The recent record high inflation rate has been a source of concern for both Congress and consumers, as they worry about how people will be able to meet their basic needs. The Credit Card Competition Act of 2022 has been introduced with the intention of bringing more competition to the credit card market, lowering interchange fees for merchants and holding down prices for consumers. However, this legislation could have the opposite effect. It may result in the elimination of consumer benefits associated with credit card use and reduce the availability of consumer credit, all without addressing the high interchange fees that are having a major impact on businesses or offering any protections to consumers against high prices.
There are four major credit card networks operating in the United States, with Visa and Mastercard being the largest, serving approximately 83 percent of the U.S. market and using a "four-party" model. The four-party model enables transactions between the customer, the customer's payment network (which issues the payment), the merchant, and the merchant's payment network (which receives the payment). Other cards and payment networks, such as American Express, use a three-party model, which brings the customer's bank and the merchant's bank onto the same payment network and effectively eliminates one party.
The Credit Card Competition Act requires large banks using the four-party model to process transactions through two or more affiliated card payment networks, one of which must not be affiliated with either Visa or Mastercard. For example, banks issuing Visa-branded credit cards can still use Visa's payment network, but they must also provide processing through a second payment network that is not affiliated with Mastercard or Visa. This change is similar to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which mandated the use of at least two networks for debit card transactions and capped debit card interchange fees. Interchange fees are the per-swipe fees that merchants pay when a card is used, and the average credit card interchange fee is around 1.8 percent of the transaction total.
Those who support the Credit Card Competition Act argue that the change will reduce costs for consumer products by promoting more competitive pricing for credit card interchange fees. However, history has shown that this is not always the case. After the Dodd-Frank legislation, merchants did save nearly $5.6 billion annually on debit card transaction fees, but consumers paid more as a result. A 2015 study by the Federal Reserve Bank of Richmond found that merchant savings were not passed on to consumers. The majority of merchants kept their prices the same, and 21.6 percent of merchants even raised their prices after the change.
In response to the loss of revenue, banks that issued debit cards made changes to their fees and account structures. The average minimum monthly holding requirement for fee-free checking accounts rose from $250 in 2009 to $750 in 2012, and the average monthly fees for maintaining a checking account nearly doubled from around $6 in 2009 to $12 per month by 2013. This resulted in a 50 percent decrease in the availability of basic, free checking accounts, which disproportionately impacted low-income consumers and led to an estimated $1 billion to $3 billion in annual fees for these consumers. It also caused a one million increase in the number of unbanked Americans.
The Credit Card Competition Act would have the effect of reducing consumer-focused competition and benefits. There are over 1,000 credit card issuers in the United States that market directly to consumers, and the market is large because interchange fees allow credit issuers to profit from any credit card usage, even if the user pays their balance and incurs no fees. This incentivizes issuers to offer a wide range of credit card products with different credit structures, requirements, and rewards.
While the bill may aim to bring competition to the credit card market and reduce costs for consumers, there is evidence from the Dodd-Frank Act that similar regulations did not benefit consumers in the past. Instead, debit card users faced increased fees and reduced access to free checking accounts, with the burden falling disproportionately on low-income consumers.
Given these concerns, it may be advisable for Congress to reevaluate the Credit Card Competition Act and consider alternative measures that better address the challenges of high inflation and the needs of consumers. It is important to strike a balance between regulation of financial institutions and protecting the interests of consumers. Without careful consideration, the Credit Card Competition Act could end up doing more harm than good.
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