The Credit Card Competition Act would hurt successful companies in the name of competition

To reduce costs for consumers, the Credit Card Competition Act aims to increase competition in the payment processing industry and reduce interbank fees by banning the safest and largest credit card processors from full operations. But manipulating the industry would ultimately hurt 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 frustrated by the increased cost of interchange fees and urged Congress to intervene. Interchange fees are costs that companies must pay to accept credit card payments and amount to around 2-3 percent per purchase.

While these fees have always been partially passed on to consumers through higher-priced items, increasingly companies are charging “extra” fees for using a credit card – essentially decoupling an item’s price from the interchange fee. This is partly due to inflation and partly 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 took in $77 billion in interbank fees — a sum they share with partner banks. If passed in its current form, the law would prevent credit card issuers (banks) with assets in excess of $100 billion from processing transactions on the two networks with the largest credit card market shares. (Even if not explicitly mentioned, this means Visa and Mastercard.)

In addition, the proposed law would ban networks that have affiliates 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 that the companies with the greatest economies of scale and safety features should no longer make money from interchange fees for a large part of the market. This is a losing proposition for both credit card processors and customers. In order to get lower processing fees, customers would likely turn to new credit card processing companies that come into the market with less security protocols due to their size. This means that customers using a credit card to purchase goods and services would be at greater risk as their purchase information may be less protected.

A common argument in favor of this law is that lower exchange fees would mean lower end prices for consumers. But that is not true. Economic research shows that demand from credit card users is inelastic. In other words, consumers are not price sensitive to the ability to use a credit card, due in part to the diminishing role of physical cash in society and the increased reward points for using credit cards. Supply to firms that accept credit cards is also inelastic—firms recognize that their sales volume decreases when they do not accept credit cards as a form of payment, and are therefore not price-sensitive to the fees for accepting credit cards. Therefore, both consumers and businesses are willing to pay the exchange fee for buying and selling goods.

Lowering interchange fees by impeding successful deals is not good legislation. Customers and businesses are willing to pay more to use and accept credit cards, but they may not be willing to accept the increased risk that comes with the ban. If the Credit Card Competition Act were passed, the increased savings for businesses would likely not be passed on to consumers because consumers are not price sensitive in the first place.

Danielle Zanzalari is an assistant professor of economics at Seton Hall University, a contributor to the Garden State Initiative and Young Voices.