According to Consumer Financial Protection Bureau“over 175 million Americans own at least one credit card”, making it “one of the most commonly owned and used financial products” in the United States. Credit card have become so dominant in America that card processors like Visa, Mastercard, American Express and Discover process over 108 million transactions per day.
The popularity of credit cards stems in large part from the substantial benefits they offer American consumers – easy cashless payments, cash back programs, and various miles and rewards. Despite these benefits, Congress is considering reforms that, if passed, would prevent credit card companies from offering these types of rewards.
Washington lawmakers must reject any effort that would see consumers lose access to these popular programs.
In late July 2022, Senate Majority Whip Richard Durbin (D-Ill.) introduced the Credit Card Competition Act (CCCA) with the support of Sen. Roger Marshall (R-Kan.). If approved by Congress, the law would order banks offer the “choice of at least two networks on which an electronic credit transaction can be processed”. Durbin and Marshall raison that by requiring choice in payment networks, merchants can reduce the swipe fees they are forced to pay each time a consumer purchases something with a credit card.
In a press release announcinglegislationsaid Durbin, “This legislation, which builds on pro-competition reforms passed by Congress in 2010, would give small businesses meaningful choice over card networks, and it would allow innovators to gain a foothold in Credit Cards Introducing true competition in credit card networks will help reduce swipe fees and contain costs for Main Street merchants and their customers.
Consumers need only look to the Dodd-Frank Act of 2010 to see the potential dangers of credit card reforms. As part of the Dodd-Frank Act, Congress passed the Durbin Amendment of the same name which capped debit charges and resulted in the decline of reward debit cards, the operation of which was no longer profitable for the banks. Shortly after the Dodd-Frank Act went into effect, JP Morgan Chase notified its customers that its debit reward program would end, followed closely by Wells Fargo and Sun Trust. In addition, banks have also discontinued free checking accounts, hitting consumers right in the pocket and pushing some low-income consumers to be unbanked.
Just as debit card reforms hurt consumers, credit card reforms will too. The biggest victim of this new legislation will be co-branded credit cards, more commonly known as rewards credit cards. Initially created by airlines, loyalty cards are now offered by Hotel chains, mobile phone companies, coffee chains, technology companiesand even grocery stores. To create a rewards card, a business typically relies on a single network processor, an agreement that would be banned if the CCCA becomes law allowing merchants to choose the network to process their payments. Such bans will make it almost impossible to offer rewards cards to consumers and it will mean higher annual fees for people who want to keep their credit cards.
The loss of reward credit cards will lead to a significant decline in consumer welfare. According to Electronic Payments Coalition (EPC), “87% of cardholders had a rewards credit card” and 96% of rewards cardholders rate their card-based rewards programs as “very or somewhat helpful.” These statistics highlight the reality that changing the way rewards cards work would prevent consumers from accessing a product they are extremely happy with.
Plus, eliminating rewards credit cards would also hurt merchants, the very people the CCCA was supposed to help. According CPE, “compared to a non-rewards consumer credit card, a rewards card is associated with an average transaction size 25-60% larger.” For traders, increased transaction sizes mean increased revenue and profitability which, in turn, can be reinvested into their business.
This legislative proposal has another serious downside, as it could divert traffic to lower-cost payment networks. However, these networks are inexpensive because they do not have the same cybersecurity protections as major credit card networks. This means that consumers, merchants and banks are more susceptible to security breaches and fraud.
Considering that no elected official would intentionally want to make things worse for their constituents, we can only assume that Durbin and Marshall had good intentions when they introduced the CCCA. Unfortunately, good intentions do not always equal good policy. The CCCA will undoubtedly cause the federal government to withdraw popular credit card rewards programs from consumers.
In the interests of consumers and merchants, Congress must put an end to these dangerous proposals because the unintended consequences will harm those it intends to protect.
Steve Pociask and Edward Longe wrote this for the American Consumer Institute. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.