OPINION:
Your credit card rewards are under attack from Big Box retailers pushing Congress to pass the so-called Credit Card Competition Act.
Despite being championed by Sens. Dick Durbin, Illinois Democrat, and Roger Marshall, Kansas Republican, as a competition boost in credit card processing, this Orwellian-named legislation forcing major banks to offer an alternative payment network is a cronyist giveaway to retail giants.
These retailers will pocket the savings. Smaller businesses lose along with customers experiencing shrunken rewards, rising fees and weakened fraud protections.
Understanding how the credit card system functions is key to understanding this legislation.
Hundreds of banks worldwide issue credit cards with unique interest rates, repayment terms and rewards programs. That tap or swipe at checkout triggers a sophisticated financial choreography. Although Visa, Mastercard, Discover or American Express are typically emblazoned on the card, they simply provide the digital “interchange” infrastructure connecting your bank to the merchant’s bank. It’s a bank that extends credit.
These complex payment networks work to verify your card and confirm available credit within seconds. Within hours, your card-issuing bank routes money to the merchant’s account on your behalf.
For this service, merchants pay an interchange fee on each transaction, typically between 2% and 2.5%. This fee rose just 0.35 percentage points since 2000. Banks split this fee with merchant processors, using their share to fund rewards programs, fraud protection systems and customer service operations.
Critically, this same fee structure enables merchants to sell on credit without conducting their own credit checks, assuming repayment risk or tying up capital in customer loans. Think about that trade: Merchants get instant payment, zero credit risk and no capital requirements in exchange for a 2% processing fee. It’s a remarkably efficient arrangement.
Forty years ago, retailers wanting to offer credit financing faced a daunting prospect: hire staff to assess creditworthiness, secure substantial capital to fund customer loans and shoulder the risk of defaults — particularly painful during economic downturns. Many retailers tried and failed at this model.
The rise of universally accepted credit cards changed everything. Suddenly, merchants could offer “credit” without extending credit themselves. Banks took on the underwriting, the capital requirements and the default risk. Retailers got paid immediately, in full, with zero credit exposure.
The Credit Card Competition Act would arbitrarily force dozens of leading banks to offer only cards that feature at least two unaffiliated payment networks, effectively prohibiting many cards that run exclusively on Visa or MasterCard. Proponents frame this as “increasing competition.”
But here’s the catch: Merchants, rather than consumers through their choice of credit card, would now pick which network to process each transaction.
Given this new power, many retailers will choose whichever network charges the lowest fee: the bare-bones option with minimal fraud protection and minimal reward programs.
The predictable result: Your bank receives less revenue from interchange fees, leaving less funding for rewards programs, fraud detection and customer service.
The legislation rests on a faulty assumption: that payment processing suffers from insufficient competition. Visa enjoys a 40% share of overall credit card purchase volume, but is in active competition with MasterCard (27%), American Express (10%), and Discover (7%).
Merchants, for instance, frequently refuse to accept American Express due to its higher transaction fees. Some merchants choose to reject credit and debit card purchases altogether. This is competition working exactly as intended.
Overall, credit card purchases account for just 35% of all transactions. Consumers use debit cards for 30% of transactions, an option favored by merchants due to lower fees. For the remaining one in 3 transactions, consumers utilize many alternatives. Cash is used for 14% of all consumer payments and ACH for another 13%.
But other payment options have exploded in recent years, including Venmo, Zelle and Buy-Now-Pay-Later Services. This is evidence that competitive alternatives exist and are being actively utilized.
Retailers promise that reduced processing costs will translate to lower consumer prices. They made the same promise over a decade ago when the Durbin Amendment capped debit card interchange fees under Dodd-Frank. How did that work out for consumers?
The Federal Reserve estimated that while just over 1 in 10 retailers experienced reduced costs, barely 1 in 100 retailers reduced prices in response. Retailers captured the benefits through higher profits, while consumers absorbed the costs through bank fees and lost services. The Credit Card Competition Act promises the same script with an identical ending. Just replace “debit cards” with “credit cards.”
The Credit Card Competition Act is a cronyist shakedown disguised as consumer protection. This legislation won’t lower prices or increase competition. It will gut consumer rewards, weaken fraud protections and transfer billions from cardholders to the bottom lines of retail giants.
• Joel Griffith is the senior fellow for economic prosperity at Advancing American Freedom.
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