Americans for Tax Reform vehemently opposes the Credit Card Competition Act of 2022. The bill is sponsored by Senators Dick Durbin (D-Ill.) and Roger Marshall (R-Kan.). Reps. Peter Welch (D-Vt.) and Lance Gooden (R-Texas) introduced the House version of the bill.
If enacted, the bill would alter the landscape of credit cards to where multibillion-dollar retailers would gain significant control of payment processing at the expense of consumers. This is rent seeking at its worst. Like the 2010 Durbin Amendment that was enacted in Dodd-Frank, the bill’s system of credit routing mandates would impose de facto price controls, raising prices and limiting credit card options for consumers. It will also eliminate consumers’ right to choose the routing network that works best for them.
The bill drastically expands the role of the federal government to overregulate the market for credit cards. The provisions of the bill direct the Federal Reserve to draft regulations to mandate that at least two unaffiliated payment networks are enabled for each credit card. Requiring multiple dual-message networks to function over one card is technologically infeasible today, and so costly that more than $60 billion in rewards that consumers receive every year would largely disappear. Consumers use rewards cards to receive cash back for groceries, gasoline, airline tickets, and even cryptocurrency.
The Durbin-Marshall bill is a perfect example of the federal government intervening in contracts between private parties. It is similar to how Biden’s Securities and Exchange Commission is intervening in contracts between private fund advisers and investors. Government encroachment in these contractual agreements will force banks and credit unions to severely limit or cease providing specialty credit cards, such as co-branded cards, that millions of consumers use every day.
Co-branded cards offer a variety of uses to consumers. CNBC reported multiple types of co-branded cards that consumers benefit from. Pet owners, wine enthusiasts, gamers, rail commuters, Star Trek fans, and airline passengers all benefit from the co-branded cards. Enactment of this legislation would make it nearly impossible for banks, credit unions, and payment card networks to continue to service these cards, eliminating the billions of dollars of rewards that consumers are used to.
This is government intervention at its worst. Not to mention, the contents of this bill are a perfect example of Congress ceding its Article I authority to the Federal Reserve. The sponsors are relying on bureaucrats to implement the mandates in the bill.
The bill goes further by mandating that the “authentication, tokenization, or other security technology” of the credit card must be designed in a way that all payment card networks can be used during a payment transaction. In other words, any new cybersecurity innovation in payments will have to be given away for free to competing networks, destroying any incentive to innovate in the market.
The cost of replacing all the credit cards has been estimated to be around $5 billion. Some academics have found that the higher costs from the routing mandate, “could result in some consumers finding it more difficult to obtain a credit card altogether.”
The bill is likely unconstitutional because it violates the Bill of Attainder Clause under Article I, Section 9 of the Constitution. The bill punishes the two largest payment processing companies by prohibiting banks and credit unions from only issuing credit cards that use the payment networks “that hold the 2 largest market shares with respect to the number of credit cards issued in the United States.” Even more astounding is that if the Federal Reserve determines that the market share for the 2 largest firms have changed, then the restrictions will no longer apply. This bill is clearly using the government to target two specific companies, Visa and Mastercard, while ignoring the collateral damage to small financial institutions and consumers. This sets a horrible precedent that no Republican should support.
Fees on credit cards are necessary to use for investment in new payment technologies to prevent fraud and cover the risk of default if a borrower fails to make payments. In 2020 alone, more than 300 million consumers were affected by data breaches. New investments in fraud protection are necessary to stay ahead of bad actors.
Fees on credit are also important because they cover the cost of risk of default associated with offering unsecured revolving lines of credit. Even Sen. Durbin has admitted that fees on credit cards are warranted considering the risk associated with defaulting if a borrower is unable to make payments. In 2010, Sen. Durbin said:
Let me give you an example. About half of the transactions that take place now using plastic are with credit cards, and there is a fee charged—usually 1 or 2 percent of the actual amount that is charged to the credit card. It is understandable because the credit card company is creating this means of payment. It is also running the risk of default and collection, where someone does not pay off their credit card. So, the fee is understandable because there is risk associated with it.
This legislation is the antithesis of free market public policy. Consumers lose while multibillion dollar retailers win under this legislation. ATR encourages all lawmakers to oppose this bill.