ATR Op-Ed in RealClearMarkets: “Credit Card Regulation Empowers the Fed to Restrict Consumer Choice”

via RealClearMarkets

Instead of promoting competition, the Credit Card Competition Act of 2022 expands the power of the Federal Reserve to distort the supply and demand of the credit card market to a point where consumers will see rewards programs largely disappear. This government intervention will lead to fewer card options, limit choices for consumers, and reduce competition in the market altogether.  

Sens. Dick Durbin (D-Ill.) and Roger Marshall’s (R-Kan.) deceptively named bill expands the regulatory authority of the Fed to intervene in the credit card market. The bill directs the Fed to require banks and credit unions to issue credit cards that utilize at least two unaffiliated payment networks. One stipulation is that the two network options may not both be Visa and Mastercard.

This bill is clearly using the Fed to target two specific companies, while ignoring the collateral damage to consumers, banks, and credit unions.

The Fed is also required to alter credit card technology to such a degree that payment networks will be required to disclose proprietary security information with competitors to fulfill the bill’s requirement that all networks must be accessible for every applicable credit card. According to one paper, altering the credit card infrastructure in such a way is not technologically feasible today, and the cost of reissuing cards to comply with this mandate could cost upwards of $5 billion.

This is clear government intervention in private contractual agreements between businesses. This destroys incentives for firms to develop new technologies that defend against fraudulent card activity and offer cheaper and more streamlined services than cash.

The bill would limit card options for consumers. Under the new regulation, merchants would likely choose the network with the lowest fee, which in turn would reduce revenues going to banks and credit unions. Interchange fee revenue is used to fund rewards and cash back programs. A reduction in fee revenue will make it nearly impossible to keep offering rewards because the cost of providing the service will no longer be economical. As the International Center for Law & Economics points out, “Every rewards card, from airlines to entertainment, would likely disappear.”

The fee charged for the electronic payment transaction service is not a sales tax—none of the revenue is going to the government. The revenue is used to supply rewards and create new fraud protection technology to make payment transactions easier and more cost effective for both consumers and merchants. However, the loss of credit card rewards under the Durbin-Marshall bill could act as a de facto tax on consumers because the “loss of cash-back rewards is tantamount to a nominal price increase on all purchases.”

Debit card regulation as enacted in the Dodd-Frank Wall Street Reform and Consumer Protection Act is living proof that credit card regulation will eviscerate credit card rewards and raise costs on consumers. Sen. Durbin’s eponymous “Durbin amendment” passed as a part of Dodd-Frank and imposed regulations on debit cards, which largely eliminated debit rewards. At the same time, about 22% of merchants raised prices on consumers after the enactment of the Durbin amendment.

Government regulation of the credit card market will significantly harm lower-income Americans. Lower-income Americans use rewards cards. According to the International Center for Law & Economics, “86% of credit cardholders have active rewards cards, including 77% of cardholders with a household income of less than $50,000.” Moreover, Dr. Angelino Viceisza found that, not even counting the cost of losing rewards cards, “lower-income and low credit households would lose $434 million, close to 22% of the cost borne by all consumers” with additional credit card regulation.

At a time when inflation is continuing to erode purchasing power, the Durbin-Marshall bill would eliminate options for consumers to reduce costs on groceries, gasoline, and medicine. Today, several credit cards offer perks that consumers can use to save money on groceries, gasoline, prescription medicines, and medical expenses.

Inflation is a result of excessive government spending and supply chain constraints, not an increase in service fees. In fact, certain payment networks lowered fees for small businesses to help offset the loss of revenue from the pandemic.

The onerous regulations imposed in the Credit Card Competition Act will do nothing to promote competition, but it will wipe out credit card rewards programs, stifle technological advancements in payment transaction technology, and make it more difficult for consumers to find savings during a time of inflation. The negative repercussions this bill will impose on consumers is a clear sign that lawmakers should oppose it outright. 

Bryan Bashur is a federal affairs manager at Americans for Tax Reform and executive director of the Shareholder Advocacy Forum.