Q&A on Credit Card Regulation
Americans for Tax Reform has been consistently opposed to government regulation of debit and credit card transactions.
Last year, ATR opposed the Credit Card Competition Act (117th Congress; S. 4674) because, if enacted, it would have unnecessarily regulated credit card transactions. The bill as introduced was also an extension of the onerous Durbin Amendment from 2010 that imposed regulations on debit card transactions.
If this bill is reintroduced, ATR will maintain its current position in opposition to introduction, passage, and enactment.
The bill will severely reduce interchange fee revenue (the percentage of the transaction amount that is routed to the cardholder’s bank or credit union for providing services) to issuing banks, credit unions, and payment card networks. This revenue is used to fund rewards programs, pay for customer service, fund revolving lines of credit, produce physical cards, and invest in new cybersecurity for payment transactions.
If enacted the bill will likely do four things:
- Largely eliminate credit card rewards programs
- Put consumers personal privacy at risk because it will disincentivize future investment in fraud protection and enhanced cybersecurity
- Reduce the availability of revolving lines of credit
- Enable large retailers to pad their pockets while consumers and small businesses will see little to no savings at all
Who sponsored the bill?
- Last year, Senators Dick Durbin (D-Ill.) and Roger Marshall (R-Kan.) introduced the Credit Card Competition Act. Representatives Lance Gooden (R-Texas) and Peter Welch (D-Vt., who is now Senator Welch after taking over Pat Leahy’s seat) introduced an identical House version.
Why was this bill introduced?
- It was introduced at the behest of large retailers. This bill is an expansion of the Durbin Amendment, which was passed as a part of the Dodd-Frank Act in 2010.
What is the issue with merchant category codes and firearm retailers?
- The International Organization for Standardization (“ISO,” which is an international nongovernmental organization made up of national standards bodies that develops and publishes a wide range of proprietary, industrial, and commercial standards) decided in September 2022 to add a new merchant category code (MCC) for standalone firearm retailers. It was Amalgamated Bank (a union-owned bank) that urged the ISO to adopt this change.
- MCCs are four-digit numbers that networks use to identify types of merchants by the goods and services they sell. MCCs are not new. For example, each airline has its own MCC. MCCs can help consumers maximize their credit card rewards.
- The new MCC is for retailers whose primary business is firearms sales. Visa, Mastercard, Discover, and American Express are applying these codes to firearm retailers. The networks can only see the card number, the merchant’s name and location, the MCC, and the date and amount of transaction.
- The Credit Card Competition Act does nothing to solve the MCC firearm issue. Individual states such as West Virginia are introducing legislation to resolve this issue by prohibiting the use of firearm MCCs for any potential surveillance activities. While the parties involved are identical in both the bill and the MCC issue, they are entirely separate issues that should not be conflated.
- Congress should examine why the ISO is able to circumvent our elected representatives and impose requirements on American companies that could be put at a competitive disadvantage to foreign competitors. Just like the Basel Committee on Banking Supervision, the ISO possesses no supranational authority or legal force in the United States.
What does the Credit Card Competition Act do?
- It mandates the Federal Reserve to draft regulations that would require credit card transactions to be directed through at least two unaffiliated payment card networks. However, the networks cannot be both Visa and Mastercard because they have the two largest market shares in payment transactions. There is a subsequent provision that says if the Federal Reserve finds over time that either Visa or Mastercard is no longer one of the two largest networks, then the restriction on the two largest networks operating over credit cards will no longer apply. Clearly, this bill is forcing the Federal Reserve to target Visa and Mastercard directly.
- The bill also has a provision that is written in a way that would require payment card networks to expose their proprietary cybersecurity and tokenization technology to their competitors. This will disincentivize investment in innovative fraud protection technology.
- The more secure Europay, Mastercard, Visa (EMV) chips create a one-time token for point-of-sale transactions. EMVs were not widely adopted in the United States until 2015. More impediments to enhanced cybersecurity, like the Credit Card Competition Act, could put the United States behind the curve compared to foreign countries.
- The bill states that it only applies to banks and credit unions with more than $100 billion in assets. However, banks and credit unions with far less than $100 billion in assets are opposed to the bill because the economics of statutorily imposing mandates on routing transactions for only a specific set of industry participants will shift costs and price hikes onto the smaller players in the market.
