By Ray Birch
SCOTTSDALE, Ariz.—If the Credit Card Competition Act is ever passed into law, expect issuers to make up for lost interchange with new types of fees and higher rates—and don’t expect merchants to pass along any potential savings, a new analysis is predicting.
The study suggests the legislation if enacted could price some consumers out of the credit card market, leaving financial institutions with smaller credit card portfolio balances and merchants with fewer sales.
As CUToday.info has reported, the bill requires that cards from financial institutions with $100 billion or more in assets be enabled to be processed over at least two unaffiliated networks – Visa or Mastercard plus a competitor like NYCE, Star or Shazam, or even American Express or Discover.
The financial institution would decide which networks to enable, but merchants would then choose which to use on individual transactions, meaning networks would have to compete over fees, security and service, according to proponents of the bill. Supporters of the Credit Card Competition Act have said it would save merchants and their customers an estimated $11 billion a year.
The legislation, which failed to pass the prior Congress, is strongly opposed by credit unions.
The scenarios outlined above are some of the possible outcomes suggested by Glenn Grossman, director of research at Cornerstone Advisors, who just completed a study titled “The True Impact of Interchange Regulation.”
Glenn Grossman
Programs to Get Squeezed
The report, commissioned by CUNA, studies the impact of the 2010 Dodd-Frank Act’s Durbin Amendment, which implemented debit card routing mandates and debit interchange price caps. The study also addresses the financial impact from the proposed Credit Card Competition Act of 2023.
“As these credit card programs essentially get squeezed, all issuers will have to make tough choices about operating credit card programs, many of which include rewards,” said Grossman. “In the report we show data from the Federal Reserve that studies the profitability of running a credit card program since 2016. The data show the expenses of providing these programs essentially exceed the revenue. The only way you make revenue is through revolving credit, and potentially some fees.”
What Happened in 2010
The report, Grossman emphasized, shows the financial market experienced a significant reaction from checking issuers following the new 2010 debit rules, with the availability of free checking dropping by 40%.
“So, what does that mean for the bulk of issuers? The Credit Card Competition Act is going to tighten what's already a revenue loss component,” Grossman said. “That will mean the other areas that generate revenue will have to essentially get larger, such as fees and interest rates. Credit card programs that are free today may someday charge some type of a usage fee.”
Today that usage fee is called an annual fee, Grossman noted.
“What will the new fees look like and what could they be—say, a monthly fee, who knows…What will these fees do? They will price people out of that product, which will mean a decrease in availability of credit, which means less spending at merchants,” Grossman said.
The Whac-a-Mole Scenario
Whac-a-mole, the arcade game where players attempt to hit a mole on the head as it pops out of a hole before retreating, is the best description for how issuers will react to new credit rules if they are passed, asserted Grossman.
He said he is not only concerned with the resulting more fees and higher rates, but a tightening of credit risk policy if issuers see lower credit card interchange.
“Before this policy issuers could allow for a certain amount of loss, charge-offs,” said Grossman. “Well, they’re making less money. So, they have to tighten credit policies. Now, not only do we potentially have fees that limit access to credit, we may limit available credit or even the ability to get a credit card. If you're a merchant, that's not good news, because these credit cards are used to spend at your establishment.”
The Unintended Consequences
Grossman reminded that the $100 billion threshold in the Credit Card Competition Act, under which the rules do not apply, is not a protection barrier, pointing out how that similar thresholds in the original Durbin rules did not protect smaller institutions’ interchange revenue.
“We use the term unintended consequences, and so the lesson here is that there will be unintended consequences of the Credit Card Competition Act for smaller institutions,” Grossman said.
‘Windfall for Merchants’
If the Credit Card Competition Act were passed into law, merchants and the larger merchants would have a “windfall,” said Grossman.
“They would see a decrease in expenses and on the losing end of that will be consumers and financial institutions,” he said. “The marketing of the Credit Card Competition Act uses the same language as the Durbin Amendment—that this is great for Americans. Well, we had an interchange regulation before and the evidence has shown those merchant savings didn't get passed through. We can look to other countries that have done the same thing on credit cards, and the same things happened there.”
No Plan to Pass Along Savings
Cornerstone’s new research polled small businesses over the issue of whether they would pass on any savings.
“Most said they would not. It's only the merchants that are going to benefit,” Grossman said.
In addition, the proposed rules could also have an effect on fraud costs.
“Let's say these smaller credit unions have to deal with multiple credit card networks over time. Well, that's more overhead cost,” Grossman explained. “Today, they only have to deal with Visa or Mastercard and they have very clear and transparent rules. What we saw with the Durbin Amendment is that these other networks, such as Star, the management cost of playing with them is far higher. It takes more work. The rules are less clear and transparent. Some of the credit unions we spoke to shared how their management costs are upwards of 60% of what their budget is just for debit losses.
“For example, if I have $10,000 budgeted for credit losses that means I have an additional $6,000 plus in management overhead just to deal with chargebacks and fraud, and things like that,” he continued. “It's just going to drive up the cost of managing these programs. That's something that the Federal Reserve does not report today when they report fraud losses. They only report the monetary loss.”
Pain for Underserved Communities
Grossman cited Federal Reserve data that show consumer interest in credit cards is rising, but said he expects that shift could not only slow, but reverse in favor of debit if the Credit Card Competition Act passes.
“The other piece of the puzzle is we could see a contraction in the services that small issuers, like credit unions, provide,” he said, especially rewards programs. “If revenue is squeezed, the smaller issuers may decrease available services. This could hurt underserved communities and individuals.”