Miami Courant

A University of Miami professor said proposed credit card regulations in the U.S. Senate would favor large retailers over small businesses and could lead to some low-income households losing access to their credit cards. 

The “Credit Card Competition Act” (CCCA), S. 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. 

“If the legislation is passed, some low-income households will lose access to credit cards,” Professor Indraneel Chakraborty, Department Chair of Finance at the University of Miami Herbert Business School, told the Miami Courant. “Others will see higher fees or interest rates on their balances."

"Small merchants in areas with a significant fraction of low-income households will see their business revenue decline," he said. "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 S. 1838, while small businesses would see significantly smaller savings, if any, exacerbating their existing competitive challenges.

Chakraborty stressed the significance of obtaining information about the bill and voicing opinions to legislative representatives. 

“In my opinion, low-income households and small merchants should obtain information about these bills that affect them, and share their opinions with their representatives in the legislature,” he said. 

Chakraborty offered recommendations for legislators deliberating on the CCCA. He urged them to reconsider the bill, emphasizing its potential drawbacks for small merchants. Additionally, he noted the bill's focus on specific credit card issuers, suggesting a broader perspective that includes all major players in the industry.

“I would suggest that the legislators also reach out to their constituents,” he said. “As many legislators have low-income households and small merchants among their constituents, the legislators should reconsider the CCCA. The bill in its current form will not benefit small merchants. The bill also focuses on two credit card issuers (Visa/Mastercard) and not the other two (Discover/American Express).” 

Access to credit continues to pose a considerable obstacle for low-income households across the nation. 

According to a recent FDIC survey, approximately one-sixth of consumers do not possess a credit card, while nearly five percent of households are unbanked. 

Despite concerted efforts by the federal government and the Federal Reserve to expand banking access, mandates designed to cut transaction costs might unintentionally impede access. 

S. 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. 

The study also said the measure resulted in an increase of 1 million "unbanked" Americans in the year after the measure was enacted. 

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.

The head of the Florida Bankers Association last week told Sunshine Sentinel that her organization opposes S. 1838 due to concerns about higher costs, a loss of credit card rewards programs, and the threat of increased credit card fraud.

She said she concurred with Glenn Grossman, the director of research at financial advisory firm Cornerstone Advisors, who warned that the CCCA might lead to a surge in credit card fraud for Floridians. 

Grossman said that if the S.1838 were approved, the routing of credit card transactions would transition from a unified system to a fragmented one, potentially compromising the fraud detection capabilities currently provided by networks. 

Grossman highlighted the substantial investments made by networks like Visa in fraud detections, emphasizing that consumer trust and usage of credit cards relies heavily on these security measures. He expressed concern that the bill could undermine this trust and diminish consumer protection.

S. 1838 is currently pending in the U.S. Senate Committee on Banking, Housing, and Urban Affairs.