The Detrimental Economic Impacts of the Credit Card Competition Act

The Credit Card Competition Act will increase costs on small businesses and consumers, reduce investment in payment security, and empower regulators such as the Federal Reserve.

If CCCA is enacted the Fed will have more power to regulate consumers’ credit cards decades into the future. This is evidenced by the eponymous Durbin Amendment. Since the enactment of the Durbin Amendment as section 1075 of the Dodd-Frank Act, the Fed, Federal Trade Commission, and Department of Justice have continuously scrutinized how networks charge service fees for point-of-sale and online debit card transactions. Enacting the Durbin Amendment has resulted in the FTC forcing Mastercard to expose consumers’ proprietary personal account numbers to competitor networks. It also gave DOJ the green light to probe “Visa’s proprietary ‘tokenization’ technology.” Now, the government-imposed price cap in the Durbin Amendment is allowing the Fed to lower debit card interchange fees over a decade after Dodd-Frank was enacted. More of the same regulatory interventionism is expected with CCCA.

In fact, CCCA specifically authorizes the Fed to force networks to give up their competitive advantage by handing over their tokenization technology to “all of the payment card networks.” Instead of promoting competition, this bill undercuts it and removes any incentive to invest in better fraud protection and cybersecurity—putting consumers’ personally identifiable information at risk.  

This expansion of federal government power is an explicit example of how to throw free market principles out the window.

The CCCA uses the government to pick winners and losers. The cost of implementing CCCA would be onerous for the U.S. economy. According to one paper, enabling the CCCA routing mandates “would effectively necessitate the replacement or upgrade of the hardware, software, APIs, and operating rules currently being used by every bank, merchant, processor, and payment network in the U.S.—a non-trivial cost.” The paper goes on to discuss that the new system proposed under the CCCA would impose burdens that “would exceed $4.4 billion.”

Small businesses and low-income households lose under the CCCA. According to one study by Cornerstone Advisors, about half of small businesses “are concerned that future credit card regulation could lead to lower credit limits and thus a negative impact on their businesses.” According to the survey, if credit card interchange fees go down, “67% of small businesses stated they would not consider passing on the savings to their customers.”

One study by scholars at Georgetown University and the University of Pennsylvania found gas retailers did not pass savings down to consumers after the Durbin Amendment passed into law. Low-income individuals will also feel the pain from the CCCA. As a result of the CCCA lower-income households may “lose $434 million, close to 22% of the cost borne by all consumers.”

CCCA could also worsen concentration in electronic payments by reducing opportunities for private investment. According to a paper published by the Office of the Comptroller of the Currency, from 1990 to 2008, the market for credit card lending became more concentrated, but “competition increased.” One of the contributing factors was the investment in information technology (IT). The paper explains that more improved IT allowed banks to “screen better, spurring price competition.” Enacting the CCCA would reduce future investment in IT because interchange revenue would dry up—ultimately impeding competition.

Sens. Dick Durbin (D-Ill.) and Roger Marshall’s (R-Kan.) government manipulation of credit card networks also fails to account for consumer welfare. In Ohio v. American Express Co., Justice Clarence Thomas’s opinion pointed out that a credit card market is two-sided. A credit card “is more valuable to cardholders when more merchants accept it and is more valuable to merchants when more cardholders use it.” The majority of the court found the price American Express charged was not any “higher than the price one would expect to find in a competitive market.” Moreover, the court found that “Amex’s increased merchant fees reflect increases in the value of its services and the cost of its transactions, not an ability to charge above a competitive price.”

The increase in prices did not restrict output and consumers were not worse off. This is evidence of a healthy market, not one that needs more governmental oversight.  

CCCA should be swiftly rejected by lawmakers. To do otherwise would be detrimental to American households, small businesses, and the competitive and secure credit card networks that consumers use every day.