- The bill also states that regulations issued by the Federal Reserve will not cover payment card networks that issue their own cards (e.g., American Express). The bill fails to exempt AMEX, however, because it is a bank holding company with more than $100 billion in assets.
- Additionally, AMEX offers its network services to certain cards that AMEX does NOT issue itself, such as:
- Wells Fargo Propel American Express card
- USAA Cashback Rewards Plus American Express card
- PenFed Pathfinder Rewards American Express card
- Navy Federal More Rewards American Express card
- U.S. Bank FlexPerks Gold American Express card
- PenFed and Navy Federal are used by households working in the federal government and in the military. The USAA card is used by current, former military, and their spouses and children. So, effectively, Sens. Durbin and Marshall have proposed a bill that could directly limit credit card rewards and fraud protection for our military service members and veterans.
Why does ATR oppose the bill?
- The bill does not promote competition, instead it dramatically expands the role of the federal government to overregulate the market for credit cards.
- The mandates in the bill are so costly that more than $60 billion in rewards that consumers receive every year would largely disappear.
- The bill authorizes the federal government to intervene in contracts between private parties.
- There is no evidence that this bill will pass savings down to consumers.
- Because the bill forces credit cards to allow access to all networks, proprietary technology will be exposed to competing networks, destroying incentives to create new and innovative fraud protection and cybersecurity.
- The bill is a perfect example of Congress ceding its Article I authority to the Federal Reserve.
What is the Durbin Amendment?
- The Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203) was signed into law on July 21, 2010.
- Sen. Durbin offered an amendment to the Dodd-Frank Act that is eponymously known as the “Durbin Amendment.”
- The Amendment, which became section 1075 of Dodd-Frank, amended The Electronic Fund Transfer Act (P.L. 95-630) by directing the Federal Reserve to draft regulations (Regulation II) that would:
- add a cap on debit card interchange fees; and
- require that every debit transaction must be capable of being transferred “over any payment card network.”
- Final vote for adopting the Durbin Amendment was 64-33.
- These are the Senate Republicans that voted in favor of the amendment and are still in office:
- John Barrasso (Wyo.)
- Susan Collins (Maine)
- Mike Crapo (Idaho)
- Lindsey Graham (S.C.)
- Chuck Grassley (Iowa)
- Roger Wicker (Miss.)
- Jim Risch (Idaho)
- These are the Senate Republicans that voted in favor of the amendment and are still in office:
Who supports the bill?
- Large retailers
- National Association of Convenience Stores
- Merchants Payments Coalition
Who opposes this bill?
- Center-right organizations (see coalition letter at bottom of Q&A)
- All sizes of banks
- All sizes of credit unions
- Payment card network (e.g., Mastercard and Visa)
What is ATR’s end goal?
- To end consideration of the Credit Card Competition Act and repeal the Durbin Amendment as it exists in federal statute. Both policies are distortionary to the market for debit and credit card transactions.
- Dispelling the myth that Visa and Mastercard are a duopoly. American Express and Discover are two other major players in the payment transactions market (not to mention the rise of fintech payment platforms). In general, antitrust cases should be dealt with in the courts, not in Congress.
Good statistics to have on hand:
- 83% of Americans own at least one credit card.
- According to data cited by the International Center for Law and Economics (ICLE), “86% of credit cardholders have active rewards cards, including 77% of cardholders with a household income of less than $50,000.”
- There is evidence that clearly shows that the Durbin Amendment’s application to debit cards reduced the availability of rewards programs. The Federal Reserve cited a study that found that 50% “of regulated debit card issuers with a reward program ended their programs in 2011.” If the Durbin Amendment is applied to credit cards, consumers will see a drastic decline in the availability of rewards cards.
- After the Durbin Amendment was enacted, approximately 22% of retailers raised prices on consumers while only 1% lowered prices. The putative benefits of the Durbin Amendment for consumers failed to come to fruition.
- According to a study conducted by the University of Chicago, consumers lost between $22 and $25 billion “as a result of the implementation of the Durbin Amendment.”
- Additional federal government intervention in the credit card market is unnecessary because market forces are already ensuring that fees remain at steady levels. In August 2021, the Federal Reserve released a report that shows that interchange fees charged on $40 credit card transactions have remained constant at gas stations, small retailers, and e-commerce.
Coalition Letter organized by ATR in opposition to the bill last year:
August 19, 2022
Dear Member of Congress:
We, the undersigned organizations, oppose the inaccurately named Credit Card Competition Act of 2022 (S. 4674). The bill is a backdoor price control, and extension and expansion of the Durbin amendment as enacted in the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203).
