"The Credit Card Competition Act"
As inflation has increased, there continues to be debate in Washington about ways to keep more money in consumers’ pockets. The Credit Card Competition Act of 2023 is one option being considered. The Credit Card Competition Act seeks to cap swipe fees charged to merchants and to also increase competition by requiring banks to work with an alternate payment network in addition to Visa or Mastercard. But if passed, the real-life impacts of this bill may have the opposite effect and end up costing consumers more.
When a credit card is swiped, the transaction goes over a payment network like Visa, American Express, Mastercard, etc. The merchant is charged a small fee, called an interchange or swipe fee. This fee averages 1.8 percent of the total transaction and covers the cost of the payment network securely processing the transaction. The credit card issuer, like Credit Union of Colorado, also receives a portion of the swipe fee to cover the costs of lending money for the purchase. These fees also help pay for data security as well as benefits like rewards programs.
Currently, Visa and Mastercard are the largest payment networks. However, competition is increasing due to the rise of alternate payment options such as PayPal, Block, CashApp, etc., in addition to traditional competitors such as Discover and American Express.
The Credit Card Competition Act is not a new idea. In fact, it is very similar to the Durbin Amendment that was enacted in 2010, ending fees associated with debit cards. The Durbin Amendment was meant to save consumers money but that’s not what happened. Reward programs associated with debit cards ended. Only 1.2 percent of merchants lowered prices according to a survey by the Federal Reserve Bank of Richmond. Small financial institutions, like community banks and credit unions, lost between 2 and 30 percent in fees even though they were not supposed to be impacted. A study by the University of Pennsylvania showed that the costs of monthly checking account fees went up by over 70 percent in an effort for financial institutions to recap lost fees. The share of basic, free checking accounts dropped by 50 percent, impacting low-income populations the most.
The Credit Card Competition Act may unintentionally have similar impacts on consumers. The lack of revenue from fees could result in consumers losing credit card rewards such as airline miles and cash back programs or paying increased fees for these benefits. Essential services such as fraud protection would also look much different. Currently, financial institutions absorb the cost of fraud on a credit card with interchange (swipe) fees helping to offset this cost. If fees were eliminated or significantly reduced, consumers could lose this protection like what has happened with debit cards. Continuing innovations, like chips and contactless payments, may be curtailed, ultimately impacting security. And the forced reissuing of credit cards, due to banks and credit unions being required to use alternative payment networks, would cost billions of dollars with those costs potentially passed onto the consumer in the form of higher interest rates.
Most people, whether they are a consumer, merchant or both, understand the substantial benefits of credit cards and electronic payments. From ease of payments, rewards and security for the consumer to increased sales, guaranteed payments and security for the merchant, the benefits for all those who rely on electronic payments would look very different if the Credit Card Competition Act of 2023 becomes law.