The Credit Card Competition Act: A Misnomer and an Irony

What Is the Credit Card Competition Act?

Currently, when a customer charges an expense to their credit card, the credit card’s issuing financial institution pays the vendor, and the cardholder reimburses the financial institution when they pay their credit card bill every month. “Interchange networks” like Visa or Mastercard serve as intermediaries between the various parties by sharing relevant payment information. 

Introduced in the U.S. Senate by Sens. Dick Durbin (D-Ill.) and Roger Marshall (R-Kan.) in 2023, the Credit Card Competition Act would, according to a one-pager published on Sen. Durbin’s website, “require the largest credit-card issuing financial institutions in the country—those with assets over $100 billion—to enable at least two credit card networks to be used on their credit cards instead of just one, and at least one of those networks must be a network other than the Visa/Mastercard duopoly.”

The argument used to prop up this bill is that it will “incentivize better service and lower cost,” but evidence from a similar proposal of the past paints a different picture. Debit card regulations imposed through the Dodd-Frank Wall Street Reform and Consumer Protection Act have hurt consumers by wiping out valuable benefits, such as rewards and better security, once seen with those cards. 

The Misnomer and the Irony

The Credit Card Competition Act and supporting materials produced by the bill’s proponents suggest a dearth of competition within the interchange network marketplace. To hear advocates tell the story, customers and vendors have one choice: the Visa-Mastercard duopoly or nothing at all. In reality, Visa and Mastercard are very different companies that vigorously compete between themselves (and others) for market share, representing 42 percent and 22 percent respectively. Beyond competition within the interchange network marketplace, there is also competition outside of it. PayPal, Venmo, Zelle, personal checks, and cash are just a few options that some businesses might actually prefer.

What are the unintended consequences?

The proposed bill would negatively impact consumers in a number of ways. First, when processing is done through a third party, card security may be compromised if the mandated interchange is not properly secured. Second, consumers—especially those with lower incomes and credit scores—would likely experience decreased access to credit. Third, revenue cuts from the affected card companies would destroy loyalty programs like cashback rewards, which many Americans use to pay for essentials like groceries, diapers, gas, and more. Eliminating this important financial tool is akin to reducing incomes and increasing costs at the same time.

Workers are another group that will lose out if this bill were to become law. Late last year, a host of unions representing flight attendants, communications workers, and even machinists stated the proposal “would put downward pressure on our members’ wages, safety protections, retirement savings, and work rules.” Put simply, these credit card programs help boost workers’ pay when they get people to apply for them. For example, flight attendants can make $50 for each applicant they sign up and get approved. In these times of record inflation, lawmakers should help workers increase their earning potential—not take away from it.

Many of the bill’s proponents say it will help small businesses. However, a study by the finance department chair at the University of Miami Herbert Business School showed that this legislation would unfairly benefit the top five businesses in the country. A recent Congressional Research Service report stated that “[i]t is not clear whether retailers would pass interchange savings on to consumers” and that “[i]t is unlikely a small business would be aware of a smaller network, and even if it did offer payment on that network, the odds that a bank would issue a card enabled for that exact network are relatively small.” Post-pandemic, consumer trends and technology have sparked a small-business resurgence. Now is not the time to stifle their growth to benefit those few at the top.

Conclusion

Over-regulating credit card interchange and giving the Federal Reserve more power is anything but conservative; in fact, any attempt to do so is a big government power-grab. The Credit Card Competition Act has more unintended consequences than potential benefits. The bill will hurt businesses and consumers by decreasing their card security, harm workers by taking away some of their benefits, and prop up big businesses while leaving smaller ones behind. Government-mandated competition is never the solution. Recently, Capital One and Discover Financial Services announced a proposed acquisition that, according to a Bankrate article, would “introduce additional competition into the credit cards payment network space.” This revelation is a good example of the market working and of the obsoleteness of the proposal at hand. Congress should say no to this misguided legislation and say yes to freedom and opportunity.

More from R Street: The “Credit Card Competition Act” and Interchange Fees