As written, the bill directs the Federal Reserve to draft rules requiring credit cards issued in the United States to offer at least two unaffiliated payment card network options for point-of-sale and online transactions.
According to the bill, the two networks may not both be Visa and Mastercard, because they “hold the 2 largest market shares with respect to the number of credit cards issued in the United States.” However, should market share switch hands to new firms, the routing mandates will no longer apply. The bill also mandates that the proprietary security of the credit cards function so that all networks are available for retailers to pick and choose—consumers get no say whatsoever. In fact, the bill never mentions consumers, nor how they will benefit.
It is abundantly clear that special interest groups are using the federal government to alter the credit card market to benefit themselves and not consumers. This is textbook rent seeking behavior, anathema to free market principles, and should be staunchly opposed by Republican lawmakers.
Furthermore, we oppose S. 4674 for the following reasons:
- The bill does not promote competition, instead it dramatically expands the role of the federal government to overregulate the market for credit cards. Today, requiring multiple dual-message networks to function over one card is technologically infeasible. The cost of overhauling our current credit system to comply with the mandates in the bill could cost up to $5 billion.
- The mandates in the bill are so costly that more than $60 billion in rewards that consumers receive every year would largely disappear. 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.”
- The bill authorizes the federal government to intervene in contracts between private parties. The federal government should not be interfering in private contractual agreements. This encroachment will force small banks and credit unions to severely limit or cease providing co-branded cards that millions of consumers use every day. This is similar to how Biden’s Securities and Exchange Commission is attempting to dictate provisions of contracts between private fund advisers and investors.
- There is no evidence that this bill will pass savings down to consumers. A report from the Government Accountability Office stated that if the regulations in the Durbin Amendment “had not been implemented, 65 percent of noninterest checking accounts offered by covered banks would have been free.” Since the enactment of the Durbin Amendment, about 22% of retailers have raised prices on consumers while only 1% lowered prices. Additional regulation on credit interchange will affect fees and interest in the credit market, thus increasing costs for consumers.
- Because the bill forces credit cards to allow access to all networks, proprietary technology will be exposed to competing networks, destroying incentives to create new and innovative fraud protection and cybersecurity. As one paper points out, the routing mandates “largely undermine the economics of networks and issuers.”
- The bill is a perfect example of Congress ceding its Article I authority to the Federal Reserve. All the provisions of this bill require the Federal Reserve to draft rules to carry out its mandates.
Based on the points made above, we believe this bill is diametrically opposed to free market principles. We encourage all lawmakers to oppose this bill.
Grover Norquist, President, Americans for Tax Reform
Adam Brandon, President, FreedomWorks
Karen Kerrigan, President & CEO, Small Business & Entrepreneurship Council
Eli Lehrer, President, R Street Institute
Steve Pociask, President / CEO, American Consumer Institute
Heather R. Higgins, CEO, Independent Women’s Voice
Tom Schatz, President, Council for Citizens Against Government Waste
Pete Sepp, President, National Taxpayers Union
Andrew F. Quinlan, President, Center for Freedom and Prosperity
David Williams, President, Taxpayers Protection Alliance
Phil Kerpen, President, American Commitment
Jeffrey Mazzella, President, Center for Individual Freedom
James Taylor, President, The Heartland Institute
Jessica Anderson, Executive Director, Heritage Action for America
Brent Wm. Gardner, Chief Government Affairs Officer, Americans for Prosperity
John Berlau, Director of Finance Policy, Competitive Enterprise Institute
Seton Motley, President, Less Government
Ryan Ellis, President, Center for a Free Economy
Ashley Baker, Director of Public Policy, The Committee for Justice
Christopher Butler, Interim Director, Digital Liberty
Paul Gessing, President, Rio Grande Foundation
Dominic M. Calabro, President & CEO, Florida TaxWatch
Gregg Keller, President , Missouri Century Foundation
Yaël Ossowski, Deputy Director, Consumer Choice Center
Bryan Bashur, Executive Director, Shareholder Advocacy Forum
Gerard Scimeca, Chairman, Consumer Action for a Strong Economy
Matthew Gagnon, Chief Executive Officer, Maine Policy Institute
Andrew Langer, President, Institute for Liberty
Annette Thompson Meeks, CEO, Freedom Foundation of Minnesota