Credit Card Competition Act is a bad deal for consumers
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More than a decade ago, Congress passed an amendment to impose regulations on our debit market. Although their intentions were not to harm consumers, we ended up losing big time. Now, members of Congress are considering passing the Credit Card Competition Act of 2022, which would impose the same types of regulations on our credit market.
The original debit card amendment, called “the Durbin Amendment,” was very damaging. It added a routing mandate to debit cards, which meant that instead of being able to use only the payment networks they know and trust, banks were forced to allow an additional “unaffiliated” network to work on their debit cards. It also capped debit card interchange fees, which are the fees merchants pay to process electronic transactions.
Big-box stores like WalMart and Amazon gained a windfall of extra revenue after the regulations dramatically cut how much they paid to process debit transactions. The interchange fee cap limited the amount they pay per transaction, no matter the size, and the routing mandate forced all payment networks to lower their rates to stay competitive, draining billions out of our electronic payment system and depositing it directly into the pockets of big-box stores.
While big-box stores like Walmart and Amazon raked in an additional $90 billion in profits, they did not use these savings to lower prices for consumers. Georgetown University Professor Vladimir Mukharlyamov and University of Pennsylvania Professor Natasha Sarin studied the impact of the regulations and found “little evidence of across-the-board consumer savings.” Big retailers made billions and gave consumers nothing in return.
It gets worse.
For banks of all sizes, the routing mandates cost them billions which they then tried to make up at the expense of consumers. Banks lost billions in interchange fee revenue, which they used to fund free checking and keep fees and account minimums low. This particularly hurt small and community banks. A 2014 study conducted by the Mercatus Center found that the Durbin Amendment had reduced earnings at nearly three-fourths of local financial institutions.
When banks lost money, they passed these losses down to us by cutting free checking and adding new and higher account fees. A 2017 Federal Reserve study found free checking declined by 35% at large banks and 15% at small banks and that the minimum balance for checking accounts increased by hundreds of dollars. Many low-income families and marginalized consumers rely heavily on free checking and low fees to keep their bank accounts open, so one million Americans lost their bank accounts after the regulations made banking more expensive.
Just like before, big-box retailers will pocket billions more and consumers will pay the price. Banks will lose billions in interchange revenue, which they will again pass onto consumers by raising interest rates, hiking up fees, cutting rewards programs, and raising credit standards. This will make credit much less accessible to low-income families and kick out anyone already on the margins of our credit system. Economists in 2021 estimated this could kick 10 to 15 million people out of our credit system.
Australia implemented similar regulations on interchange fees a few years ago, and now there are no more free credit cards and rewards programs are much less valuable. In total, a move like this in the U.S. will transfer $40 to $50 billion a year away from ordinary Americans and into the pockets of big-box stores.
Medlar lives in Helena.
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