Most small businesses begin as an idea and a dream. Through risk-taking, creativity and sweat those dreams become the economic lifeblood of local communities across America. This activity has provided a pathway for millions to achieve prosperity and financial security. Moreover, the American public recognizes the hard work and authenticity that entrepreneurs bring to their enterprises: “Small Business” is the most trusted institution in America, according to Gallup.
That is why most members of Congress wrap themselves in the small business flag, especially around election time.
Unfortunately, some members of Congress are advancing and supporting legislation that would turn back the gains that have eased the path to startup activity and the innovative tools that generate the sales needed to compete and survive against bigger competitors and in the digital economy. The Credit Card Competition Act (S. 1838/ H.R. 3881) sounds like a bill that small businesses should support, but the effects – driven by federal credit card routing mandates - would have negative, far-reaching consequences for entrepreneurs and their small businesses.
To understand the damaging implications of proposed credit routing mandates, one needs first to understand the precedent set by debit card routing mandates. Debit routing regulations came about in 2010 under Dodd-Frank legislation (the Durbin Amendment) and provide a similar framework and the legislative goals to credit card mandates sitting before Congress today.
Debit routing mandates significantly reduced revenue for local financial institutions that invest in the payment networks consumers use to purchase goods and services. This disruption had a direct impact on the communities and small businesses that small banks and credit unions serve, and contributed to the elimination of benefits like free checking accounts, the reduction in capital lending to launch and expand a business, and quite possibly pushed a significant number of community banks and credit unions over the edge, which led to ultimate closure. More than 5,000 community banks and credit unions have shuttered in the 13 years since enactment of debit card routing mandates.
The winners of debit regulation, via restrictions on interchange fees, have been large retailers – not small businesses or consumers. The Durbin Amendment purportedly exempted community banks and credit unions from debit routing mandates, yet data from the Federal Reserve shows that their interchange revenue still plummeted. As our organization has noted time and again, federal regulation has a disproportionate impact on small players across sectors, and the case was and is the same for small banks and financial institutions that serve local communities. Expanding routing mandates to credit cards would exacerbate this problem, and create even more headwinds for small financial institutions.
Credit card routing mandates will erode the tools that small business owners rely on to remain competitive. Valuable services provided by card issuers and payment networks, such as fraud prevention, new technologies development, and payment system infrastructure maintenance, would be greatly impacted. The consequence of price regulation is the decline in the quality of service available to merchants and choice and innovation in options, which ultimately hurts small businesses and the U.S. economy.
The significance of electronic payment options for entrepreneurs and startups cannot be overstated. According to a survey conducted by the Small Business & Entrepreneurship Council, access to electronic payments was identified by 87% of new business owners as an essential tool that helped them launch their enterprises during the pandemic. In fact, it tied for first place as the most crucial tool or technology for starting a new business.
In addition, as consumers who use popular credit card rewards programs, entrepreneurs and small business owners would lose access to these programs. The legislation would lead to the elimination of funding that makes these popular credit card rewards programs possible, which helps consumers and small businesses pay for everyday goods and services. These rewards programs are extremely popular with small businesses owners due to increased savings and easier expense management. As noted by Brian Kelly, The Points Guy, on CNBC: "Simply put, this bill is going to take the value from consumers that they get from points and put it to the bottom line of retailers."
It is crucial that U.S. lawmakers and policies take a proactive approach in supporting small businesses by supporting the U.S. electronic payments industry. By doing so, we can strengthen an environment where Main Street businesses can thrive in the post-pandemic economy, weather economic downturns, and compete in the global marketplace.
The credit card routing mandates proposed in the S. 1838/ H.R. 3881 bill would disrupt and harm the ecosystem that has provided immense value to small businesses and the startup ecosystem.
Lawmakers must recognize the negative, downstream effects of this legislation, especially on small businesses. The burden imposed through credit card routing mandates would harm entrepreneurs and their enterprises. This intrusive regulation must be rejected so that true competition can flourish across all sectors of the U.S. economy.