To lower costs for consumers, the Credit Card Competition Act aims to increase competition in the payment processing industry and decrease interchange fees by banning the safest and largest credit card processors from fully operating. But manipulating the industry would ultimately harm consumers.
Sens. Richard Durban (D-Ill.) and Roger Marshall (R-Kan.) introduced the bill in 2022 in response to complaints from small businesses and consumers who are frustrated by increased costs of interchange fees and asked Congress to intervene. Interchange fees are costs that businesses must pay to accept credit card payments, and amount to about 2-3 percent per purchase.
While these fees have always been partially passed on to consumers through higher priced items, businesses are increasingly charging “extra” for using a credit-card — essentially decoupling the price of an item with the interchange fee. This is in part due to inflation and in part due to a lack of price transparency between businesses and consumers. The Credit Card Competition Act would not solve this problem.
The bill aims to curb the perceived market dominance of American Express, Discover, Visa and Mastercard by restricting their ability to charge interchange fees. These companies control 77 percent of the credit card market, and in 2021 they made $77 billion in interchange fees — a sum they share with partnering banks. If passed in its current form, the Act would restrict credit card issuers (banks) that have over $100 billion in assets from processing transactions on the two networks with the largest market shares of credit cards. (While not explicitly named, this means Visa and Mastercard.)
Further, the proposed Act would prohibit networks that have affiliated companies with the credit card issuer from processing the transaction. For example, the Visa Chase Sapphire Card would not be able to use a Visa exchange network.
This means the companies with the largest economies of scale and safety features would no longer be allowed to make money through interchange fees for a large portion of the market. This is a lose-lose for both credit card processors and customers. To get lower processing fees, customers would likely go with new credit card processing firms that enter the market with fewer safety protocols due to their size. This means that customers who use a credit card to purchase goods and services would take on a higher risk as their purchasing information may be less protected.
One common argument in favor of this Act is that lower exchange fees would mean lower end prices to consumers. But this is untrue. Economic research shows that credit card users’ demand is inelastic. In other words, consumers are not price sensitive to the ability to use a credit card, which is partially due to the declining role of physical cash in society and the increased reward points given for using credit cards. The supply of firms accepting credit cards is also inelastic — firms realize their volume of sales will decrease if they do not accept credit cards for payment and, therefore, they are not price sensitive to the fees of accepting credit cards. As such, both consumers and firms are willingto pay the interchange fee to purchase and sell goods.
Lowering interchange fees by hindering successful business is not good legislation. Customers and firms are willing to pay more to have the convenience of using and accepting credit cards, but they may not be willing to accept the increased risk that comes along with the ban. Moreover, if the Credit Card Competition Act is passed, the increased savings to firms would likely not pass down to consumers, since consumers are not price sensitive in the first place.
Danielle Zanzalari is an assistant professor of economics at Seton Hall University, a Garden State Initiative contributor and Young Voices contributor.