Interchange and Routing

Impact of the so-called Credit Card Competition Act

Some in congress are proposing legislation that threatens the valuable benefits that consumers receive with their credit cards, like rewards programs. The so-called Credit Card Competition Act would expand government-imposed routing mandates to the credit card market. Proponents of the legislation say it will inject more competition into the market; it’ll do anything but. Imposing government mandates on credit card routing, as this legislation will do, could have negative impacts for community banks and consumers alike.  This bill is being pushed by the biggest grocery, big box, and online retailers and is opposed by travel experts, including The Points Guy.

It could spell the end of card rewards programs. When was the last time you booked a flight using rewards points? Or saved on gas? If you’re like millions of Americans, you probably take advantage of credit cards rewards. Those rewards are supported by the banks and card networks who supply them. This legislation could mean the end of those rewards, as the funding that enables those popular programs would be eliminated.  Debit card rewards went away when a similar law went into effect for those cards and the same will happen for credit if the Credit Card Competition Act (CCCA) is passed.

It could limit community banks’ credit card offerings. The misguided legislation will harm banks of ALL sizes and consumers. Community banks focus first and foremost on serving their community and their customers. For many community banks, one convenient option they provide to customers is credit card services. If routing mandates like the CCCA are imposed, community banks may lose the ability to support credit card offerings for their customers.

It could expose credit cards to data security risks. The key component of this legislation is that it will allow the government to mandate which networks can be used for routing credit cards. Rather than allow banks to choose networks based on security and soundness, they will be forced to use a network the government chooses. Banks and card companies work hard to ensure the networks they use are the most secure; cheaper, alternative networks being pushed by mega-retailers may not have the same priority.

What’s the core issue? Durbin Amendment 101

Every time you use your debit card, the Durbin Amendment comes into play.

In 2010, Congress passed the Durbin Amendment as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act. It contains provisions intended to limit the amount of interchange revenue banks can receive on debit card transactions. These interchange fees are most banks’ largest source of non-interest, non-fee income and is the revenue stream offsetting the cost of offering a checking account.

Rather than save consumers money as promised, merchants pocketed the savings they reaped from the government price cap, while community banks lost a revenue source to support important consumer benefits like free checking and debit rewards.

The Durbin amendment also contained a routing provision mandating that merchants be allowed to choose the networks for routing debit card transactions.

Now, Senators Durbin (D-IL), Marshall (R-KS), Vance (R-OH) and Welch (D-VT) and Representatives Gooden (TX-05), Lofgren (CA-18), Tiffany (WI-07) and Van Drew (NJ-02) have introduced S. 1838/H.R. 3881, new legislation which expands government routing mandates to the credit card market, with potentially disastrous consequences.

How does the Durbin Amendment affect consumers?

After 2010, the availability of free checking and debit card rewards dramatically declined as banks were forced to adjust to lost interchange revenue. And on the routing, many merchants opted for a lowest-cost network, which may not be the most secure. Some low-cost networks do not support basic fraud detection features like text messaging to notify consumers of debit transactions, nor do they always provide bankers the same ability to reverse fraudulent transactions.

This new legislation would impose even more restrictive government mandates on credit card transactions.  Rather than allowing banks to choose networks offering the best customer experience, security, and resiliency, they would be forced to choose among options set by the Federal Reserve.

Ten years after the Durbin Amendment was enacted, consumers have yet to benefit from the lower prices retailers promised; they are harmed by reduced access to affordable deposit accounts and losing out on security benefits protecting them from fraud.

How does this affect community banks?

Community banks have lost substantial revenue due to the cap on interchange fees. This limits investments small community banks can make in staying competitive in a fast-moving payments landscape and their ability to provide the best financial products to meet customers’ needs.

With additional government mandates a possibility if S. 1838/H.R. 3881 is passed, these same banks, which tend to have a lower volume of credit card transactions, may be forced to no longer offer credit cards, as their options and negotiating power would be drastically reduced.

The newest challenge: credit card mandates

Despite the Durbin Amendment’s severe consequences, Sen. Durbin has long sought to expand routing requirements to include credit card transactions for all banks, including community banks issuing credit cards through a third-party agent or revenue-sharing program. 

This newly introduced legislation does just that, mandating government interference in credit card transactions and in turn:

  • Force banks to transmit credit card transactions using companies set by the government, rather than using companies that your bank picks based on factors like reliability and safety
  • Likely mean elimination of important benefits like free checking and credit card rewards programs at many community banks.
  • Require banks accept all types of transactions a merchant requests, which would force banks to frequently reissue cards to meet new retailer demands.

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What can policymakers do? Oppose the Credit Card Competition Act

Policymakers should oppose any attempts to impose the failed results of the Durbin Amendment onto credit card customers. Lawmakers and consumers alike can protect consumers and small community banks by voicing their urgent opposition to these government mandates and the current legislation, S. 1838/H.R. 3881, the Credit Card Competition Act.

Finally, policymakers should also support repeal of the Durbin Amendment, a decade-long failed policy which has only benefited large retailers.