The federal Credit Card Competition Act of 2023 (CCCA) has been touted as a means to reducing the credit card interchange fees businesses pay to process credit card transactions. But as can often be the case, government schemes to intervene in free-market transactions inevitably create distortions, misaligned incentives, and unintended consequences. Unfortunately, the CCCA would create more problems than it purports to solve.
Interchange fees aren’t just arbitrary costs. They cover a plethora of services: fraud protection, transaction facilitation, rewards programs, and more. By reducing interchange fees, consumers will see the quality of credit card services dramatically reduced.
We’ve seen a similar story play out in the banking industry. A decade ago, the government intervened between consumers and banks when Congress passed the so-called Durbin amendment, which reduced the interchange fee revenue banks rely on. A boatload of unintended consequences followed: banks increased fees on other services, implemented new penalties, lowered interest on savings accounts, and eliminated free checking accounts.
Most troubling, the stricter standards banks imposed after the Durbin Amendment led to one million Americans, primarily from low-income communities, becoming unbanked.
The CCCA would lead to a similar result, with some Americans being excluded from the benefits of credit card networks, and others paying more and receiving less.
While the intention behind the CCCA is to save merchants money, there’s no guarantee those savings will be passed to consumers. Instead, we will see a scenario where merchants pocket the extra profits while consumers grapple with a decrease in card benefits. The potential for this unintended consequence is especially concerning given that the Act lacks mechanisms to ensure these savings benefit the end consumer.
And again, we’ve seen this scenario play out before. The winners from the Durbin amendment were the big box stores like Walmart and huge online retailers like Amazon. Research by the Federal Reserve Bank of Richmond showed that only 1 percent of retailers lowered their prices in response to the interchange fee regulations on debit cards imposed by the Durbin amendment.
It’s estimated big box stores raked in an extra $90 billion in profits at the expense of consumers over the past decade due to the regulations on debit card interchange fees.
The CCCA isn’t just aimed at limiting fees by the big credit card companies, it also hits smaller players like our community and regional banks. Smaller, newer financial institutions use interchange fees to fund their growth and compete with established giants. The Act exempts these smaller financial institutions, but the exemption is meaningless. Like with the Durbin Amendment, it will create an industry-wide impact that hurts community and regional banks, too.
Our leaders in Congress must fight against the Credit Card Competition Act. Any time the government steps in to regulate pricing in a competitive market, massive distortions result. Incentives go out the window. Winners and losers are created. In this case, it’s clear to see that the winners (big box and online retailers) would rake in major profits at the expense of the rest of us.
Republican Sen. Mark Noland serves Senate District 5 in Flathead County. He is the Vice Chair of the Senate Business, Labor, and Economic Affairs Committee. He lives in Bigfork.
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