Credit cards swiped at a register or keyed in online go through an authorization and routing process to ensure that there is enough available credit to make the purchase and to tie the purchase to the correct account. The authorization places fees on the merchant for use of the processing system. The proposed bill would mandate credit card companies to adapt to new card processing systems with varying levels of security and fees, with the systems chosen at the discretion of the merchant.
The first Durbin Amendment, part of the larger Dodd-Frank Act, touted itself as the consumers’ savior from the corrupt business practices of big banks during a time when many Americans were feeling the sting of the financial crisis coupled with anti-Wall Street sentiment in the midst of bailouts for banks deemed “too big to fail.” The act limited the price of processing fees that debit card issuers could charge merchants, with the assumption that merchants would then pass those savings on to the consumer by lowering product prices. In fact, the opposite happened, with 23 percent of merchants raising prices on consumers and effectively destroying the debit card rewards program that once existed. Further, access to free checking accounts and lending for lower-income Americans dwindled, as banks’ appetite for risk was slashed because of reductions in revenue from government-mandated decreases in interchange fees. As is often the case, financial regulations harmed those they were purported to help.
Now, Sen. Durbin has introduced a new set of mandates against credit card processing fees, despite once saying “the [credit card processing] fee is understandable because there is risk associated with it.” We can only speculate as to the outcome of these regulations, but drawing on what occurred with debit cards, the following are likely consequences.
Slashing Credit Card Reward Programs
When card issuers are forced by the government to trim the fees they charge to process transactions, the revenue loss must be realized elsewhere. Just as with debit card holders, credit card holders are likely to see a massive reduction in the points, cash back and rewards they receive for buying with credit. Consumers across the country take advantage of the wide array of branded credit cards to match their spending habits, such as rewards at airlines and grocery stores. Credit cards offer these as incentives to draw in customers and give people the flexibility to use the card that suits their needs. The proposed legislation will likely take a hacksaw to such offers.
Scaled-Back Credit Card Options
A reduction in revenue has effects beyond those felt by the consumer and the card issuer. It is also likely to affect the co-brand relationships credit card companies have in place, such as those with gas stations and hotels. This may lead to a massive reduction in the availability of co-branded cards and decreases in competition and consumer options.
Transfer of Wealth to the Nation’s Largest Merchants
When large merchants are given the power to decide where consumers’ credit card information is routed, they are likely to choose the option that will bestow the greatest benefit to their bottom line. Just as with the previous mandates, there is a false hope that these savings will be passed on to consumers. The far more likely outcome, and the one with historical precedence, is that the nation’s largest retailers and e-commerce platforms will pocket the savings and still increase prices on consumers, who would then be left with higher prices and less credit card rewards.
Reductions in Credit Card Security
Another foreseeable issue with the proposed legislation is the potential for reductions in credit card security. Credit card companies have both a duty and an incentive to carefully manage sensitive data, or they risk consumers fleeing to the competition. Merchants do not bear this burden in the same way; when any type of fraud or data loss occurs, individuals are instructed to contact their credit card company. It stands to reason that merchants are likely to select the cheapest, and potentially least-secure, option available. Fraud will continue to be managed by the credit card companies, with merchants holding the power on routing sensitive information. This is a risk to both the consumer and the credit card companies.
Less Access to Credit for Lower-Income Individuals
Reductions to the bottom line for credit issuers lead them to be more conservative in their lending practices. This means they will likely be less willing to take on risk, reducing access to credit for lower-income Americans and those with lower credit scores.
Legislative misnomers, such as the “Credit Card Competition Act of 2022,” are meant to convey the desired outcome of the legislation. In reality, the act will reduce competition at the expense of the consumer, translating to fewer credit card options, lower security and less access to credit. Regulation creates unintended consequences, most often at the expense of those least powerful to fight against those consequences. The R Street Institute believes that free markets and limited, effective government are the best solutions to such matters. True competition does not come from mandates; it comes from free markets and limits to government overreach.