An op-ed in the New York Times this month made the odd claim that credit card reward points programs are being paid for by the poor. In the piece, Stanford professor Chenzi Xu and graduate student Jeffrey Reppucci note a “credit card perks war,” which the authors trace back to Chase’s 2016 launch of the Sapphire Reserve card and the subsequent slew of products competitors released to try to keep up. The growing set of options for consumers should be seen as a win for the free market, yet the authors disparage rewards programs as upholding the so-called duopoly between the Visa and Mastercard credit card payment networks. Unfortunately, many Democratic and even some Republican officeholders agree with Ms. Xu and Mr. Reppucci’s misinterpretation of the market’s successes.
Enter the Credit Card Competition Act, a dubiously named bill proposed in the Senate last year by Democrat Dick Durbin of Illinois and Republican Roger Marshall of Kansas. The senators wrote the bill to target Visa, Mastercard, and the banks that issue their credit cards. It would require those banks to support at least one credit card network other than Visa or Mastercard. Further, neither the payment networks nor issuers could request exclusivity agreements with the merchants they work with, nor could they require merchants to use heightened security measures exclusive to Visa or Mastercard networks. Through these measures, the act purports to increase competition by making way for more credit networks in the market, supposedly driving down interchange fees to bring savings to consumers. But the senators and the authors of the New York Times piece are wrong to believe that the credit card market isn’t competitive already, and they ignore the trend such competition has precipitated: More people have access to better credit cards, including lower-income consumers.
Credit card companies fighting for business through perks is, in fact, a manifestation of market competition which has led banks to provide credit products for people of varied financial means. Some banks like Chase have taken a diversified approach, offering products for all credit and income profiles while operating on the traditional Visa and Mastercard payment networks. But competition has even extended beyond the big two payment networks. American Express cards prioritize exclusive travel rewards on a payment network separate from Visa and Mastercard. Meanwhile, Discover provides credit cards targeted toward students and young people to develop credit history on a fee-free card with cash-back rewards, also on its own payment network.
Banks aren’t giving out rewards because they enjoy giving freebies to the wealthy. They do so because they make more money through increased transactions, especially from affluent customers. The revenue from those transactions offsets the risk of lending to less reliable consumers with lower spending volume and less consistent payment rates. The poor are not subsidizing rewards; in fact, consumers with poor credit receive more favorable terms because high-credit consumers provide more stable revenue. Like most goods that were once considered luxuries, credit cards with strong perks were first available to big spenders, but market competition has made them more accessible to others. The various credit card networks and many more issuing banks have benefitted high-income and low-income consumers by increasing the options, especially for those who weren’t eligible for credit only a few years ago.
More consumers than ever are taking advantage. According to the Federal Reserve, 84% percent of American adults owned at least one credit card in 2021, including a solid majority of those with family incomes of less than $50,000 per year. By comparison, Gallup found in 2014 that only 71% of adults had credit cards. Despite gripes from supporters of the Credit Card Competition Act, these numbers demonstrate that there is a demand for credit cards among low-income consumers which is being met thanks to existing market competition. Reducing financial institutions’ ability to create profitable products won’t hit the wealthy — businesses will always cater to them. Rather, it will reduce options for lower spenders and the working class, who will be worth less to credit card issuers.
Such attempts to regulate payments have been enacted before and, like most restrictions on the free market, they ended up benefitting big corporations, not individuals. A 2010 amendment to the Dodd-Frank Act introduced by the very same Senator Durbin capped debit card interchange fees—the rate paid by merchants on payments—to 0.05% plus $0.21 per transaction, which let big box stores keep more of the revenue from each sale but didn’t pass savings onto consumers. This lowered revenue for community banks and credit unions, forcing them to charge maintenance fees, cut debit rewards programs, or even shutter their doors. Meddling with credit payments would end the same way.
Senator Durbin plans to re-introduce the bill this legislative session, despite the repeated discrediting of the underlying ideas. Instead of limiting the positive effects that competition has already had on the credit card market, the senators behind the Credit Card Competition Act should promote responsible credit card use to take advantage of what competition has already made available.
