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? Interchange 101
Interchange is a fee charged to merchants to facilitate their ability to accept debit or credit cards. This fee is revenue to the card issuer, which is used to fund card fraud prevention and protection, invest in payment system upgrades, and offset the cost of other free or low-cost banking products.
In 2010, Congress passed what is colloquially referred to as the Durbin Amendment as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act. The Durbin Amendment created a government mandate that imposed a price cap on interchange fees and provided that merchants, rather than card issuers, be allowed to choose the payment networks for routing debit transactions.
In recent years, merchants have claimed that interchange fees should be further lowered and that government-imposed limits should apply to credit card interchange as well. As a result, some in Congress and federal regulators are pursuing policies that would further limit interchange revenue for banks of all sizes.
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, the so-called Credit Card Competition Act, legislation which would expand government routing mandates to the credit card market. Additionally, the Federal Reserve is proposing to lower the interchange price cap on debit transactions under Regulation II.
How’s does this affect consumers and community banks?
Ten years after the Durbin Amendment was enacted, consumers have yet to benefit from the lower prices merchants promised. Additionally, after 2010, the availability of free checking and debit card rewards dramatically declined as banks were forced to adjust to lost interchange revenue. And due to the debit routing mandates, many merchants opted for a lowest-cost network, which tend to be less secure. In short, thanks to the Durbin Amendment, consumers have less access to low-cost banking products and are losing out on security benefits protecting them from fraud.
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 hampers their ability to provide the best financial products to meet customers’ needs. Further price caps or government mandates on interchange could force some community banks to no longer offer credit cards, as the cost of maintaining and operating a card program would exceed the revenue generated for smaller- volume issuers.
What can policymakers do? Oppose the Credit Card Competition Act and withdraw the proposal to lower debit interchange caps.
Policymakers should oppose any attempts to double-down on the failed results of the Durbin Amendment or expand them onto credit card customers. Protect consumers and small community banks by voicing your urgent opposition to the so-called Credit Card Competition Act and the Federal Reserve’s proposed rule to further lower debit card interchange fees.