to big retailers.
The CCCA blatantly targets VISA, Mastercard, large banks, and credit card issuers. The language explicitly states that financial institutions must provide an alternative to the two largest credit card networks, VISA and Mastercard, only falling short of naming the two companies outright. Likewise, the bill will only apply to creditors with over $100 billion of assets.
The theory behind the bill is quite simple. According to proponents, VISA and Mastercard constitute a “duopoly” in the credit card network market, and because of this, transaction costs are being kept artificially high. If creditors are forced to provide more network options, the increased competition between networks will lower the overall price of transactions. These transaction costs are referred to as interchange fees, and they are paid out by merchants. If merchants don’t need to pay as much on interchange fees, it’s assumed these savings will pass down to the consumer.
The truth is that the Durbin Amendment did lower the interchange fees. After passing, the interchange fee dropped from $0.44 per transaction to between $0.21 and $0.24. The problem is that banks have simply made up for this loss in other ways, mostly by eliminating or contracting many of their fee-free services and rewards programs that consumers had received. Additionally, the people who benefited from the Durbin Amendment were neither the mom-and-pop retailer nor the consumer. As creditors couldn’t charge over a set interchange rate, smaller retailers who used to benefit from discounts got those discounts revoked to make up the costs. The only group that saved money was large retailers, who in return did not pass savings down to consumers.
If the Durbin Amendment can provide an example of what we might expect to happen after the passage of the CCCA, credit card rewards are not long for this world. After the Durbin Amendment passed, debit card rewards have largely dried up, affecting nearly 80 percent of households with incomes of less than $50,000. Many consumers rely on rewards programs to save money and pay bills.
Senators supporting the CCCA likely want what’s best for their constituents and are not simply looking out for large retailers. However, the propaganda around the Durbin Amendment and now the CCCA has tainted the issue and obscured the facts. This is because the facts are decidedly against the bill, and if judged by the facts alone the bill does not hold up to scrutiny.
The Durbin Amendment already provided an example of what happens when third-party debit card networks are forced on financial institutions. It can be reasonably assumed the results of the CCCA will not be much different.
Isaac Schick is a policy analyst at the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.