With inflation at a record high, Congress and consumers are worried about how Americans will afford their needs. The Credit Card Competition Act of 2022 aims to bring more competition to the credit card market, reduce interchange fees impacting merchants, and hold prices down for consumers. But the bill could destroy consumer benefits for card use and reduce consumer credit availability, without addressing the highest interchange fees impacting businesses or protecting consumers from high prices. Ultimately, the Credit Card Competition Act represents unnecessary regulation that is designed to rein in financial institutions but ultimately punishes consumers.
There are four major credit card networks in the United States. Visa and Mastercard are the largest of these networks—they serve approximately 83 percent of the U.S. market, and operate a “four-party” model. The four-party model facilitates transactions between the four parties involved in a consumer credit card purchase: the customer, the customer’s payment network (which issues payment), the merchant, and the merchant’s payment network (which receives the payment). Other cards and payment networks, such as American Express, operate a three-party model. In this model, the customer’s bank and the merchant’s bank are on the same payment network, effectively eliminating one party.
Under the Credit Card Competition Act, the Federal Reserve would require large banks using the four-party model to process transactions on two or more affiliated card payment networks, one of which must be a network other than Visa or Mastercard. For example, banks issuing Visa-branded credit cards could process on Visa’s payment network but must also offer processing on a second payment network that is not affiliated with Mastercard or Visa. These changes mirror 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 per-swipe fees that merchants pay when a card is used. The average credit card interchange fee is around 1.8 percent of the transaction total.
Supporters of the Credit Card Competition Act say the change would reduce costs for consumer products by forcing more competitive pricing for credit card interchange fees. But, historically, this change did not benefit consumers. While merchants did save nearly $5.6 billion annually on debit card transaction fees after Dodd-Frank, debit card users paid more. The Federal Reserve Bank of Richmond found in 2015 that merchant savings were not passed to consumers. The majority of merchants maintained prices, while 21.6 percent of merchants even raised prices after the change.
In response to the lost revenue, debit-card issuing banks implemented changes to fees and account structures. Banks raised the average minimum monthly holding requirement for fee-free checking accounts from $250 in 2009 to $750 in 2012, and they nearly doubled the average monthly fees to maintain a checking account from around $6 in 2009 to $12 per month by 2013. Overall, the share of basic, free checking accounts dropped by 50 percent. This change disproportionately impacted low-income consumers, who pay an estimated $1 billion to $3 billion annually due to increased fees, and grew the unbanked population by around one million Americans.
The Credit Card Competition Act would ultimately reduce consumer-focused competition and benefits. There are more than 1,000 credit card issuers marketing directly to consumers in the United States. 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 does not incur fees. This helps incentivize issuers to establish a wide range of credit card products with different credit structures, requirements, and rewards. This could also lead issuers to cease offering credit card usage rewards, as they did with debit card usage rewards after Dodd-Frank. Additionally, if banks and credit unions have fewer incentives to offer credit cards, people with lower incomes or lower credit scores will likely be the first to lose access and could face higher interest rates, worse penalties, and additional fees for card use.
Finally, the Credit Card Competition Act does not address the highest interchange fees impacting merchants. The average credit card interchange fee is 1.7 to 2 percent, but the highest fees come from cards operating the three-party model. Interchange fees for American Express cards, using the three-party model, are estimated to range from 2.3 to 3.5 percent. Despite this, the Credit Card Competition Act only addresses the four-party model.
The Credit Card Competition Act unnecessarily regulates credit card usage at the expense of consumers. It fails to offer a real solution for consumers facing high inflation, address the highest interchange fees imposed on merchants, or protect consumer access to credit during high inflation. For these reasons, Congress should not move forward with this legislation.