Credit Card Competition Act: MYTHS vs. FACTS

MYTH: Retailers pocketed the savings from the Durbin Amendment
 
FACT: RETAIL IS SO COMPETITIVE THAT REDUCING BUSINESS COSTS ALWAYS RESULTS IN CONSUMER SAVINGS

• The retail sector is an intensely competitive industry. Retailers try to keep prices as low as possible to incentivize customers to their stores.
• When Moody’s Investor Services looked into it, they found savings from debit reform shielded consumers from higher prices that would have resulted from increases in other operating costs for businesses such as transportation and fuel costs.
• The best example is that cost increases, as reflected in the Producer Price Index for retail trade industries, rose 9.4 percent from the time reform went into effect in October 2011 through the end of 2016, while price increases to consumers, reflected in the Consumer Price Index, increased only 4.3 percent. That is a large spread between the higher costs that merchants had to pay for the goods they sold and the prices that they charged consumers. Those numbers demonstrate clearly that merchants shielded their customers from the majority of the cost increases the merchants themselves faced.
• And, that experience has held true even during the past year with increased inflation. During 2021, the Producer Price Index rose by 9.7 percent while the Consumer Price Index rose by 7 percent.
• Retail profit margins show the same pattern. Those margins did not grow following debit reform.
• It is very clear that savings from debit reform (and more) have been consistently passed along from merchants to consumers in the form of prices that are significantly lower than what consumers would have been forced to pay in the absence of those reforms.

 
MYTH: If this bill passes, credit card rewards will disappear
 
FACT: CREDIT CARD REWARDS ARE OFFERED AROUND THE WORLD EVEN THOUGH THEIR FEES ARE MUCH LOWER

• Competition on credit cards will not end rewards. Visa and Mastercard don’t give rewards, the banks who issue the cards do. Those banks will still offer rewards to incentivize customers to use their cards.
• Merchants regularly provide many of their own rewards and loyalty programs – without resorting to the price-fixing that the credit card industry engages in.
• Rewards have not gone away in other countries where swipe fee reform has been adopted. A decade after reform in Australia, the Reserve Bank of Australia found banks still offered “significant credit card rewards” despite Visa and Mastercard claims that rewards would go away.
• Competitive markets are much better for consumers than price-fixing – they deliver low prices and rewards by reacting to what consumers want.

 
MYTH: This bill will hurt small banks and credit unions.
 
FACT: THE BILL DOES NOT APPLY AT ALL TO SMALL BANKS AND CREDIT UNIONS – THEY WON’T HAVE TO DO A THING

• The bill exempts banks with under $100 billion in assets, only 32 of the largest banks and one credit union are above that threshold.

• The biggest banks issue 85% of credit cards.

 
MYTH: The bill will hurt card security.
 
FACT: THE BILL WILL IMPROVE CARD SECURITY AND FIX A VULNERABILITY BY PLUGGING THE LOOPHOLE THAT TODAY COULD ALLOW CHINA UNION PAY TO ENTER THE U.S. MARKET

• This bill makes our credit cards more secure than they are today.
• There is language in the bill that prohibits any network from entering the U.S. market if it threatens security – ensuring that it would block China Union Pay, or any network sponsored or funded by a foreign government.

• The United States has the most credit card fraud in the world – with 34% of all the fraud in the world even though the U.S. only has 22% of the world’s transaction volume.
• Today, any bank in the United States is free to select China Union Pay as the network on their credit cards.
  • This is a particularly big threat because Visa and Mastercard have brought China Union Pay into the security standard-setting bodies that they control.
• Competition leads not only to lower prices but to more innovation on things like card security.

 
MYTH: Swipe fees are needed to cover rising fraud costs.
 
FACT: RETAILERS ALREADY PAY FOR A MAJORITY OF FRAUD LOSSES AND THE FEES ARE MANY MULTIPLES OF TOTAL FRAUD LOSSES

• Visa and Mastercard have no skin in the game when it comes to fraud. Retailers and banks pay for fraud with retailers shouldering the majority of the costs.
• Retailers pay for fraud three times:
  1. Retailers pre-pay for fraud through interchange fees. However, these fees far exceed what is needed to cover banks’ fraud losses.
  2. Retailers pay for fraud in chargebacks.
     • Why merchants must pay chargebacks to cover the majority of fraud that they have already prepaid (and then some) to the banks is inexplicable.
  3. If a retailer suffers a data breach, Visa and MasterCard rules require the
     merchant to pay for any increase in fraud for those breached accounts and for card reissuance for all impacted or suspected impacted cards.

• The Fed has collected data on debit card fraud every two years since debit reform was passed. Its 2019 data shows that merchants covered 56.3 percent of debit card fraud   while card issuing banks only covered 35.4 percent. Keep in mind that 2019 is 4 years after merchants made the shift to chip card/EMV technology (Fed Data).
• The picture is similar for credit losses. The Federal Reserve has reported that the merchant share of fraud on dual message debit  cards (processed in similar fashion to credit cards) is more than 60 percent (Fed Data).
• On top of retailers’ fraud costs, the EMV transition cost retailers an estimated $30 billion. Retailers have made this shift because chip card technology is more secure.

 
MYTH: The bill isn’t workable and would lead to a massive reissuance of cards.
 
FACT: THE SAME THING HAPPENS WITH THE SAME BANKS ON DEBIT CARDS AND NONE OF THAT REQUIRED REISSUING CARDS

• Routing competition is proven to work because it happens today on debit.
• The whole concept of “massive reissuance” no basis in fact.
• They made the same claim about reissuance of cards when debit reform was debated, but when it came time to implement the new law the banks did not have to reissue cards.
• Routing happens as a back-office process with the banks sharing information regarding the enabled networks with processors. It doesn’t need to change anything physical on the cards.
• That was true for single-network debit cards a decade ago and it’s true for single-network credit cards now.
• There have been some credit cards that have used more than one network over time – Diner’s Club for example has done that. There was no “massive” change or investment needed for that. In fact, hardly anyone noticed. There will be some software changes that happen, but these will be relatively minor.

 
ONE THING IS CLEAR FROM ALL OF THIS – EVERY ONE OF THE CLAIMS MADE BY THE CARD INDUSTRY TO CRITICIZE THE CREDIT CARD COMPETITION ACT IS WRONG