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Rediscovering Failed Policies: The Credit Card Competition Act

Posted: Jun 24, 2024

The upcoming 4th of July holiday is projected to be the busiest Independence Day travel week ever. One common way families are making travel affordable is through credit card rewards programs. According to major U.S. airlines, about a quarter of American households have an airline credit, which is how 15 million Americans utilized reward points from these cards to book air travel last year. Indeed, credit card points were responsible for more than 60 percent of frequent flier/reward points issued in 2022.

According to survey data, 71 percent of Americans have a credit card that offers rewards, and nearly half of these card holders rely on their rewards to offset the rising costs of travel and other expenses. Given that federal policies substantially contributed to the inflationary surge over the last three years, it should not surprise that some in Washington are looking to upend rewards programs too.

One downside of churn in Congress is that bad policies, no matter how flawed or failed, are frequently rediscovered. A recent example is the Credit Card Competition Act (CCCA), which is the latest iteration of a decade-plus effort to impose price controls on electronic payment systems such as debit and credit cards. Among industries, this debate pits retailers against payment network participants that include financial institutions and credit card issuers.

Into this inter-industry fight, the so-called “populists” have now parachuted, embracing European-style regulation. A recent post from American Compass, a non-profit favored by the Elizabeth Warren wing of the Republican party, applauds outright price caps on the fees credit card networks charge, known as interchange fees, for the use of those payment systems. The history of price controls suggests that such an approach will fail to achieve the desired outcome and will ultimately harm consumers.

But one need not become steeped in the long history of failed policies to understand the effect of artificially legislating away prices. Rather, examine the recent example of  U.S. embracing price controls with debit cards under the 2010 Dodd-Frank law. The results were predictable.

Nothing about capping fees changes the cost of producing a given service. Capping them simply reduced the revenue stream from that service and redistributed it to counterparties. Research by the Richmond Federal Reserve indicates that those counterparties – retailers – largely pocketed the difference and did not pass along savings to consumers.

Debit interchange fees subsidized less-profitable banking services. With the reduction in fees, these services were reduced, which led to higher fees and reduced access to free-banking banking services, particularly concentrated among lower income Americans. Indeed, debit interchange price controls were estimated to have increased the unbanked population by about 1 million. The same study found that the net effect of reduced services and a windfall to retailers amounted to an estimated annual transfer of $1 billion to $3 billion annually from low-income households to large retailers and their shareholders.

The price control regime, as is typical of many progressive policies, pretended to ring-fence smaller banks from these impacts. But predictably, legislating away market forces failed here again, as about half of surveyed small banks were ultimately impacted by the price controls. And whereas some debit cards offered rewards programs, those have now essentially vanished. In all, according to an estimate by University of Chicago researchers, consumers lost more than they gained, with an estimated loss of $22-25 billion in consumer benefits.

Consumers responded to these forces and shifted more purchases to credit cards. Now these same policymakers are looking to ruin that market too, and are advancing legislation that would likely have similar effects for credit card users. Advocates will retread the same arguments used to advance debit card price controls, but like so many “populist” policies, it’s ultimately American consumers that will be stuck with the tab. And they won’t be able to earn any miles for paying it!