Thousands of Virginia in underserved areas, such as low-income neighborhoods and communities of color, rely on small banks because they invest in neighborhoods that are not as profitable for big banks. We have to protect our credit unions and local banks, which is why Congress must reject the Credit Card Competition Act of 2022.
The Credit Card Competition Act is an obvious corporate cash grab by big retailers like Amazon and Walmart at the expense of ordinary consumers and small, local banks. It aims to add a regulation to our credit card market that will dramatically impact our electronic payment system. The regulation, known as a routing mandate, will force banks offering credit cards to add an unaffiliated payment network to their cards so that retailers can have more choice on which payment network to use.
This is great for big box stores, who will be able to choose cheaper, often less secure, networks on which to process credit card payments. In response, payment networks will lower their interchange rates for merchants, the fees that merchants pay to process transactions electronically, so they can stay competitive with the cheaper networks. This will create a “race to the bottom” where interchange fee rates for merchants drop, and interchange fee revenue for banks of all sizes, including small banks, will plummet.
How am I so certain that this will happen? Because it already happened with debit cards twelve years ago. Congress passed a similar amendment called “the Durbin Amendment” that added routing mandates to debit cards, which allowed giant retailers like Walmart and Amazon to rake in an extra $90 billion in revenue. They were supposed to pass these savings onto consumers, but according to the Federal Reserve Bank of Richmond, 99% of retailers kept prices the same or raised them after the amendment passed.
That $90 billion came directly out of the pockets of local banks and everyday Americans. A Credit Union National Association report found that the regulations lost credit unions $1.1 billion in 2016 alone. A 2014 study conducted by the Mercatus Center found that the regulations had reduced earnings at nearly seventy five percent of local financial institutions. In response to the billion-dollar losses, small banks had to cut back on services that many financially marginalized folks need, like free checking accounts and accounts with low minimum balance requirements. Big banks also dramatically cut back on free checking and raised their fees.
Now the same big corporations are trying to push through the Credit Card Competition Act of 2022 and extend these routing mandates to the credit market. They claim that the bill exempts small banks, but in reality, they will still get hurt. A 2017 Federal Reserve study found that the negative consequences of routing mandates are felt by both regulated and exempt financial institutions.
Since the credit market is larger than the debit market, economists in 2021 reported that extending these regulations to credit cards could cause annual revenue losses of $5 to $10 billion for community banks and local credit unions. That means banks of all sizes will have to make cutbacks to their credit costs, resulting in less valuable rewards programs, higher interest rates, and tighter credit restrictions, making it even more difficult to access for folks who are struggling. This will transfer $40 to $50 billion a year away from consumers and local banks and directly into the pockets of big box retailers.
We cannot afford to lose our small community banks. These banks help service folks in our underserved communities where big banks don’t want to invest. Congress needs to reject the Credit Card Competition Act of 2022.
Andrew Whitley is the former executive director of the Democratic Party of Virginia.
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