The supporters of the Credit Card Competition Act (S. 1838 and H. R. 3881) declare that its passage would reduce costs for merchants and prices for consumers. Its backers, however, ignore the fact that it may very well increase the cost of credit card transactions by abetting an increase in fraud, which would ultimately result in higher costs and reduced access to credit for millions of Americans.
The bill has its origins in an amendment to the Dodd-Frank Act, which requires the 134 largest banks that issue consumer debit cards to add alternative electronic network processing agents, besides the Visa or Mastercard networks. The CCCA effectively extends and expands these rules to credit cards.
Most electronic payment systems involve several parties that facilitate the transaction: the merchant’s bank, the cardholder’s bank, and a network services provider that links the banks. Before 2011, most debit cards designated a single network agent affiliated with the debit card issuing bank.
Processing any electronic payment, whether by debit card or credit card, involves a series of messages and verification services provided by the two banks and the processing network agent connecting them. These services are not costless, and a small percentage of each transaction is typically deducted from the merchant’s proceeds to cover these costs.
In 2011, the Fed’s regulation set a cap on interchange fees that halved the allowed interchange fee on the typical transaction to about 25 cents in addition to requiring covered banks to add additional network agents to their debit cards. Over the ensuing thirteen years, the changes have forced the entry of more than a dozen new processing networks into the debit card processing market.
The regulation of course lowered the average cost of processing debit card transactions, but there has also been an undesirable side effect: increased fraud involving counterfeit debit cards, stolen debit cards, and online “card not present” debit card transactions. In a recent study, I reported that before the rule change, the fraud rate for debit cards issued by the 134 covered banks was the same as the fraud rate for other bank’s debit cards and for credit cards. The fraud rate was about 7.8 basis points, or $7.80 of fraud losses for every $10,000 of transactions processed across all types of payment cards. However, by 2021 fraud losses for the subset of debit cards covered by the Fed’s regulation had more than doubled to 17.5 basis points. The growth of fraud losses for the debit cards covered by the Fed’s regulation was 2.6 times higher than the growth of fraud across the spectrum of all debit and credit types of payment cards.
One explanation for this growth is that since 2011 debit card issuers covered by the new regulations have had to add lower-cost and less secure alternative network processors to the availability lists for their cards.
The proposed Credit Card Competition Act would put credit card issuers under the same non-exclusivity and merchant choice restrictions that debit card issuers have faced for the past 13 years. A likely result may be an increase in credit card fraud comparable to what occurred in the debit card market. I estimate that after ten years of similar fraud growth, credit cards covered by the proposed Credit Card Competition Act could be subject to an extra $6.40 of fraud losses per $10,000 of transactions annually than would likely be the case otherwise, roughly a 40% hike. Such an occurrence would erase nearly all the ostensible savings the bill would engender.
The added fraud losses that banks incur could result in higher interest rates or other fees to cardholders and a curtailment of cash-back or other rewards programs. It could also result in requirements for higher credit scores or deposit minimums for cardholders, effectively reducing credit for the underbanked. It is also likely that card-issuing banks would change their policies in ways that would shift more of the fraud loss burden to merchants.
The proposed bill’s failure to address fraud is symptomatic of a broader failing of the federal government to promote commerce by ensuring the availability of a sound medium of exchange. Thousands of years ago this was achieved by minting coins that were easily recognized as genuine. In the 19th century the government undertook the task of preventing counterfeiting and facilitating the clearance of interbank check transactions.
We are now in a new era of electronic payments, but the federal government has yet to adequately respond with increased penalties and enforcement to combat card fraud. This bill would make the problem worse.
