An official with the Electronic Payments Coalition said that pending federal legislation governing interchange rates on credit cards, similar to those mandated in Europe nearly a decade ago, may have an unintended side effect: Less availability for credit and more consumer fees.
The “Credit Card Competition Act” (CCCA), introduced by Senator Richard J. Durbin (D-Ill.) as Senate Bill 1838, would require banks to offer merchants at least two network options, one of which cannot be Visa or MasterCard, for processing credit card transactions.
When previously asked to comment on whether or not the proposed law would affect the level of national credit card debt, EPC’s Managing Director of Communications Nick Simpson said it would not— albeit with other, potential accompanying effects.
“The Durbin-Marshall bill is related to credit card interchange rates, which would not impact payments. There is, however, proof from the EU [European Union] where interchange is capped, that shows a reduction in credit availability and an increase in consumer fees,” EPC’s Managing Director of Communication Nick Simpson said.
The European Union capped credit card interchange rates in 2015.
According to a document issued by the EPC, “Europeans, as a result of government mandates, have significantly restricted access to credit cards, and those with cards face fees up to 105% higher than American cardholders.”
European consumers have to contend with a trifecta of challenges, with less access to open credit card accounts, fewer options in selecting from companies with which to open accounts and higher annual fees on those accounts, the EPC says.
“More than 80% of U.S. adults use and have access to credit through credit cards. In continental Europe, those figures hover below 50%, and are as low as 18% in parts of Eastern Europe. And a majority of those credit products in Europe are merely ‘deferred debit’ charge cards. Following new government mandates, the number of credit card options decreased by 14% between 2014 and 2018,” according to the EPC, citing reports from Argus Advisory Research.
“The average annual fee on consumer credit cards went up 13% after government caps were imposed. Cardholders pay fees 17% higher in Italy, 76% higher in Germany and 105% higher in France than U.S. cardholders. In the U.S., fees represent just 5% of revenue, while that percentage is three to six times higher in the EU.”
Simultaneously, European consumers also saw credit card rewards programs slashed after the 2015 government caps were enacted.
“Many U.S. credit cards currently offer cardholders a range of benefits, often including purchase-protection insurance, car-rental insurance, travel insurance, and fee-free international transactions. These benefits were also common on cards issued in the EU prior to the introduction of [card legislation], but were removed afterwards,” per the EPC study.
Other authorities on the subject also foresaw issues for American consumers, should the bill be passed.
“If the legislation is passed, some low-income households will lose access to credit cards. Others will see higher fees or interest rates on their balances,” Professor Indraneel Chakraborty, Department Chair of Finance at the University of Miami’s Herbert Business School, recently told the Miami Courant.
“Small merchants in areas with a significant fraction of low-income households will see their business revenue decline. Small merchants in general will also see their rewards decline, which will increase their cost of operations and thus reduce their profits. Overall, this legislation will not benefit smaller businesses and lower income households.”
Chakraborty published a February 2024 paper, “Imposing Alternative Payment Networks on Credit Cards Will Likely Hurt Low Income Households and Small Merchants,” in which he estimated that major U.S. retailers would gain around $2.9 billion from Senate Bill 1838, while small businesses would see significantly smaller savings, if any, exacerbating their existing competitive challenges.
March 2024 Consumer Credit Data from the Federal Reserve showed a savings rate of 3.2%, while total credit card debt reached $1,337.77 billion. At the start of 2020, savings rates were near 10% and the total debt near $1,000 billion.
Meanwhile, a recent CNN report states that the percentage of serious delinquency accounts in personal credit cards, meaning more than 90 days late, is at the highest level since 2012.
“In the first quarter of 2024, credit card and auto loan transition rates into serious delinquency continued to rise across all age groups. An increasing number of borrowers missed credit card payments, revealing worsening financial distress among some households,” Regional Economic Principal Joelle Scally said.
Household debt also increased during the first quarter of 2024 by 1.1%, largely driven by mortgage balances.
Senate Bill 1838 would apply to credit cards what a similar measure in 2010, often referred to as the “Durbin Amendment,” applied to debit cards. The 2010 measure was a requirement of the “Dodd–Frank Wall Street Reform and Consumer Protection Act.”
A 2014 George Mason University study found that the 2010 “Durbin Amendment” led to a 50% reduction in the number of “fee-free” accounts offered by banks between 2009 and 2013, and doubled average monthly fees on “non-free” current bank accounts.
In his paper, Chakraborty referenced the “Durbin Amendment” to illustrate that the proposed CCCA could yield comparable outcomes, such as banks scaling back services for certain customers, low-income consumers encountering elevated fees and more unbanked households.
Senate Bill 1838 is currently pending in the U.S. Senate Committee on Banking, Housing and Urban Affairs.