In 2022, and then again in 2023, Sens. Richard Durbin (D-Ill.) and Roger Marshall (R-Kan.) introduced legislation that would have required U.S. issuers of most Visa- and Mastercard-branded credit cards to include a second network on their cards, and to allow merchants to route transactions on a network other than the primary network branded on the card. A recent study by Oxford Economics, however, cautions that such legislation could do immense harm to the American economy.
The legislation was misleadingly called the Credit Card Competition Act (CCCA), on the spurious grounds that it would “enhance credit card competition and choice in order to reduce excessive credit card fees.” As I noted in a previous paper, by forcing most U.S. credit-card issuers to include a second network on all their cards, the CCCA would actually remove the choice of network from both the issuer and the cardholder, and place it in the hands of the merchant and the acquiring bank. By forcing networks to compete mainly on price, rather than other attributes, this would almost certainly reduce competition among issuers. As such, the legislation should really be called the Credit Card Anti-competition Act.
A particular concern I raised in that assessment was the likely negative effects on revenue to issuing banks, and the response of those banks to such revenue losses, including reductions in rewards and increases in fees and interest charges. My analysis drew on assessments of various other regulatory experiments, including:
- Durbin’s previous attempt, through an amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, to reduce issuing-bank revenue from debit-card interchange fees. That led banks to eliminate rewards on most debit cards, increase monthly checking-account fees, and raise the minimum amount needed to avoid those fees, all of which particularly harmed lower-income consumers, many of whom were effectively debanked.
- Of particular relevance to the CCCA, the Durbin amendment required that all debit-card issuers include more than one network on their cards. This allowed merchants to route payments over cheaper PIN networks, ensuring that smaller banks and credit unions—who were otherwise exempt from the explicit price controls—were nonetheless harmed as much (if not more) than the larger covered banks. And as with the covered banks subject to the explicit price controls, they ended up passing on much of their losses to consumers through increased fees and reduced benefits.
- The EU’s 2015 Interchange Fee Regulation, which led issuers to increase interest rates charged on credit cards (the differential between credit-card interest rates and the European Central Bank’s base rate rose), and thereby harmed consumers with credit-card debt.
- The Reserve Bank of Australia’s 2003 price controls on interchange fees, which—among other things—resulted in a dramatic reduction in card rewards and an increase in annual card fees.
Ultimately, all these attempts to impose price controls on payment networks have caused net harm to society. While some larger merchants have seen cost savings, they have passed on little if any of those savings to consumers. Meanwhile, smaller merchants typically have not seen a reduction in the fees charged by their acquirers. And consumers have lost card benefits and/or now face higher fees that exceed any reductions in the cost of goods and services paid for with their cards.
The Oxford Economics Study
The Oxford Economics study, commissioned by the Electronic Payments Coalition, assessed the likely economic effects of the proposed legislation during the first four years following implementation. To do so, the authors assumed that the CCCA, like the Durbin amendment, would result in an approximate 50% reduction in interchange-fee revenue. In the case of credit-card interchange fees, this would mean a reduction from around 2% to around 1% of the transaction amount. Using this assumption as their starting point, they then used Oxford Economics’ proprietary macroeconomic model to identify the effects on banks, consumers, and the wider economy.
While the precise effect of the CCCA on interchange fees would depend on many factors, a 50% reduction seems well within the bounds of possibility. In the absence of any other change, such a reduction in interchange fees would dramatically reduce income from card transactions for covered issuers. Oxford Economics concludes that this would “almost eliminate returns,” which seems likely. In response, those issuers would almost certainly reduce various card benefits, such as insurance and rewards, and would likely increase annual fees and interest charged on outstanding credit. (These are all responses that banks have implemented in response to other regulations that have capped interchange fees, as noted above.)
Consumers—particularly those in the middle- and lower-income brackets—highly value rewards programs, as they provide tangible benefits such as cash back, travel points, and discounts. The reduction in rewards would thus reduce the incentive for consumers to use credit cards. Oxford Economics estimates this could reduce consumer discretionary spending by $80 billion. This, in turn, would lead to “an estimated loss of up to $227 billion in economic output over four years, and job losses peaking at 156,000 in the second year after the CCCA’s implementation.”
The Oxford Economics study also found that the effects of the CCCA, if implemented, would be felt disproportionately in metros where recreation/tourism represents a significant proportion of the local economy, estimating losses over four years of as much as $6.5 billion in Miami, $5.8 billion in Las Vegas, $3.7 billion in Orlando, $3.5 billion in Nashville, and $2.3 billion in Hawaii. This could lead to a total of more than 30,000 job losses in just those five cities.
The study also highlights the CCCA’s potential to undermine investment and innovation in the U.S. payments ecosystem. Issuers invest heavily in fraud prevention and cybersecurity, much of which is funded by interchange fees. Lower revenues could lead to reduced investment in these areas, potentially exposing consumers and merchants to greater risks. Reduced revenue would also likely mean a reduction in investment in innovations in payment technology, such as digital wallets and mobile payments. In other words, the CCCA could make the U.S. payments landscape less competitive, less innovative, less diverse, and less secure.
Conclusion
There is some uncertainty as to the likely effects of the CCCA, as nothing quite like it has ever been implemented anywhere in the world. But based on my own work and the Oxford Economics study, it seems highly likely that, if implemented, the CCCA would do immense harm to the economy in general and to regions reliant on recreation and tourism in particular. It would also likely harm airlines, due to the significant income they receive from co-branded cards, and smaller merchants, who would be disadvantaged relative to larger merchants.
