Credit card competition law threatens future of local banks and credit unions
Thousands of Virginians in underserved areas, such as low-income neighborhoods and communities of color, depend on small banks because they invest in neighborhoods that aren’t as profitable for big banks. We need to protect our local credit unions and banks, which is why Congress needs to defeat the Credit Card Competition Act of 2022.
The Credit Card Competition Act is an obvious cash grab on businesses by big retailers like Amazon and Walmart at the expense of ordinary consumers and smaller local banks. It aims to add regulation to our credit card market which will have a significant impact on our electronic payment system. The settlement, known as the routing mandate, will require banks offering credit cards to add an unaffiliated payment network to their cards so retailers can have more choice over which payment network to use.
This is ideal for big-box stores, which will be able to choose cheaper, often less secure networks over which to process credit card payments. In response, payment networks will reduce their merchant interchange rates, the fees merchants pay to process transactions electronically, so they can stay competitive with cheaper networks. This will create a “race to the bottom” where interchange fee rates for merchants will fall and interchange fee revenues for banks of all sizes, including small banks, will fall.
How am I so sure this will happen? Because it already happened with debit cards twelve years ago. Congress passed a similar amendment called the “Durbin Amendment” that added routing warrants to debit cards, which allowed giant retailers like Walmart and Amazon to reap $90 billion in additional revenue. They were supposed to pass those savings on to consumers, but according to the Federal Reserve Bank of Richmond, 99% of retailers either kept prices the same or raised them after the amendment passed.
That $90 billion came straight out of the pockets of local banks and ordinary Americans. A report by the Credit Union National Association found that regulation caused credit unions to lose $1.1 billion in 2016 alone. A 2014 study by the Mercatus Center found that regulation reduced revenue nearly seventy-five percent of local financial institutions. In response to the billion-dollar losses, smaller banks have had to cut services that many financially marginalized people need, such as free checking accounts and accounts with low minimum balance requirements. The big banks have also drastically reduced free checks and increased their fees.
Now the same big companies are trying to push through the Credit Card Competition Act of 2022 and extend those routing mandates to the credit market. They claim that the bill exempts small banks, but in reality they will still be affected. A 2017 Federal Reserve study found that the negative consequences of routing mandates are felt by both regulated and exempt financial institutions.
Since the credit market is larger than the debit market, economists reported in 2021 that extending these regulations to credit cards could result in $5 billion to $10 billion in annual revenue losses for banks. community and local credit unions. This means that banks of all sizes will have to reduce their borrowing costs, which will translate into less valuable rewards programs, higher interest rates, and tighter credit restrictions, making access even easier. difficult for people in difficulty. This will transfer $40-50 billion a year from local consumers and banks and straight into the pockets of big-box retailers.
We cannot afford to lose our small community banks. These banks help service people in our underserved communities where big banks don’t want to invest. Congress must reject the Credit Card Competition Act of 2022.
Andrew Whitley is the former executive director of the Democratic Party of Virginia.