By Nirav Shah
Wealth of Geeks
The Credit Card Competition Act was proposed in 2022 by Sens. Richard Durbin (D.-Ill.) and Roger Marshall (R.-Kan.). Though the legislation failed to make any headway last year, it’s back again with new supporters in both houses of Congress.
The proposal has been attached to the annual defense authorization of Congress, causing widespread apprehension nationwide. If the Credit Card Competition Act (CCCA) passes, it will likely make the future of cashback credit cards and credit card rewards uncertain by impacting how credit card issuers provide cash back, miles rewards, and points.
While this bill will benefit retailers significantly, consumers may have to bear the brunt of it. Like thousands of people across the United States, many young physicians with debt are apprehensive.
—————
What Is the Credit Card Competition Act?
The Credit Card Competition Act concerns credit card transactions and network access. According to this bill, financial institutions with an asset of more than $100 billion will be forced to offer merchants more authority to route credit card transactions. The CCCA stipulates that two or more unaffiliated networks other than Visa and MasterCard must be available to consumers — usually Discover or American Express. Smaller networks such as NYCE, STAR, or SHAZAM can also enter the fray with new competitors.
Supporters of the bill feel the Act may lower store prices. However, opponents argue there is a threat of decimation of the perks that come with credit cards. Numerous industry experts feel this legislation will harm consumers in multiple ways.
—————
Why?
According to a study by Wells Fargo, almost three-quarters of the U.S. population uses a rewards credit card. These rewards are paid by credit card companies, in part, through interchange fees. The fee payment processors charge for transaction handling and processing while swiping, tapping, or dipping the card. This fee can range from 1.30% to 3.25% of the set amount.
With millions of such transactions yearly, this is a profitable practice for banks. In fact, the fees take in so much money, they also cover the cost of banks providing rewards to consumers for their spending.
Over 80% of the market share of the credit card processors belongs to Visa and MasterCard. In April 2022, both companies decided to increase their fees. Senators Durbin and Marshall objected to these changes and sent an objection letter to the CEOs of Visa and MasterCard. Both companies raised many of their fees anyways. These developments led the Senators to introduce the Credit Card Competition Act in 2022 and again in 2023.
Credit Card Competition Act proponents claim it will end the dominance of Visa and MasterCard, promoting fair competition among processors. This may reduce the transaction costs for merchants, allowing them to pass on these savings to consumers by offering lower prices.
Durbin sponsored similar legislation more than a decade ago, commonly known as the Durbin Amendment to the 2010 Dodd-Frank Act. This bill addressed reducing swipe fees on purchases using debit cards. The argument was the same: increasing the savings for merchants and passing on those savings to consumers. However, multiple studies concluded the Durbin Amendment had little or no impact on retail prices.
The Federal Reserve Bank of Richmond published an economic brief in 2015 reporting over 21% of merchants actually raised their prices after implementing this act. Similar findings were revealed in a 2019 study conducted by the University of Pennsylvania Carey Law School. According to this study, in their efforts to replace a defunct revenue stream, banks started charging higher annual fees for financial products, which led to higher prices.
—————
Credit cards help consumers
Of the many different ways consumers may be affected by the Credit Card Competition Act, card rewards are one of the biggest concerns. After the implementation of Sen. Durbin’s amendment in 2011, debit card rewards almost disappeared. The act removed the most crucial funding source for these rewards by capping interchange fees. Sen. Durbin argued lower prices would benefit consumers, but the merchants mostly pocketed these savings.
The Credit Card Competition Act would not explicitly cap the interchange rates. The idea is to lower the fees by making the field more competitive. While this sounds like a noble objective, the fact remains it leaves consumers empty-handed if the retailers pocket the difference.
In taking away benefits such as cashback from everyday Americans, the Act may benefit large retailers by providing them with lower processing fees. Along with credit cards for personal use, even the best business credit cards are likely to be impacted by this proposed legislation.
Access to credit is another serious concern related to the Credit Card Competition Act. Even the minor financial institutions exempted from these new rules believe the proposal may limit an average American’s access to credit. The National Association of Federally-Insured Credit Unions president and CEO Dan Berger says consumer spending accounts for more than 70% of the U.S. Gross Domestic Product (GDP), and credit cards are the primary drivers of this spending.
He feels that credit availability for small businesses and consumers may suffer because of disruptions caused to credit unions issuing credit. As credit unions and banks are likely to have fewer incentives for offering credit cards, individuals with low credit scores and lower incomes may lose access almost immediately.
Ensuring consumer data security could be another headache if the Credit Card Competition Act passes. As the most trusted card networks, Visa and MasterCard are serious about data security and invest in maintaining the reliability of their payment networks. The economic incentive for this investment may be lost with the passing of this bill. Moreover, the new competitors entering the fray may not be as secure and reliable as the ones consumers have used for years.
—————
Credit cards help physicians navigate debt
Like thousands of people nationwide, young physicians have expressed their doubts about the potential ramifications of the Credit Card Competition Act.
“As a resident, fellow, and early attending out of training, there are significant gaps between paychecks, and credit card rewards have become a mainstay for all of us during those periods. Imagine you graduate in May and sometimes do not receive a paycheck till July 31st. There’s simply no way to manage expenses like this, and many financially thoughtful students have had to deal with it,” says Kunakorn Atchaneeyasakul, M.D.
Another physician resident anonymously reported selling furniture because their income and costs are so high they cannot immediately afford the professional clothing required for their jobs.
The National Defense Authorization Act’s Senate version for the 2024 fiscal year has over 800 amendments proposed alongside the CCCA. Typically, only a fraction of these amendments will make it into the bill’s final version on the Senate floor for voting. To become a law, it must be passed by the House of Representatives and receive the President’s signature. Consumers opposing the bill can contact their elected officials to share their views
