Amidst record-high inflation, global conflict and a heated presidential race, there is immense pressure on elected officials and regulators to take action and provide relief to Americans. In Congress, I’ve urged my colleagues to think about economic issues critically and avoid succumbing to dogma or the catchiest soundbites.
As bankers are well aware, offering false promises to consumers while claiming to “hold banks accountable” is a hallmark of politicians chasing a headline without any regard for the practical consequences of their misguided policies.
Perhaps the most notable recent example of this is the Credit Card Competition Act, the latest attempt to eliminate credit card interchange fees. Since the Durbin Amendment in the 2010 Dodd-Frank law capped interchange fees on debit cards, proponents have pushed to do the same on credit cards. What they fail to acknowledge is how not a single consumer benefited from the debit cap. In fact, it was just the opposite. Consumers who once enjoyed cash back or other rewards on their debit cards lost those benefits. Free checking largely disappeared, fees increased, and minimum balance requirements became more prevalent.
While debating the Durbin Amendment, I was repeatedly told retailers would pass savings on to consumers, so at least the public is enjoying the savings, right? Like me, you probably knew then and you absolutely know now, those benefits were never going to make it to consumers. Study after study shows customers never saw any savings — only a loss of benefits.
It begs the question: After 13 years with no evidence of benefits to the economy or everyday Americans, why are these efforts still popping up? Have they learned nothing?
As far as I can tell, the only lesson learned was how capping privately negotiated fees can only pass Congress when one party holds the White House, the House of Representatives, and a supermajority in the Senate, as was the case in 2010. Supporters of free markets largely disagree with government caps on private negotiations. So, to win support on the Republican side of the aisle, those crafting the policy (lawyers and political consultants of the nation’s largest retailers) shifted from a cap to the much more palatable notion of competition. To their credit, it worked. The bill has Republican sponsors in both the House and Senate — but not nearly enough support to pass the House.
While some of the mechanics and messaging have changed, this bill would still lead to cutting services and benefits without achieving savings for consumers. In fact, this time around, the consequences would be even more devastating for customers.
What proponents of the Credit Card Competition Act apparently do not understand is that services cost money. When you eliminate the ability to pay for a service, you eliminate the service itself. Interchange is no different. Reports about credit card rewards disappearing are true — an account would not earn or obtain points if the charge doesn’t occur on the point provider’s network — but the loss of fraud protection would be devastating to small retailers and consumers.
As everyone reading this knows far too well, when a large retailer experiences a data breach, banks must reissue thousands of credit cards and reimburse hundreds of thousands, if not millions, of dollars in fraudulent charges to consumers. Thanks to interchange fees, financial institutions, not the merchant exposed to the attack, cover those costs. I can only imagine the reaction of consumers if they were to learn their coverage no longer existed, and they would have to simply accept their money has been stolen or sue the merchant and fight it out in court. It’s the reality consumers would be facing under this proposed bill.
Small retailers would face a similar dilemma. While the Walmarts of the world could afford to take on some liability — make no mistake, they have no intention of doing so — the quick shop on the corner cannot. Instead of a minimal charge to use credit card services, they would be forced to buy additional insurance to protect against data breaches and fraud or face bankruptcy when things go wrong. Particularly in small communities, the added expense could spell disaster for the local economy.
Some have suggested card issuers and banks should simply continue covering losses out of the goodness of their hearts. Serious people understand that is fantasy. Not only would it be a breach of a bank’s fiduciary duty to its customers and shareholders, but banking regulators would also quickly step in (rightfully so) for safety and soundness reasons. Again, services cost money and cannot exist without the ability to pay for them.
I am not naïve to the reality of political posturing when it comes to banking policies. Again, financial institutions have long been an advantageous target for progressives. There are public supporters of the Credit Card Competition Act and other disingenuous bills aimed at the financial services sector who know the economic damage their bills would cause — particularly to low-income families. They’re content to let those of us who take these issues seriously protect them from themselves while they falsely claim to be the champion of the people their policies would hurt the most.
But not everyone falls into that category. Plenty of legislators believe this is the right thing to do. Part of my job as a senior member of the Financial Services Committee is to help my colleagues on and off the committee understand issues with which they’re not familiar — just as I lean on my colleagues with expertise in other fields to help shape our conference’s policy agenda. Ultimately, we all answer to our constituents, and I am grateful for the consumers and community banks who have expressed the concern we share with this misguided legislation.
