Research Note: Why the Credit Card Competition Act (CCCA) and Similar State Bills Will Hurt Small Financial Institutions

Abstract

Legislation in Congress and numerous states intended to reduce the interchange fees charged by credit cards would significantly reduce revenue for community banks and credit unions and-concomitantly-reduce access to credit in smaller markets across the United States, disproportionately affecting low-income households. There is a natural analog to help us anticipate the outcome of such legislation: Community banks and credit unions saw their debit card processing costs increase precipitously following passage of the Durbin Amendment to Dodd-Frank in 2010, which capped interchange fees on debit cards. It led to a reduction in access to credit for millions of Americans and an increase in the consolidation of community banks. The Credit Card Competition Act--which would mandate credit cards utilize more than one payment network--would give the largest merchants significantly more bargaining power when negotiating their interchange fees—at the expense of community banks—distorting the market. Smaller institutions without market power will effectively lose money on each transaction, reducing their viability and thereby jeopardizing credit access in the communities they serve. At the same time, several states have proposed to exempt sales taxes and tips from interchange fees on credit cards. The effect of this legislation would be similar to that of the CCCA--smaller financial institutions would see their interchange revenue reduced significantly. We estimate that such an exemption 1 would reduce revenue for community banks and credit unions by nearly $1.6 billion per annum. This is because economists estimate that a nationwide implementation of such an exemption would reduce total revenue by roughly $10.5 billion, and community banks and credit unions have a 15% share of the consumer lending market. While the federal and state legislation contain so-called carve-outs for community banks, the benefits from an exemption are slight since these institutions typically partner with larger institutions to operate credit card programs. The loss of revenue to smaller financial institutions--which tend to operate in smaller markets--means that the loss of credit from laws intended to reduce interchange fees will disproportionately affect the availability of credit in these communities and lead to a more rapid consolidation in the banking market.

JEL Classification: K21