Credit Card Competition Act Will Disrupt the Payments Ecosystem for Banks of All Sizes

The Credit Card Competition Act (CCCA) is intended to remove restraints in the credit card marketplace, ultimately lower processing fees for merchants, and ostensibly lead to savings for consumers.

But critics say the CCCA could introduce harm to stakeholders in the card industry and disrupt an already well-functioning payment ecosystem.

The act aims to require financial institutions that issue credit cards and have more than $100 billion in assets “to enable at least two credit card networks to be used on their credit cards instead of just one, and at least one of those networks must be a network other than the Visa/Mastercard duopoly,” according to a summary of the 2023 version of the act.

We sat down with Indraneel Chakraborty, a Professor at Miami Herbert Business School, the business education unit of the University of Miami, to get his perspective on other effects the CCCA may cause. Chakraborty told us that his research focuses on how financial policies from governments and regulators ultimately impact economic outcomes.

“There are some cautionary tales about how even good ideas have to be kind of recalibrated a little bit to make sure that they do not end up in some unexpected outcomes that we do not want to see happen,” Chakraborty said.

Politicians can introduce regulations that will increase the likelihood of an outcome they’re seeking. But Chakraborty told us that competition is the only force you can rely on for measurable, lasting change.

“If there is fierce competition, and you then try to restrict it by putting in new rules, then that essentially would lead to the market shrinking, which is what I think the Credit Card Competition Act will do,” Chakraborty said. “If you impose extra demands that everybody has to maintain two infrastructures when one exists, what would you do? Increase costs.”

As you begin to carve your own path in the world, you learn some financial lessons that you may not have been exposed to in your youth. For me, that included learning about such necessary nuisances as recurring bills and taxes. But there were some bright spots in those lessons, too.

For example, I wasn’t familiar with credit card rewards in my younger years. But I was happy to discover as I was comparing credit card options one day that card rewards programs allow you to earn points you can redeem for cash back, merchandise, and discounts on travel costs.

In a recent survey conducted on behalf of the American Bankers Association, 91% of respondents said they value their credit card rewards program. The report also revealed that 63% of survey participants indicated they would be disappointed if government regulatory changes caused them to lose their credit card rewards.

That may happen if the Credit Card Competition Act moves forward. Chakraborty told us that, under the CCCA, rewards, fraud prevention programs, and access to cards will decrease. And it may not just be the larger financial institutions that are affected by the act’s stipulations.

More than 9 out of 10 people who participated in a recent survey said they value the rewards program offered through their credit card.

“Many of these smaller card companies and banks are tied up with larger banks who then work with the transaction network,” Chakraborty told us. “If you regulate the larger banks, you will essentially end up reducing their interest in working with the smaller banks and their customers. I think that’s where you would see the biggest loss proportionally in the business.”

Larger banks may have deeper compliance divisions than their smaller counterparts, which means larger card issuers are better suited to accommodate new regulatory initiatives from a workload angle. Larger institutions may also be in a better place financially to work with new regulations. 

Chakraborty said the added costs of complying with additional regulations are proportionally lower for larger banks than smaller ones.

“Little banks will think that this is not worth their time,” Chakraborty told us. “More and more regulations and restrictions have not stopped big banks from becoming larger, but they have stopped the smaller banks from getting equal access in the competitive markets. If you increase the costs on small banks, they’ll go away. This will be one more nail in their coffin.”

Lawmakers may be on to something with their attempts to increase competition in the credit card arena, but they may be looking in the wrong place. Chakraborty said the government’s efforts to increase competition should focus on reducing the regulatory barriers for entry of new payment networks.

He told us that, as it’s currently constructed, the CCCA may lead to a situation where consumers have to shoulder the burden of more payment costs via higher interest rate expenses. But the act could bring more dramatic changes to cardholders as well.

“Consumers could also end up being cut out from the lending network,” Chakraborty explained. “That is bad for the issuing bank. It’s bad for the merchant. And it’s bad for the borrower. I’m all for additional competition. But I think the way politicians are doing this will not get the results they want because there is already a lot of competition.”

Another way the CCCA may harm smaller banks that issue credit cards is by forcing them to move into lines of business they may not have much expertise in to recoup revenues lost on their card portfolios. Chakraborty said the first place for banks in that situation to turn to is real estate, but some smaller banks are already overexposed in the real estate space.

You may think that the Credit Card Competition Act won’t have the negative effects that Chakraborty foresees, but recent history supports his predictions.

The Durbin Amendment, which sets restrictions on debit card interchange fees, affected the rewards that institutions tied to their debit card programs. In fact, Chakraborty said, after the implementation of the amendment, the debit card rewards market has essentially disappeared. And he told us he envisions the CCCA similarly injuring credit card rewards.

“The theme of all these regulations over time is that small banks have been regulated out of the market, eventually,” Chakraborty told us. “And consumers, especially those with low socioeconomic status, will find it tougher to get a bank account, credit card, or start their own business. That is the result of a market that doesn’t increase competition but restricts it.”